If you haven’t seen it, the show is a competition between 10 survival experts who are dropped off in the middle of nowhere, completely isolated from all human contact. Each person is allowed to bring ten survival items, some clothes, and a safety kit. They all have cameras to film their journeys. Whoever survives the longest wins $500,000.
It is astonishing what these people are capable of. They build their own shelters and catch all their own food. On a daily basis, they’re forced to solve problems. They have no one to help them, or to blame, but themselves.
My favorite competitor is an Australian guy named Outback Mike. I was blown away by the ideas he came up with and the things he built. There was no mental or physical challenge that he backed down from.
My wife and I first discovered Alone during the pandemic. It was the perfect show during that time of immense mental and physical hardship. There was something about the way each survivalist focused on that day’s tasks, and blocked everything else out, that resonated with us.
Watching the latest season of Alone these past few weeks, it occurred to me that the show is full of analogies for the personal finance topics we discuss in the blog.
I’ve found analogies to be great teaching tools, so here we go.
1. Not all calories are created equal.
The major challenge in Alone is getting enough calories to survive. Food is not exactly plentiful in the remote locations where the competitors are dropped off.
To survive, competitors dedicate endless hours strategizing and looking for food. Common strategies include fishing, trapping, hunting, and foraging.
One of the first things you learn is that not all calories are created equal. Calories from fat and protein are at a real premium. Even with an unlimited supply of berries and greens, the competitors make clear that you cannot survive for long periods without fat and protein.
Besides the importance of the type of calories, the way the calories are procured is just as critical.
This makes perfect sense in a survival scenario. If you expend 2,000 calories of energy to catch a fish, and that fish only provides you 1,000 calories of food, that is a losing proposition. If you continue on that trajectory long enough, you’ll starve to death.
This is why contestants on the show always think about ways to passively procure food, such as setting traps or using gill nets. If they can obtain food passively, they can then use that time to rest (save calories) or on other necessary tasks.
In the show, most competitors eventually tap out, on the brink of starvation, having failed to obtain enough food. It’s never for a lack of effort. It’s just really hard.
So what do calories have to do with personal finance?
Just as not all calories procured are created equal, not all dollars earned are created equal.
This begs the question:
If you think about what you do to earn money, are you the contestant trading 2,000 calories of energy for 1,000 calories of food?
The first professional works 80 hours per week and earns an annual salary of $200,000.
The second professional works 40 hours per week and earns an annual salary of $120,000.
Which one would you rather be?
Would your answer change if we convert the annual salary to an hourly rate?
On an hourly rate, the first professional ends up earning $48 per hour.
The second professional earns $58 per hour.
If you’re still leaning towards the first professional who earns more overall but less per hour, did you think about how valuable that extra 40 hours per week could be?
That’s time that could be spent on your true passions. It’s time that could be spent with friends and family. That’s time that could also be spent developing a skill or earning income through a side hustle.
Looking at it another way, what if you could earn the same $200,000 without having to work 80 hours per week? This is where passive income streams come in.
Like the gill net that catches fish without the active involvement of the fisherman, have you explored ways to make money while freeing up your time for other worthwhile pursuits? This is an unavoidable step on your way to financial freedom.
For what it’s worth, I’m confident that the survival experts would all choose to be the person who makes more money per hour while also having more time available for other pursuits.
2. Attitude is everything.
Watching Alone, you see a wide range of personalities. While each contestant has the resume of a survival expert, one attribute always separates the winners from the losers: attitude.
The contestants are forced into what would be impossible survival scenarios for the average person. It’s completely understandable to have tense, frustrating, and stressful moments.
This isn’t me judging the contestants who have poor attitudes. I wouldn’t last an hour in the woods by myself. I’ve never even been camping. My wife caught more fish when she was six than I’ve caught in my whole life.
This is just my observation that most of the time, contestants have similar survival skills. What separates the winners is their attitude and ability to recognize that things will go wrong.
When things go wrong, they don’t blame anyone else or play the victim.
Instead of getting frustrated and quitting, they think of solutions to the problem at hand. This is what so impressed me with Outback Mike.
Yes, we all need a bit of luck in life to thrive. But, we need to put ourselves in position to benefit from luck when it comes our way. That takes intentional thought and effort.
I’m guessing we all know very smart and talented people that have bad attitudes. When things don’t go their way, they immediately blame other people. Nothing is ever their fault. They feel entitled to success without doing the work.
That type of person usually doesn’t lead a very happy or fulfilling life.
For sure, that person would not last a week on Alone.
3. Along with starvation, missing family is the hardest part.
If it’s not starvation, odds are contestants will tap out because they miss their families. The physical challenges of being forced to survive on limited food in rugged conditions is hard enough.
To do it alone and isolated from your family makes it nearly impossible.
One of the most enlightening parts of the show is when the contestants reveal their mental struggles to the camera. Since they’re alone, and typically starving, we get to see raw emotion in real time. You learn a lot about the human condition in these moments.
One unavoidable truth is that us humans are social creatures.
We need our people. We need love and support and connection. Going through life alone goes against our DNA.
Even the chance at winning more money than the contestants ever dreamed of is not nearly enough to keep them away from their families any longer.
There’s one other lesson Alone teaches us about the importance of family. A lesson that is extremely relevant to me right now.
When each season begins and the new contestants are introduced, my wife and I know right away who isn’t going to make it: the people with young kids.
These people have all the skills necessary to survive. But, those skills don’t matter when they start missing their kids. The emotion is too strong. The longing to be with their kids overcomes all else. They simply do not want to miss another day of their kids’ lives.
I think about this lesson in the context of our daily lives. Like the professional in our example above working 80 hours per week, at what sacrifice do all those hours come? How many hours away from home is that? How much time away from our kids?
When I think about those questions, I again think about what I would do with my time if I was financially free.
Let’s take a deeper dive into the two most common strategies for paying back debt when you have multiple loans: Debt Snowball v. Debt Avalanche.
In our post on how to confidently tackle debt, we discussed that it’s a smart idea to apply one of these strategies. Here, we’ll see why.
You’ll notice we have lots of charts and numbers in this post. Don’t worry, you don’t need to do any math. I’ll show you how to use a simple online calculator to help you decide with strategy is best for you.
Before we look at the strategies, always keep in mind the number one rule:
Always pay the minimum required amount on every loan no matter what.
Whatever strategy you end up using, always pay the minimum payment on every loan. If you fail to do so, you will be charged penalties and your credit history and score will be negatively impacted. You will also accrue interest on those penalties, compounding your mistake.
Don’t worry if this sounds confusing right now. We’ll discuss credit cards and the responsible use of credit in detail in upcoming posts.
The below strategies apply to any excess funds you have left after paying at least the minimum on every loan balance. No matter what, you need to make the minimum payment on each loan every single month.
What is the Debt Snowball method?
The first strategy is known as “Debt Snowball.” When you apply the Debt Snowball strategy, the idea is to focus on the loan with the smallest balance first, regardless of interest rate.
Remember, these strategies are for helping you pay back multiple loan balances.
Once you have paid off the first loan in full, you move to the loan with the next smallest balance, again regardless of interest rate. The money you had been paying to the first loan can now be rolled into the second loan.
What is the Debt Avalanche method?
The second strategy is referred to as Debt Avalanche. With this method, you will prioritize the loan with the highest interest rate, regardless of the balance.
Once you’ve paid off the loan with the highest interest rate, you move to the loan with the next highest interest rate. Just as before, the money you had been paying to the first loan can now be applied to the second loan.
You can apply either of these strategies in the same way no matter how many loans you have.
The first step in choosing a debt payoff strategy is to gather some basic information on each loan that you have.
For each loan, you’ll need to find the outstanding balance, the interest rate, and the minimum required monthly payment. You can pull this information from your most recent monthly statement.
Once you have this information, you can plug the numbers into a simple online calculator. By doing so, you’ll get an idea of how much it will cost you (in terms of time and money) to pay off these debts.
They have calculators for all sorts of different purposes, including a Debt Payoff Calculator. Using the Debt Payoff Calculator, you can decide the best payoff strategy for your personal situation.
You may prefer the quicker emotional wins that come with the Debt Snowball method. Or, you may prefer the savings that come from the Debt Avalanche method.
There’s no wrong answer. The choice is yours.
Let’s see how Debt Snowball and Debt Avalanche work in practice.
Note, for simple illustration purposes, the minimum payments in these examples remain the same throughout the life of each loan.
Example 1: Two Different Credit Card Balances
Imagine you have two credit cards with balances owed.
Credit Card 1: $5,000 balance with a 15% interest rate and a minimum required payment of $150 per month.
Credit Card 2: $10,000 balance with a 20% interest rate and a minimum required balance of $200 per month.
Balance
Rate
Min. Pay.
Credit Card 1
$5,000
15%
$150
Credit Card 2
$10,000
20%
$200
After creating a Budget After Thinking, you’ve determined that you have $1,000 per month to put towards these two loans. Because you have to pay a minimum of $150 to Credit Card 1 and $200 to Credit Card 2, you have $650 left to deploy.
How should you do it?
Debt Snowball
If you apply the Debt Snowball approach, you prioritize paying off the loan with the smallest balance. That means paying $800 to Credit Card 1 ($150 minimum payment plus $650 remaining funds) until that loan is paid off completely. The remaining $200 needs to be applied to cover the minimum payment on Credit Card 2.
Once Credit Card 1 is paid off completely, you will add that $800 payment to Credit Card 2 for a total payment of $1,000.
Balance
Rate.
Min. Pay.
Snowball
Credit Card 1
$5,000
15%
$150
$800
Credit Card 2
$10,000
20%
$200
$200
Using calculator.net, you’ll see that it will take you 18 months to eliminate both loans with the Debt Snowball approach. It will cost you a total of $17,303.70, of which the total interest is $2,303.73.
Importantly, Credit Card 1 will be completed paid off in 7 months.
Debt Avalanche
Now, let’s see what happens when we apply the Debt Avalanche approach. Under this approach, you would prioritize Credit Card 2 because it has the higher interest rate. That means you would pay $850 to Credit Card 2 and only the $150 minimum payment to Credit Card 1. Once Credit Card 2 is paid off, you would pay the full $1,000 to Credit Card 1.
Balance
Rate
Min. Pay.
Avalanche
Credit Card 1
$5,000
15%
$150
$150
Credit Card 2
$10,000
20%
$200
$850
Using calculator.net, you’ll see that it will take you 18 months to eliminate both loans with the Debt Avalanche approach. You’ll end up paying a total of $17,071.84, of which the total interest is $2,071.87.
It will take you 14 months to eliminate the first loan, Credit Card 2.
Now, we can compare the results of using Debt Snowball or Debt Avalanche.
Under the Debt Snowball approach, you’ll pay $231.86 more in interest. It will take you 18 months to eliminate both debts under each approach.
However, under the Debt Snowball approach, it will only take you 7 months to completely erase one loan. Under Debt Avalanche, you will not erase the first loan until 14 months have gone by.
Now that you have this data, you can decide whether you prefer Debt Snowball or Debt Avalanche. Some people may prefer the emotional win of eliminating one loan completely after 7 months using the Debt Snowball method.
Other people will prefer the Debt Avalanche approach, which results in more savings. The tradeoff is that they won’t eliminate any loans completely until month 27.
As we said before, there is no right or wrong answer. It is entirely a matter of personal preference.
Why not just pay the same amount to each credit card?
If you pay $500 to each credit card from the beginning, let’s see what happens:
Balance
Rate
Min. Pay.
Equal
Credit Card 1
$5,000
15%
$150
$500
Credit Card 2
$10,000
20%
$200
$500
You will end up paying off both loans in 18 months and paying a total of $17,249.39, of which the total interest is $2,249.42. You won’t eliminate any loans completely for 11 months when Credit Card 1 is paid off.
Compared to the Debt Snowball approach, splitting the payments evenly means four more months to pay off the first loan completely. That means you’re waiting longer for your first emotional win.
Compared to the Debt Avalanche approach, you’ll end up paying $177.55 more in total interest. If you’re looking to maximize your savings, splitting payments is not the way to go.
As you can see, whatever your preference is, it makes sense to pick either Debt Snowball (fastest emotional win) or Debt Avalanche (most money saved).
Personally, I prefer the Debt Snowball approach.
I prefer the Debt Snowball approach because of the emotional win that comes with eliminating a debt in less time, sometimes even twice as fast.
That victory is more important to me than saving $231.86 spread out over 18 months (the length of time it takes to eliminate both debts).
If you prefer paying the least amount in interest, I won’t argue with you. There’s nothing wrong with saving money. It’s a personal choice.
That said, there is one instance where I prefer Debt Avalanche to Debt Snowball.
If you have Bad Debt, like credit card, always pay that debt first.
Bad Debt typically has significantly higher interest rates than other forms of debt, like student loans, auto loans, or mortgages.
Compare these current (February 2025) average interest rates for various types of loans:
It’s not hard to see that credit card debt comes with a significantly higher interest rate than any other form of common debt.
This is why I recommend you always pay your credit card debt first.
Let’s look at a second example to illustrate this point.
Example 2: Auto Loan and Credit Card Balance
Auto Loan: $8,000 balance with an interest rate of 5% and a minimum required payment of $50 per month.
Credit Card: $20,000 balance with an interest rate of 20% and a minimum required payment of $400 per month.
Balance
Rate
Min. Pay.
Auto Loan
$8,000
5%
$50
Credit Card
$20,000
20%
$400
Just as before, you’ve determined that you have $1,000 per month to put towards these two loans. Because you have to pay a minimum of $400 to your credit card and $50 to your auto loan, you have $550 left to deploy.
How should you do it?
Debt Snowball
If you apply the Debt Snowball approach, you would prioritize paying off the loan with the smallest balance. That means paying $600 to your Auto Loan until that loan is paid off completely. The remaining $400 needs to be applied to cover the minimum payment on your credit card debt.
Once the auto loan is paid off completely, you will add that $600 to the credit card debt for a total of $1,000.
Balance
Rate
Min. Pay.
Snowball
Auto Loan
$8,000
5%
$50
$600
Credit Card
$20,000
20%
$400
$400
Using calculator.net, you’ll see that it will take you 37 months to eliminate both loans with the Debt Snowball approach. It will cost you a total of $36,753.16, of which the total interest is $8,753.18.
Importantly, the auto loan will be completed paid off in 14 months.
Debt Avalanche
Now, let’s see what happens when we apply the Debt Avalanche approach.
Under this approach, you would prioritize the credit card loan because it has the higher interest rate. That means you would pay $950 to the credit card and only the $50 minimum payment to the auto loan. Once the credit card is paid off, you would pay the full $1,000 to your auto loan.
Balance
Rate
Min. Pay.
Avalanche
Auto Loan
$8,000
5%
$50
$50
Credit Card
$20,000
20%
$400
$950
Using calculator.net, you’ll see that it will take you 34 months to eliminate both loans with the Debt Avalanche approach. You’ll end up paying a total of $33,822.14, of which the total interest is $5,822.17.
It will take you 27 months to eliminate the credit card debt.
We can again compare the results of using Debt Snowball and Debt Avalanche.
Under the Debt Snowball approach, you’ll pay $2,931.01 more in interest. It will also take you three months longer to eliminate both debts.
On the plus side, your auto loan will be completely paid off in 14 months, which is nearly twice as fast as with Debt Avalanche.
Some people may still prefer the emotional win of eliminating one loan completely after 14 months using the Debt Snowball method.
For me, the price of that emotional win has gotten too expensive. I would prefer to save the $2,931.01 and have both loans paid off in less time, even if that means waiting longer to pay off a single loan.
If you do this exercise with any normal credit card compared to another form of loan, you’re likely going to find that the credit card interest rates are so high that you should target those loans first.
Do you prefer Debt Snowball or Debt Avalanche?
As we said before, there’s no right or wrong answer. Money decisions are emotional. Paying off debt is the perfect example.
Using a simple online calculator can help you make the best decision for your situation. All you need to do is find the balance, interest rate, and minimum payment for each of your loans and the calculator will do the rest.
Whichever method you choose, stick with it. Save yourself the stress of doing mental gymnastics each month.
The most important thing is that you are making your payments every month.
In this post, we’ll learn how to pay off debt on a budget. In our initial series on debt, we first looked at some scary stats about how common debt is in society.
By recognizing that debt is something that impacts nearly all of us, I hope that you stop feeling alone if your’e in debt. There’s no reason to be ashamed. You are not a bad person.
Debt is a major obstacle on the way to financial freedom. To help you stay motivated to eliminate debt, write down your version of Tiara Goals. By reminding yourself what you’re actually striving for, you’re more likely to stay on track.
When you’re faced with these inevitable temptations, take a look at your Tiara Goals. I keep my Tiara Goals in my notes section on my phone. I also have a picture on my phone of the original sheet of notebook paper I scribbled on.
All it takes is a quick glance at my most important life values to overcome whatever temptation is in front of me.
Getting out of debt is not easy. Make it easier by regularly reminding yourself what you would do with financial freedom.
2. Create a Budget After Thinking so the debt stops growing.
If you’re currently in debt, it’s crucial that you stop that debt from getting larger. Think about it. If you’re paying off $1,000 of credit card debt each month, but you’re still spending $1,200 more than you earn, your efforts will be for nothing.
Your debt is growing faster than you’re paying it off. You’re not getting any closer to being debt-free.
Once you’ve stopped the disappearing dollars and learned where your money is going each month, you can make thoughtful decisions to pay off debt on a budget.
Then, you can be confident that any money you allocate to debt will actually lower your debt balance.
3. Prioritize Later Money funds to pay off debt.
As we’ve discussed, the art of budgeting is to generate fuel for your Later Money goals. The more fuel you can generate each month, the faster you will achieve your personal finance goals.
When you’re in debt, I recommend you prioritize using your Later Money to eliminate that debt. This is especially true if you have Bad Debt, like credit card debt. Your number one money focus needs to be to eliminate that debt.
This is the key to learning how to pay off debt on a budget.
There’s a good reason to focus on paying off your Bad Debt.
The interest rate on Bad Debt is generally very high. The amount you pay in interest each month will be significantly greater than what you may reasonably expect to earn through investments.
If you only have Good Debt, like student loan debt, you have some more flexibility in whether to focus on that debt or your other investment goals. This is because Good Debt generally carries lower interest rates, so your investment returns may match or even exceed what you’re paying in interest.
Seeing your savings and investments grow while focusing on how to pay off debt on a budget can provide an emotional lift. Establishing good savings and investment habits now will also have longterm benefits that should survive your debt phase.
4. Apply our Top 10 Strategies for staying on budget.
Our Top 10 Strategies for staying on budget will help you generate more money to allocate to debt. These tips are crucial if you’re trying to learn how to pay off debt on a budget.
For example, when you see something that you might want to buy, make a note in your phone instead of buying it right away. After a couple weeks, you probably won’t even want that thing anymore. Take that money you didn’t spend and put it towards your debt.
As another example, how about playing The $500 Challenge Game? When you come in under budget that month, use the excess funds to pay down debt.
When you have debt, applying our Top 10 strategies to staying on budget can teach you something powerful. You’ll see for yourself that the emotional high of paying down debt is better than the feeling you’d get from spending that money on things you don’t care about. It’s important not to ignore these emotional wins when learning how to pay off debt on a budget.
5. Talk to your people about how to pay off debt on a budget.
Talking money is not taboo. That includes talking about our current money goals and money challenges. Of course, it includes talking about how to pay off debt on a budget.
The problem was that none of us talked about it. I think about how much stress we could have saved each other if we were just willing to talk about money like we talked about everything else. Instead, we hid our truths from each other. Even worse, we likely enabled each other’s poor spending habits.
I now know that it didn’t have to be that way. I would have been better off if I was open about it.This part still bothers me today: I also might have helped my friends facing the same challenges just by starting the conversation.
6. Track your net worth and savings rate for small wins.
Remember that your net worth grows when you reduce your liabilities, meaning debt. When we think of net worth, it’s common to focus on growing our assets. Don’t forget that reducing your debts has the same impact on your balance sheet.
For example, when tracking your net worth, eliminating $1,000 in debt is the same as an investment that grows by $1,000.
Even when you’re focused on how to pay off debt on a budget, tracking your net worth can be very motivating. Every payment you make to reduce that debt improves your net worth.
This is especially helpful if you are focused on paying off student loans or paying down a mortgage. You may not have many appreciating assets, but you can still make a positive impact on your net worth by reducing your debt.
The same logic applies to tracking your savings rate. Measure and feel good about each additional amount you dedicate to eliminating debt. The goal is to stay motivated while you pay off debt on a budget.
There are two common strategies to consider when you hope to pay off debt on a budget. These strategies are referred to as “Debt Snowball” and “Debt Avalanche.”
Debt Snowball means paying down your smallest debt balance first, regardless of interest rate. When you’ve paid off that loan completely, you then move to the next smallest balance, again regardless of interest rate.
Debt Snowball is ideal for people that are motivated by the emotional wins that come with eliminating a loan completely, even if it costs more money in interest in the long run.
Debt Avalanche means you pay down the debt that has the highest interest rate first, regardless of the balance. Once that debt is gone, you move to the loan with the next highest interest rate.
Debt Avalanche is for people who would prefer to pay less overall interest, even if it will take longer to pay off a single loan and receive the emotional win.
I discussed the pros and cons of each strategy here. Some people will prefer the emotional wins of the Debt Snowball method, while others will prefer the mathematical advantage of the Debt Avalanche method.
Personally, I use the Debt Snowball method.
I value the emotional wins of eliminating a debt entirely, even if it ends up costing me more in the long run. I am currently applying the Debt Snowball method to pay off HELOC debt.
I’ve experienced firsthand that our money choices have more to do with emotions than they do math. If you prefer to play it strictly by the numbers, I completely understand.
The key is that whichever strategy you pick, stick with it. You’ll save yourself a lot of unnecessary mental gymnastics by choosing one approach and then moving on.
One word of caution: whichever method you choose, be sure to always pay the minimum on all of your loans. Otherwise, you’ll be in violation of your loan terms and face devastating penalties.
The idea with either of these methods is to allocate whatever funds remain to the single loan you have prioritized after paying the minimum on all loans first.
8. Think about loan consolidation or balance transfers.
Whether you have credit card debt, student loan debt, or even mortgage debt, you may have the option to consolidate each type of loan into a single loan. If you do your homework, you should end up with a lower overall interest rate and have only one loan payment to make each month.
If you choose to go this route, make sure you fully understand the fine print involved.
For example, if you’re thinking about consolidating your student loans, you’ll end up sacrificing certain loan forgiveness provisions that accompany federal loans.
The same caveat applies when considering a credit card balance transfer. A balance transfer is when you move the balance from one credit card to a different credit card with a lower interest rate. Most major credit cards accept balance transfers from other banks’ credit cards.
The main reason to consider a balance transfer is if the card you are transferring into carries a significantly lower interest rate than your current card. In some instances, you may even qualify for a promotional rate with no interest charged for a limited period of time.
I used balance transfers when I was focused on eliminating credit card debt at the beginning of my career. I did my homework and found a card that was advertising 0% interest for 12 months with no balance transfer fees. That meant that for an entire year, I paid no interest. Every payment I made went directly to lowering my overall debt.
If you’re considering a balance transfer, be mindful that there are usually upfront fees involved, usually around 3%. That fee may end up cancelling out any benefit from doing the transfer in the first place.
9. Get a side hustle to help pay off debt on a budget.
At the end of the day, there are really only two ways to more quickly pay off debt on a budget: spend less money and/or make more money.
We already talked about creating a Budget After Thinking to help on the spending side.
If you really want to get rid of your debt faster, earning more money and the same time you’re spending less money is a dominate combination.
If you take on a side hustle, you can use every dollar you earn to pay off debt. Since this is new money you’re earning, you shouldn’t need it to fund your Now Money or Life Money.
Avoid the temptation of using that money on things you don’t really want anyways. Think about how much faster that debt will disappear if you’re able to throw additional money at it each month.
If you’re not ready for a side hustle, the same logic applies anytime you earn a bonus or commission at your primary job. Put that money to good use by paying down your debt.
10. Don’t let yourself fall backwards while you pay off debt on a budget.
When you do succeed in eliminating a debt, don’t let yourself fall back into bad habits. It’s hard to pay off a debt. It takes time. It takes patience and discipline.
Don’t let it all be for nothing.
When you pay off a loan, celebrate that accomplishment!
Be proud of yourself and let that good feeling motivate you to continue on your journey towards financial freedom.
Before you know it, debt will be part of your past life. You can shift all your attention to the opportunities that comes next for you and your family.
Let us know in the comments below:
Have you used any of these strategies to pay off debt on a budget?
What about any other strategies to pay off debt on a budget that have worked for you?
A few months before we got married, my wife and I took a trip down to Florida. One afternoon, I headed out to the beach with a book, a notebook, and a few ice cold beverages.
The weather was perfect. It was sunny but not too hot. Blue skies and just a slight breeze. The beach was quiet that afternoon. I set up my chair to face the ocean and started reading. This little break was exactly what I needed in the middle of “wedding planning.”
I don’t recall the book I was reading that day. I’ve been meaning to look back at my journals to see if I can figure it out. Anyways, I’ll never forget what I learned about myself that afternoon.
The author wrote about the power of financial freedom. We’ve discussed financial freedom in previous posts. The basic idea is that when you are financially free, you can choose how to live your life on your own terms. You can make important decisions based on what truly matters to you, as opposed to being forced down a certain path for money reasons.
On the beach that day, the concept of financial freedom was not new to me. I had read about it for years. The concept really hit home that afternoon when the author asked a simple but powerful question:
What would you do with financial freedom?
Maybe the question really resonated with me because I was about to get married. It’s only natural to daydream about what life would be like after the wedding, even though my wife and I had been a couple for six years by that point.
Over the years, we had talked a lot about what we wanted our lives together to look like. We knew long before the wedding how we each felt about major topics like starting a family and where we wanted to live.
We were also on the same page when it came to money decisions. My wife and I met early on during my personal finance journey, not long after I had determined to get my money life sorted out. My wife still jokes that she was my first personal finance student.
By the time we got married, I had been on my personal finance journey for about seven years. I was out of debt and was starting to think about the options that were now available to me. It was around this time that I learned one of the most powerful words in personal finance:
DINK
Back then, my wife and I were both working as lawyers in Chicago. We didn’t have any kids. I didn’t realize it until later on, but we were DINKs.
DINK means “Dual Income No Kids.”
When you’re in a relationship where you have two incomes coming in and are sharing financial responsibilities, you have the opportunity to supercharge your Later Money goals.
If you are currently a DINK, or will soon be a DINK, please pay extra attention here.
Don’t waste this powerful opportunity to supercharge your Later Money goals.
This is what my wife and I were able to do, even if we didn’t know what a DINK was. We each had good incomes coming in and our monthly expenses were low. The two of us could comfortably share an apartment, instead of each paying for an apartment separately. That’s major savings each month.
We didn’t have to worry about childcare. We were young so the odds of unexpected medical care were lower. All things considered, it was pretty easy to keep our Now Money to a minimum with plenty to spare for Life Money.
This allowed us to fuel our Later Money goals, like having a nice wedding and saving up for a home or rental property. We had money in the bank and seemingly endless choices.
And, I didn’t want to screw it up.
Which brings us back to me sitting on the beach, thinking about what I would do with financial freedom, with maybe 1 or 2 less beverages in the cooler.
What did I really want out of life?
I put my book down and looked off into the ocean, thinking about what I wanted out of life. I started thinking about what my ideal life would look like. By this point, I was engaged in the type of deep thought where you don’t even realize what’s happening around you.
It quickly occurred to me that I had never truly thought about what I wanted in life. Sure, I had thought about things like having a family and being able to take vacations.
But, I never carved out time to purposefully think hard about what I actually wanted. I had never asked myself what truly motivates me.
Without a doubt, I had never written down the answer to that powerful question: what would I do with financial freedom?
I hadn’t ever allowed myself to dream about financial freedom.
The truth is, I don’t think I had ever visualized a life that wasn’t dominated by a full-time job. Up to that point, my whole life had revolved around getting an education and then getting a job. I never pictured a world where I might not need a full-time job to provide for myself and eventually my family.
I had read about the concept of being financially free, but it always seemed like a possibility for other people, not me. Writing this years later, I feel sad for that version of myself for having such limiting beliefs.
That said, I completely understand why I felt that financial freedom was unattainable for someone like me. This was in the phase of my life where I had been preoccupied with eliminating debt. Because of that debt, I didn’t allow myself to dream about what life could look like if money wasn’t holding me back.
This was also before my wife and I had rental properties. It was before we recognized the impact of side hustles and multiple streams of income. I had read about and understood these concepts in theory, but I hadn’t put what I learned into practice.
That day on the beach, it was like a light went on in my head.
After years of patience and discipline, I had climbed out of debt. I was now a DINK with Later Money in the bank waiting to be deployed. That meant I had created opportunities.
I wasn’t financially free, but for the first time in my life, I allowed myself to accept that financial freedom was possible for me.
This was one of the most powerful moments in my life.
With that realization in my mind, I walked into the ocean to cool off and think some more.
What would I do with financial freedom?
There in the ocean, I wasn’t thinking about dollars or career goals. This was more important than that. I was thinking about what I wanted my life to look like if money was not an issue. I was thinking about what I would do with my time if I was in complete control.
Floating there in the water, it was like I had an epiphany. Everything suddenly became clear to me. I ran out of the ocean to get back to my chair before I forgot what just popped into my head.
I whipped out my top bound spiral notebook and started writing with a blue pen. Minutes later, I had written down seven answers to the question: what would I do with financial freedom?
My “Tiara Goals” were born.
Nearly eight years later, I still have that sheet of notebook paper. I keep it safe in a leather binder protected by a laminated page holder. It has those familiar tear marks on the top of the page where the paper connected to the spiral binding.
Even though I have these seven goals memorized by now, I still look at this sheet of paper every month. Looking at this sheet is an incredible reminder of that day on the beach when everything became clear to me.
A quick aside, I call my goals “Tiara Goals” because it’s a silly, but meaningful, description to me. Have some fun with what you name your goals. If you do it right, you’ll be thinking and talking about these goals a lot.
What are my Tiara Goals?
So, here are my original Tiara Goals from 2017, as scribbled on that sheet of paper and edited for clarity:
Be with my wife and kids as much as I want. Dad never missed a game. Mom never missed a game. Nana never missed a game.
Not be forced to commute to work on Friday or Tuesday or whatever day, if I need that day for myself.
Choose how to spend my working hours (representing clients, teaching, volunteering, building a business, etc.).
Continue to study and learn constantly.
Take at least one big trip every year.
Never turn down an exciting or smart opportunity because I can’t afford it.
Work alongside people that value my contributions.
Keep in mind that I wrote these goals before I had kids and before I was even married. This was also years before the pandemic when working from home was a foreign concept to most of us.
I think it says a lot that I was thinking about these things way back then.
In a future post, we’ll unpack each of these goals.
While I haven’t reached financial freedom yet, I think I’m doing a pretty good job already living by these fundamental values.
We can obtain Parachute Money. We can choose to do meaningful work and choose to spend more time with people who are meaningful to us.
No, it’s not easy to achieve financial freedom. But, it is a whole lot easier when you know what you are striving for in the first place.
That’s why at the beginning of my financial wellness class, I ask my students to write down their own versions of Tiara Goals. I want to help them avoid the limiting beliefs that I had before that day on the beach.
My favorite part of class is when my students share their Tiara Goals.
Without a doubt, this is always my favorite part of class. When I say I’m on a mission to convince you that talking money is not taboo, I think of my students sharing their goals. I get so energized by hearing their goals. My students report the same sentiment after learning what drives their friends and peers.
Over the years, my students have shared countless impactful stories. As unique as these goals can be, it’s remarkable how most of us want the same things in life. Year after year, I hear the same motivating forces:
Spend more time with my family.
Travel and enjoy experiences around the world.
Stay healthy and fit.
Provide for my children and my aging parents.
Work for a cause I believe in.
Have time to volunteer.
I also regularly hear one thing that my students, and the rest of us, don’t want:
Be specific, but not too specific, when you think about financial freedom.
When we talk about what we do with financial freedom in class, I encourage my students to get specific without being so precise that the goal becomes restrictive. When we’re thinking about goals related to financial freedom, the idea is to focus more on big-picture, core values.
There will be a time and a place to strategize how to get there. The point here is to help define what you’re even trying to get in the first place.
For example, instead of “spending more time with family,” I would suggest something like, “never miss my child’s soccer game or dance recital because of work.”
Instead of “travel around the world,” I would suggest “at least one overseas trip of at least 2 weeks per year.”
Adding that little bit of specificity will help you visualize what you’re striving for with your money decisions.
Don’t get discouraged if you think you are not close to financial freedom.
Even when you feel like financial freedom is only a distant dream for you, it’s important to actively think about what you want out of life. I’d even suggest that the further away you feel from financial freedom, the more important it is to think about what it would mean for you.
When you’re at your lowest point, visualizing what you would do with financial freedom is a helpful escape.
If you haven’t ever actively thought about what you would do with financial freedom, hopefully this post will encourage you to do so.
Don’t forget to write down whatever you come up with.
I suggest you share your version of Tiara Goals with your friends and loved ones. It’s OK to keep some of your goals private. By sharing, you will get the benefit of them cheering you on. You’ll also hopefully encourage them to share their goals with you, which can be very inspiring.
Have you thought about what you would do with financial freedom?
Have you ever written it down or shared your answers with others?
8 out of 10 people! Is it just me, or is that mind-boggling?
On the flip side, only 4% of workers report no concerns about losing their jobs.
These numbers are shocking to me, but maybe I shouldn’t be that surprised. As Yahoo Finance explains,
Many large corporations have already announced or kicked off a round of layoffs, including Chevron, CNN, Estee Lauder, Meta, and Southwest Airlines. And that, of course, doesn’t count the thousands of workers terminated under Elon Musk’s campaign to reduce the federal workforce.
My mind immediately jumps to a follow-up question:
Surveys like this one motivate me to continue bringing attention to core personal finance issues, like having adequate emergency savings. This is why I so strongly believe that talking about money is not taboo.
Life is too short and too precious to be in a constant state of worry. Is there any sense worrying about something, like getting laid off, when you have practically no control over whether it happens or not?
Nearly half of US workers choose to work more days than they are required to!
And, it gets worse if you’re a high earner or highly educated.
According to the same study, the more money you earn, the less likely you are to take your full paid time-off.
The more educated you are, the less likely you are to take your full paid time-off.
The more senior you are, like being a manager vs. non-manager, the less likely you are to take your full paid time-off.
If the first survey mentioned above surprised me, this one just makes me angry.
Do you recognize a difference between working hard and always working?
Don’t misunderstand why these results make me angry. It’s not about working hard vs. slacking off. It’s not about being a good employee vs. a bad employee. I am 100% in favor of people working hard and working with integrity to get the job done.
My frustration is that somewhere along the way, “working hard” turned into “always working.”
By the way, before you accuse me of being a slacker, I am no stranger to working hard.
I work full-time as a lawyer, manage 11 rental properties, teach law school courses on Wednesdays and Sundays, and publish three blog posts per week. Still, none of these things are more important to me than spending quality time with my family.
Years ago, I first read Tim Ferris’ game-changing book, The 4-Hour Workweek. Ferris described how his small business took off as soon as he started doing less, not more. He empowered his staff and stopped himself from getting in the way. Not only did his company thrive, he had more time available to pursue what really mattered in his life.
If you’re one of these people choosing to work more hours instead of taking your earned vacation time, have you ever asked yourself why?
Keep in mind, these are days off that your company has already agreed to give you. You earned them. Why are you not taking them?
Are you worried about getting fired? Passed up for a promotion? Is your self-worth tied to how many hours per week you work?
Years from now, when your grandkids are huddled up for story time, do you plan on telling them how much you worked and how many life experiences you skipped out on?
These are hard questions to truthfully answer. If you’re being honest with yourself, you may start thinking about another set of questions:
Is this job the right job for me? Do I want to spend my life stressed from working too much? What would be a better use of my working hours so I can spend more time doing the things that I love with the people that I love?
I’ve spent a lot of time thinking about these questions. I’ve realized that I’ll never understand what the point is of working so much at the cost of spending time with the things and people you love.
Maybe I’m the weird one. But, I don’t think I am. Unfortunately, the data backs me up and confirms that working too much can have series consequences.
Fortunately, we can learn from strategies geared towards retirees. Let me explain.
The tips include finding a purpose, strengthening your body, and rebuilding your brain.
When I came across this story, I immediately thought that we shouldn’t wait for retirement to do these things. This is solid advice for all of us, at any stage in our lives.
Do you know what sounds pretty great to me?
A life filled with purpose sounds pretty great. The same goes for being fit and smart.
The challenge is that work often gets in the way.
When we let this happen, the consequences can be catastrophic.
As just one example, lawyers as a profession have long struggled with mental health issues. I first learned about these challenges during law school orientation. Today, I see it in practice. Being a lawyer is a hard way to make a living. When you work as a lawyer, the hours are intense and stress levels are consistently high.
In 2023, the Washington Post analyzed data from the U.S. Bureau of Labor to determine what the most stressful jobs are. The study confirmed that lawyers are the most stressed.
Of course, lawyers are not alone in struggling in this regard due to long, stressful hours. The same study showed that people working in the finance and insurance industries were right up there with lawyers as being highly stressed.
Anecdotally, I’ve personally talked to people recently in a wide variety of other fields, like consultants and small business owners, who are frustrated for the same reasons.
The point is, regardless of industry, many of us struggle with work stress.
What can we do about it?
That’s a complicated question with many possible answers. For starters, I firmly believe that by building strong personal finance habits, we can create more opportunities to find purpose and practice good health.
I recommend you think back to our conversations about Parachute Money and why you should want to be good with money. When you’ve made thoughtful money choices, you can choose to live a life right now on your terms rather than waiting until retirement.
I agree with what you’re probably thinking. These are not easy or fun topics to think about. However, in my opinion, it’s much worse to let life go by while failing to take responsibility.
Am I wrong about people working too much?
Maybe I’m wrong about people working too much?
I don’t think I am.
The data paints a very sad picture for lawyers, and I have to believe anyone else working long and hard hours. If you have similar data about your profession, please share it with us. I hope I’m wrong about what that data will show, but I fear I’m right.
As always, let us know what you think in the comments below.
And, thank you for continuing to share stories you’ve come across that would be good to discuss here.
There may not be a more polarizing debate in personal finance than the concept of Good Debt vs. Bad Debt.
“Good Debt” generally means loans used to acquire income generating assets, like rental properties or businesses.
“Bad Debt” generally refers to consumer debt, which is personal debt owed because of buying things for personal or household use. For most people, this simply means credit card debt.
Two absolute giants in the field, Robert Kiyosaki (of Rich Dad Poor Dad fame) and Dave Ramsey (maybe the most well known personal finance expert in the world), take opposite viewpoints.
Before addressing their different opinions, it’s important to highlight that both Kiyosaki and Ramsey agree on a critical point:
All consumer debt is bad.
You’d be hard-pressed to find any personal finance expert who says that credit card debt is OK. I’d be concerned if you found anyone at all, expert or not, who seriously took the position that credit card debt is OK.
A quick side note: There is some difference in opinion as to what else besides credit card debt qualifies as consumer debt. For example, is your primary home mortgage considered consumer debt? What about your student loan debt? I’ll give you my take below.
Now, let’s take a look at how each Kiyosaki and Ramsey differ on Good Debt v. Bad Debt.
Kiyosaki believes in the power of Good Debt.
Kiyosaki argues that Good Debt is a powerful tool to generate consistent cash flow from investments. Kiyosaki defines Good Debt as debt that is used to buy assets like real estate or businesses that generate income.
As long as the debt leads to positive income, it’s considered Good Debt. For example, Good Debt would include taking out a mortgage to buy a cash flowing rental property.
Kiyosaki suggests that Good Debt can be responsibly used to quickly acquire more assets, even if the debt is considered a liability.
If it were up to Ramsey, there would be no distinction between “Good Debt” and “Bad Debt.” All debt is bad and carries risks that will weigh on your emotions and drag down your net worth.
Ramsey is adamant that debt should not be used as a tool to build wealth. He contends that a person’s income is the best way to consistently build wealth.
In his bestselling book, The Total Money Makeover, Ramsey walks you through how to build wealth without relying on debt.
So, where do I come out on the Good Debt v. Bad Debt debate?
Kiyosaki and Ramsey are personal finance legends. There’s no right or wrong in this debate. I appreciate each of their viewpoints.
Ultimately, what side of the debate am I on?
I’m on Team Kiyosaki.
When you responsibly use Good Debt, you can more quickly create income streams to accelerate your journey towards Parachute Money. However, if you’re struggling with consumer debt, taking on any additional debt, even Good Debt, is a bad idea.
Like other real estate investors, my wife and I have experienced firsthand the power of Good Debt. In seven years, we have acquired four cash flowing rental properties (three in Chicago, one in Colorado) that add extra income to our personal balance sheet each month. Without that income coming in, our financial picture would look completely different.
On top of that, we have benefited from appreciation with each of our properties, further increasing our net worth. Of course, appreciation is largely out of anyone’s control. Market conditions have been very favorable for us.
That doesn’t change the fact that we acted on opportunities when others only talked. We lived in small apartments for six years with a growing family. We responded to tenants whether we were on vacation or it was the middle of the night. Above all else, we stayed disciplined, focused on our goals, and paid the bills even when money was tight.
For these and so many other reasons, I believe in the responsible use of Good Debt to acquire cash flowing assets.
Just because we’ve taken on debt doesn’t mean we don’t worry about it.
All that said, Ramsey’s voice still rings in my ears when it comes to debt. Up to this point in our lives, my wife and I are comfortable with the Good Debt we’ve taken on to build our portfolio. Even so, we frequently think about Ramsey’s point of view and the valid debt risks he highlights.
Even with the extra rental income coming in, we still feel the heavy burden of mortgage debt. That’s why our goal for 2025 is to prioritize eliminating as much mortgage debt as possible. While we are comfortable with a certain level of debt, we don’t ever want to be reckless.
If you’re thinking about using debt to acquire assets, don’t ever ignore the heavy emotional toll that debt will have on you. Just as importantly, if you’ve struggled with debt in the past, be careful about going down that road again.
It’s easy to get blinded by the potential cashflow of an investment while ignoring the accompanying debt. Long before you ever sign the loan documents, make sure you’ve done your homework and thought hard about what it’ll take to pay that loan off.
What about primary residence mortgage debt and student loans?
I mentioned that I would share my perspective on whether debt to buy a primary residence or student loan debt is Good Debt.
I think both should absolutely be considered Good Debt.
This is one area where Kiyosaki and I don’t agree.
Why I consider a primary home mortgage Good Debt.
Kiyosaki favors using Good Debt to buy assets, meaning investments that put money in your pocket. A primary home does not put money in your pocket, so Kiyosaki would not recommend using debt for this purchase.
He’s not alone in this viewpoint. Many smart people think it’s financially foolish to buy a primary residence instead of renting. For an in-depth analysis on the question of buying vs. renting, check out this video from Khan Academy.
I don’t agree with this viewpoint. For most of us, our primary residence is the best way to build generational wealth for our families. This is not my personal strategy for building wealth. That said, I understand that this strategy is how most of us do build wealth.
Besides just wealth building, I appreciate more than ever how owning a home can be emotionally beneficial. Since we moved to our longterm home, I’ve already experienced the psychological benefits of establishing roots and feeling connected to a community. After bouncing around apartments in Chicago for nearly 20 years, I can tell you that it feels good having a permanent home.
So, I consider a primary home mortgage Good Debt. For similar reasons, unlike Kiyosaki, I recommend including your primary residence in your net worth.
Why I consider student loans Good Debt.
I also disagree with Kiyosaki on whether student loans count as Good Debt.
I don’t want to put words in Kiyosaki’s mouth, but his perspective seems mostly shaped by how he feels about the modern educational system in this country.
How exactly does he feel about our education system?
All things considered, it makes perfect sense that he thinks student debt is Bad Debt.
I don’t agree. I’m grateful for my education through law school. I learned how to think and solve problems. I learned how to challenge myself and do hard things. I think this is true for anyone that goes to school and takes it somewhat seriously.
I’m not discounting Kiyosaki’s point that maybe the system needs fixing. Regardless, I believe that education opens doors, whether that’s through connections made along the way or licenses earned (like the license to practice law).
From my perspective, debt incurred to pay for that experience and training is well worth it.
If that wasn’t enough, the data shows highly educated people earn more money. In fact, men with graduate degrees earn $1.5 million more over a lifetime than those with only high school degrees. That’s another reason why I consider an investment in yourself through student loans Good Debt.
Are you Team Kiyosaki or Team Ramsey?
Maybe you feel there is such a thing as Good Debt. Maybe not. Either perspective is completely valid.
In the end, can we at least all agree that credit card debt is always bad debt?
In today’s Q&A, we’ll address two great questions from readers about shopping for a home in today’s environment. We’ll also talk through how to know if you have enough Parachute Money.
As always, please continue to reach out with your questions on our socials or by replying directly to our weekly newsletter emails. I personally read and reply to every email.
Should I wait for mortgage rates to drop before buying a home?
This question has been on people’s minds for a few years now. Ever since rates started climbing from the all-time lows during the pandemic, people have been hoping they might significantly drop again.
In my humble opinion, that ain’t happening. At least not anytime soon.
Google “Are interest rates going to drop” and you’ll find that nearly every major news outlet and mortgage lender has a prediction. Most predictions right now are about the same. US News summed it up just about perfectly:
Analysts expect the 30-year fixed mortgage rate to stay elevated between 6% and 7% for the next two years. Just two months ago, economists thought it would fall into the 5% range by the second half of 2025. With such wild fluctuations in the forecast, you’d be just as likely to get a satisfactory mortgage rate outlook from a Magic 8 Ball: Cannot predict now. Ask again later.
Nobody knows what’s going to happen with rates. Just two months ago, US News thought rates would drop. Now, they’re expected to stay elevated. What are you supposed to do with that information?
I recommend you ignore it.
My advice is to buy a home when you’ve decided it’s the right moment in your life to do so. Make that decision regardless of what current interest rates are.
Why do I recommend you ignore mortgage rates?
There are really only three things that can happen to mortgage rates over time:
Stay the same.
Go up.
Go down.
In any of those three scenarios, there’s no point in basing your decision to buy a home only on the current rates. Let me explain.
Let’s say you have a crystal ball and can look three years into the future. Looking into your crystal ball, let’s play out each of the three scenarios mentioned above.
1. Your crystal ball shows you that mortgage rates stayed relatively consistent.
Since rates stayed the same, there would be no point in waiting to buy a home because of rates. The rates three years from now are the same as they are today.
By waiting, you’re likely going to experience that homes have gotten more expensive. The longer you wait, the more expensive they are going to be.
So, even if rates stay the same, prices are likely to go up and you shouldn’t sit around waiting for them to drop.
2. Your crystal ball shows you that mortgage rates went up.
If rates go up, it’s easy to conclude that it’s a mistake to delay your home buying decision. Higher rates, combined with higher prices, is… not good.
3. Your crystal ball shows you that mortgage rates went down.
This is the scenario that many people are waiting for. When rates go down, you can afford a more expensive home. That’s a good thing, right?
Not so fast.
Do you think you’re the only person sitting around waiting for rates to drop? For the same reasons that you’re waiting, many other people are also waiting.
So, what happens when lots of people are waiting to buy the same thing? Demand goes up. When demand goes up, you have more competition to buy that same house. That means prices go up. You’ll end up paying more money for the house, even with a lower interest rate.
Take it from me, bidding wars are not fun. I would much prefer to get the house I want without the added competition.
If mortgage rates end up dropping later on, I’ll refinance my loan into the lower rate. I may pay more on a monthly basis in the short term, but long term, I have the house I want at the best available current rate.
So, there you have it. No matter what happens to rates, in my opinion, you’re best off shopping for a home when the time is right in your life.
Forget about the rates. If rates do end up going down in the future, you can still benefit by refinancing.
My wife and I are considering buying a home that would be the most expensive home ever sold in the neighborhood. Is that a bad idea?
This is another great question. Opinions will certainly vary, so I encourage you to talk to your inner circle to get a variety of perspectives.
Personally, I have no problem buying the most expensive property in a neighborhood, under one condition: I plan on holding that property for at least 10 years.
Like the data above shows, home prices tend to go up historically. Since 1990, home prices nationally have appreciated on average at a rate of 4.4%.
If you’ve done your homework and are shopping for real estate in good neighborhoods, it’s only a matter of time before another home sells for a higher price.
The longer you hold the real estate, the more home appreciation works in your favor.
When we bought our first rental property in Chicago in 2018, we paid the highest price for any 4-flat in our neighborhood. At the time, we were a bit concerned that we were overpaying. Those worries were short lived. With seven years of appreciation working in our favor, numerous properties have sold since then for significantly more money.
Yes, there are always going to be dips in the market. Do not expect your home to steadily appreciate every year. This is why my one condition is to hold the property for at least 10 years. When you hold property (or any investment) for the long run, time is on your side. You can wait out any dips in the market.
As long as you’ve done your homework and are willing to hold a property for the long run, I would have no hesitations in buying the most expensive property in a neighborhood.
I’m fascinated by the concept of Parachute Money. My question is: how will I know if I have enough Parachute Money?
The idea of Parachute Money is one of my favorite concepts in personal finance. Check out our post here to learn more about how empowering Parachute Money can be.
To know how much Parachute Money you need, look back at your Budget After Thinking. All you need to do is add up your monthly Now Money and Life Money to figure out how much Parachute Money you’ll need to maintain your current life.
For example, let’s say your budgeting process taught you that you need $6,000 of Now Money and $4,000 of Life Money each month. Your Parachute Money target is $10,000.
If your goal is to walk away from your primary job, you’ll need to create $10,000 of income streams not counting that primary job. That could be from any combination of investments and side hustles. Once you hit $10,000 in parachute strings, you should be able to safely walk away from that job.
Note that for calculating your Parachute Money, you can ignore your Later Money goals. The reason why relates back to the purpose of Parachute Money.
The purpose of Parachute Money is to be able to choose to walk away on your own terms while continuing to support yourself.
Presumably, choosing to walk away from a bad situation accomplishes one of your primary goals for saving and investing money in the first place.
At this phase of your life, it’s OK to temporarily set aside your Later Money goals. If and when you choose to seek new sources of income, you can start fueling your Later Money goals again.
The exception to this rule is if you have debt obligations that are not accounted for in your Now Money. If that’s the case, be sure to include your debt obligations in your Parachute Money target.
One last thing about Parachute Money: achieving true Parachute Money is hard. Just remember, the payoff could be extremely valuable to you: not having to work your primary job if you choose not to. That’s the definition of financial independence.
Thanks again for all the great questions!
If we didn’t get to your question this week, we’ll do our best to get to it in an upcoming post.
We’ve all heard these common money phrases. If you were to ask someone older than you for one piece of personal finance advice, I’m betting you’ll hear one of these lessons. Let me know if I’m right about that in the comments below.
There’s a reason these phrases are so common. They’re simple and easily reflect some of our core personal finance principles. In fact, we’ve covered these concepts in detail in earlier posts:
It’s not that we want to have high debt and low savings. So why is this the reality for so many of us?
I have 3 main theories why we fall into debt.
There are countless theories on why people end up in debt. I have three primary theories. Looking at each of these explanations can help us understand and avoid common pitfalls that lead us into debt.
1. We fall into debt because we are simply careless.
Like many people, I failed to create a budget and assumed that my W-2 income was plenty. I ignored emergency savings and never even thought about creating Parachute Money.
The saddest part is that I didn’t even realize that I was slipping backwards. I had no idea because I didn’t track my net worth or savings rate. I worked hard all year long and just hoped things would work out.
By the way, if this sounds familiar, you should know by now I’m not judging anyone. I’ve been very open about my money mistakes. We all deserve a chance to learn about and talk about strong personal finance habits.
So, being careless with money is one common reason people fall into debt. Another common reason is that bad things happen in life.
This might include medical emergencies, home repairs or car troubles. It’s not our fault that these things happen. But, it is our fault if we’re not prepared in advance.
While these events are unfortunate, and maybe even tragic, they are not unexpected. We all need to expect that bad things will happen.
Preparing for the unexpected is part of every solid organization’s planning. In government, planning ahead means having a “rainy day fund.”
When managing properties, planning ahead for big repairs means having a “Capital Expenditures” or “Cap Ex” fund. For our personal finances, planning ahead means having an emergency fund.
Whether it’s government, business, or personal finance, the goal is to have options other than taking on debt to get through challenging circumstances.
3. Blame the Kardashians.
Besides carelessness and emergencies, there’s another powerful force that contributes to rising debt levels across the world. This force is nearly impossible to ignore. It’s become a part of our daily lives, whether we want to admit it or not.
What is this powerful force that contributes to our rising debt levels?
The era of social media and on-demand entertainment has made it harder than ever to avoid temptation. It’s everywhere we look.
Blaming the Kardashians realtes to another timeless, common money phrase: “Keeping up with the Joneses.”
The Kardashians are the modern day Joneses.
Once upon a time, “the Joneses” represented your neighbors, people you could observe from a distance on a regular basis. The idea behind the phrase is that you can see what your neighbors are spending money on and are either consciously or subconsciously tempted to do the same.
If your neighbors buy a new car, you buy a new car to keep pace. If your neighbors vacation in Australia, you research diving tours at The Great Barrier Reef. When you notice your neighbors hosting a backyard BBQ party with lots of happy looking people, you decide to host a party the next weekend.
As humans, it can be difficult to ignore the temptation to keep up with our neighbors. Whether we like it or not, we are concerned with our social status. Part of our self-worth gets tied to comparing ourselves to others.
Who better to measure up against than the people in our neighborhood who we probably have a lot in common with?
This same idea is oftentimes compounded in the professional setting. It is not uncommon to compare ourselves in the same way to our colleagues at the office.
Some professions heighten the pressure to keep up. Have you ever noticed that real estate agents seem to always drive nice cars? Or, big city lawyers wear fancy suits? It’s easy to get caught up in expensive tastes when you’re expected to fit in.
One of my favorite personal finance books, The Millionaire Next Door, discusses this concept in detail. I highly recommend you read this book if you are struggling with comparing yourself to others.
What does this all have to do with the Kardashians?
In today’s world dominated by social media and the internet, we’re no longer influenced just by our neighbors or colleagues. We’re now influenced by people throughout the world. That could mean friends or complete strangers.
Instead of just learning your neighbors went on vacation, now you know when anyone in your circle is on a trip. At any moment, you may be on the train in 12 degree weather heading to work. One look at your phone and you’ll see plenty of wonderful pictures of people doing cool things. It’s hard to not want that for yourself.
The byproduct of social media and the internet is the never ending temptation to spend money. Even if that means spending money we don’t have. That’s a powerful force pushing us deeper into debt.
I am fighting this temptation in my life right now. Having moved to a new home not long ago, there are so many things we want to buy and projects we want to do. I need to constantly remind myself to slow down so I don’t again fall victim to consumer debt.
Instead, the first part of the solution is to recognize when you’re making careless money decisions based on what you think other people are doing.
Making money decisions based off of your neighbors, let alone the Kardashians, is the fast road to debt. You have no idea why or how another person is spending money. For all you know, it’s all for show and that person is barely getting by.
Do you really want to blindly follow this person’s choices? Wouldn’t it be better to confer with people you trust to help you think through money decisions?
The second part of the solution is to recognize that everywhere you look, companies are clamoring for your dollars.
If you let that reality sink in, you’ll hopefully pause the next time you’re about to spend money on something you don’t actually care about.
This is where we circle back to money mindset.
To counteract social media and mass marketing, you need to have a competing force in your life that’s strong enough to overcome all the noise.
I’m referring to your ultimate goals in life. I mean the reasons you wake up every morning to go to a job or stay up late to finish a project.
Why are you working so hard?
When you can answer that question, you’ll know what your ultimate goals are in life. With those goals in the forefront of your mind, it’s much easier to make consistent, intentional money decisions.
Most importantly, you’ll stay on budget and avoid sinking into debt.
You’ll also be much happier when you stop worrying about what random strangers are spending money on.
Yup, 8 out of 10 of us have some form of debt. Put another way, just about everyone reading this post has debt. That’s why learning to effectively deal with debt is a core personal finance concept.
For the next couple of weeks in the blog, we’re going to focus on debt so we can continue our progress towards financial independence.
Those of us who don’t want to learn will remain debt’s financial prisoner.
As we begin our discussion on debt, let’s start with some scary statistics.
According to the Federal Reserve Bank of New York, total household debt in the United States grew to $18.04 trillion by the end of 2024. That’s such a big number, it’s hard to know what to do with that information.
Let’s break it down by the type of debt:
Credit card balances increased by $45 billion from the previous quarter and reached $1.21 trillion at the end of December 2024.
Auto loan balances increased by $11 billion to $1.66 trillion.
Mortgage balances also increased by $11 billion and reached $12.61 trillion.
HELOC balances increased by $9 billion to $396 billion.
Other balances, reflecting retail cards and other consumer loans, increased by $8 billion.
Student loan balances increased by $9 billion to reach $1.62 trillion.
While these numbers are still too big to comprehend, one powerful conclusion is hard to miss:
In every category, the amount of debt increased from the previous quarter.
48% of credit card holders carry a debt balance, an increase of 9% since 2021.
53% of the people have been in credit card debt for more than a year.
The main causes of credit card debt are unexpected medical bills (15%), car repairs (9%) and home repairs (7%).
According to another Bankrate.com survey, 33% of Americans report they have more credit card debt than emergency savings.
These last couple stats helps us begin to understand why so many people fall into debt in the first place. It goes back to our previous conversation about the importance of emergency savings. When we don’t have savings, the first place we turn is to our credit cards.
What can we learn from these scary debt statistics?
Whether we look at the national figures or per household numbers, the picture is clear.
Worldwide, we have a consumer debt problem. And, it’s getting worse.
For most of our conversation on debt, we’ll focus on credit card debt. Most everyone agrees this is the worst kind of debt to have. It’s also the type of debt that’s the most relatable to many of us, regardless of where we are in our careers.
Before we go any further, it’s important to understand the two main reasons why I share studies like these about debt.
1. If you are currently in debt, please know that you are not alone.
If your money mindset is not in the right place, it won’t matter. You’ll stay in debt, or worse, your debt will continue to increase.
2. If you think you are immune from falling into debt, think again.
When we are presented with statistics like this, it’s not uncommon for us to be in denial. We might say to ourselves:
“No, I understand that other people are in debt. But, that won’t happen to me.”
Or, “No, I make good money. I can pay off my credit card debt if I really wanted to.”
If it were really that easy, then why do half of Americans carry credit card debt? Why is our credit card debt growing instead of shrinking?
You may not currently be in credit card debt, and that’s a very good thing. But, what if one of those emergencies mentioned above surfaces in your life?
If you were hit with a large, unexpected medical bill, could you cover it without credit cards?
What if your roof needs to be replaced? Or, your furnace breaks during the middle of winter? Do you have tens of thousands of dollars saved to cover these necessary expenses?
Do you own a car? How awful is that annoying “Check Engine” light? A simple trip to the mechanic could be another few thousand dollars out of your pocket.
These types of financial emergencies do not discriminate.
Ending up in debt might come as an unpleasant shock to you. Knowing these statistics will hopefully put your mind at ease that you’re not alone.
So, even if you’re comfortable in your job and make good money, you may still end up in debt. If you do end up in debt, the lessons we’ll soon learn will ensure that your stay in the financial penalty box is as short as possible.
In our series on debt, we’ll soon learn:
How in today’s world of social media, “Keeping up with the Joneses” is really more like “Keeping up with the Kardashians.”
There is a difference between “good debt” and “bad debt.” When used responsibly, good debt can help you reach your financial goals faster.
Paying off debt is hard. It’s heavy. It’s stressful. There’s no shame in admitting that. Just because it’s hard, doesn’t mean we can ignore it any longer.
Whether you currently have debt or smartly want to be prepared just in case, our series on debt is crucial for anyone seeking financial independence. There is no faster way to undue all your hard work than to fall into debt.
You don’t need me to tell you that debt is a major barrier to reaching financial freedom. In fact, debt is oftentimes the exact opposite of financial freedom.
When you have debt, your choices are limited. It’s like you’re in financial prison. When you are free of debt, you are in control.
Maybe you feel like your airplane is a fighter jet, moving too fast to enjoy the ride. Maybe your airplane is a small regional carrier, boringly flying back and forth between the same two airports.
For whatever reason, you decide you need to get off this airplane. You decide to take control and make a change. You’re ready to jump.
All you need is a parachute.
You have a choice between the only two parachutes on the plane.
The first parachute has only one string (or line) connecting the canopy to the harness . You think to yourself, “This doesn’t seem very safe. What if that one string breaks? That would end very badly for me.”
Then, you look at the second parachute. This parachute has 10 strings. You say to yourself, “OK, this one looks much safer. If one string breaks, the parachute still has nine other strings to keep me safe. Even if something goes wrong with one or two strings, I would glide safely to the ground.”
It’s obvious which one of these parachutes to choose.
This situation illustrates what I believe is one of the most empowering concepts in personal finance.
It’s what I call “Parachute Money.”
Before we move on to our next core personal finance topic, credit and debt, let’s take a few minutes to discuss this powerful money concept.
What is Parachute Money?
The central idea of Parachute Money is to create multiple sources of income so you are not beholden to any one source.
Parachute Money includes your primary job, any side hustles, any income generating assets, and your emergency savings account. It also includes the income of your significant other, if you share finances.
With Parachute Money, if one of your sources of income dries up, you are more than covered with your other sources.
Picture each source of income as a string on your parachute. The more strings on the parachute, the stronger it is. Likewise, the more sources of income you have, the stronger your personal finances are.
Note that multiple sources of income does not have to mean multiple jobs. Even with one job, you can still pursue additional, or stronger, parachute strings.
Let’s say you earn a salary and also could earn commissions or bonuses. Each one of those income streams could be another string in your parachute.
Or, you could prioritize boosting your emergency savings even more than you normally would. You might even consider a separate savings bucket called “Parachute Money.” Besides boosting your savings, you could also focus on passive income streams, like investing in dividend stocks.
The central idea remains the same. Protect yourself with as many income sources as you can.
Think of Parachute Money as a way to visualize financial independence.
Parachute Money empowers you to confidently make big life changes. When you have Parachute Money, you are financially free to control your life, not the other way around.
Parachute Money is all about your intentional decisions. It’s for when you’ve decided, on your terms, that you’re ready to make that big change in your life. You’re excited to take matters into your own hands, but you don’t want to disrupt your entire life in the process.
To return to our airplane analogy, you could stay on the plane if you wanted. Nobody is forcing you to jump. But, you’re ready for something different. And when you do jump, you want a parachute that will help you land as safely as possible.
That’s what Parachute Money can do for your life. It allows you to make that leap while landing gracefully.
You could say it out loud like this, “I have Parachute Money. I am financially independent because I am not beholden to any single source of income. If one source of income goes away, because I’ve decided it’s time for a change, my other sources of income will protect me.”
Parachute Money is more than just emergency savings.
An emergency savings account is part of your Parachute Money, but there’s more to it.
Recall that an emergency savings account is what you turn to when life dictates your choices. If you unexpectedly lose your job or have a large bill to pay, emergency savings will keep you afloat. You didn’t choose for these things to happen, but you still need to be prepared.
So, emergency savings are for protecting yourself and your family from the unexpected. Like we talked about above, Parachute Money is about you dictating the course of events, not the other away around.
What are my current parachute strings?
My wife and I have worked hard to create multiple sources of income. We currently have the following strings in our parachute, in no particular order:
My primary job as a mesothelioma attorney
My wife’s primary job as an attorney
Rental Property 1
Rental Property 2
Rental Property 3
Rental Property 4
Law School Professor
Emergency Savings
Combined, these sources of money provide a solid parachute for us.
If you wanted to, you can break out some of these sources of income into further parachute strings.
For example, Rental Property 1 consists of 4 apartments. Each apartment could be a separate string. I teach multiple law school courses; each course could be another string. Like we talked about above, your job may include a salary, commissions, and bonuses. Each could be a separate parachute string.
What are some situations where Parachute Money can make big decisions easier?
Let’s look at three possible situations where Parachute Money can empower you to make the best choices for you and your family.
1. It’s time for a new job.
After working for the same company for 10 years, life around the office looks different.
Your direct supervisor left for a new job. You were passed up to take her place. New policies are rolling out, including a requirement to be in the office five days per week.
You feel stuck in place. You still like your job and most of the people you work with. And, you could hang around for the steady paycheck.
Or, you can take control and make a change. If you have Parachute Money, you can take your time looking for a new job that matches your priorities. Maybe you decide not to go back to full-time work at all.
2. It’s time to move.
You live with a roommate and have another 10 months on your lease. Things have gotten uncomfortable.
He doesn’t clean up after himself. He stays up late watching movies so loud you can’t sleep. He eats your favorite leftover Thai food you had saved for lunch the next day.
You could “tough it out.” He’s still a good friend of yours.
Or, you can take control and make a change. If you have Parachute Money, you can handle the costs of breaking the lease and finding a new apartment.
The problem is your parents have let it be known, in so many words, that they are to be consulted on how you spend their money.
You may think you are choosing where to live or where to send your kids to school. Deep down? You know your parents will have the final word.
You can continue letting your parents dictate your life.
Or, you can take control and make a change. If you have Parachute Money, you can tell your parents, “Thanks, but no thanks.”
Parachute Money gives you control.
These are just a few examples of how Parachute Money allows you to regain control of your life.
Notice that in each situation, you’re not dealing with a sudden emergency. Instead, you’ve reached a tipping point and decided it was time for a change. Without Parachute Money, your options would be limited.
In our example above about wanting a new job, Parachute Money allows you to make that leap. You may temporarily be without your primary source of income- that string on the parachute broke.
But, you’ll be more than fine because you have other parachute strings to land you safely, like an emergency savings account, a side hustle as a ghost writer for a blog, and a rental property.
Parachute Money is one of my favorite personal finance concepts.
The Simple Path to Wealth is a must read for anyone wanting to learn the power of investing on your own through index funds.
We’ll have plenty more to say about how Collins has influenced my own decisions in our investing series. I credit him for teaching me that investing does not have to be hard. It’s actually pretty simple if you follow his tips.
In his book and blog, Collins describes what he calls “F-You Money.” He tells the story of getting in a shouting match with his boss one day at work, shortly before walking away from that company. As Collins explains, nobody deserved an “F-You” more than that guy.
In Collins’ example, he had enough money saved up where he could say those choice words to his boss. His “F-You Money” empowered him to live on his own terms.
On your way to financial independence, don’t ignore Parachute Money.
The reason I love the idea of Parachute Money is because it encapsulates so many of the money wellness habits and goals we’re striving for with Think and Talk Money.
Think back to the image of the parachute with only one string. What happens if that one string breaks?
Likewise, what happens if your only source of money no longer fits into your best life?
As you think about these questions, picture yourself jumping out of the airplane.
What parachute are you reaching for?
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The only thing that’s taboo is avoiding your personal finances.
To help flip the script and convince you that talking money is not taboo, I plan to regularly post about the current money conversations that I’m having. Through my examples, I hope to encourage you to have similar conversations.
In our first “Great Talk” post, we’ll discuss what my wife and I decided to do with our Later Money throughout 2025. We’ll also talk about how really smart people I know have started budgeting. We’ll conclude with an empowering conversation I had with a friend about what you can do with your time if money wasn’t an obstacle.
What I’m doing with my Later Money in 2025.
Later Money is what you are saving, investing, or using to pay off debt. This bucket includes long term goals and investments, like retirement and college savings. It also includes emergency savings, paying off debt, or any other shorter term goals, like saving for a wedding or a downpayment for a house.
So, what are my wife and I doing with our Later Money in 2025?
We recently had a great talk about our options and came up with a plan that will guide us throughout the year. Before we talk about our 2025 goals, it’s important to keep in mind that your Later Money goals will change over time. That’s perfectly fine.
We purchased our first rental property in 2018, a four-flat in an up-and-coming Chicago neighborhood. Less than a year later, we bought a three-flat in the same neighborhood.
In 2021, we invested in a Colorado rental ski condo. In 2022, we purchased our fourth rental property, a three-flat, in the same (now booming) neighborhood in Chicago.
After living in our rental properties since 2018, we purchased a single-family home just outside Chicago in 2024.
During this timeframe, any spare dollar we earned went towards acquiring more real estate. We contributed towards other financial goals, like retirement and college, but our priority was investing in real estate.
Reading Small and Mighty Real Estate Investor helped my wife and I conclude that at this point in our lives, we have enough. If anything, we’re closer to having too much on our plate. We self-manage our 10 units in Chicago and work closely with a property manager in Colorado. With our full-time jobs and kids at home, we’ve bitten off as much as we can chew.
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.
We want to build a life full of experiences and memories. That means we need more time, not more money. Acquiring and managing more properties right now would take up a lot of time. That tradeoff is not currently worth it to us.
So, if we’re not pursuing additional properties in 2025, what are our goals?
After talking it through together and weighing all our options, my wife and I came up with these three goals for 2025:
Our third goal is to boost our contributions to our kids’ college savings accounts. We use what’s called a “529 college savings plan.” 529 plans are state-sponsored, tax-advantaged investment accounts. We use Illinois’ 529 plan because we receive a tax break as Illinois residents. Just about every state offers a 529 plan. They are a great way to save for college.
With our plan in place ahead of time, we now know where every dollar is going before we earn it. This takes the anxiety out of trying to figure it out after the money has already hit our bank account.
At the end of each month, all we need to do is make our Later Money transfers to each account. We can rest easy knowing that we’re making progress towards our personal finance goals.
How Budgeting is Helping Very Smart People.
One of my favorite moments since launching Think and Talk Money occurred just last week. Walking down the hall in my office, one of my colleagues called me over.
She was very excited to share that she started tracking her spending so she can create a Budget After Thinking.
We chatted for ten minutes. She’s been reading the blog on her commute to work every Monday, Wednesday, and Friday. She used Think and Talk Money vocabulary, like “Now Money” and “Life Money.”
She showed me the app she’s been using to track her spending, one I wasn’t familiar with and am now looking into. The best part was that she’s been telling her friends about Think and Talk Money because she’s already learned so much.
This is exactly why talking about money is not taboo. She taught me something new and helped me think about my own budgeting process. She gave me new ideas to think about.
How could this type of conversation be bad?
We didn’t need to talk numbers. We talked strategy and habits. That’s what talking money is all about.
What would you do with your time if money was not an obstacle?
I had lunch with an old friend last week at a downtown Chicago lunch spot that’s been serving up epic burgers since the 1970’s. My friend and I are both balancing careers as lawyers in Chicago with young families at home.
In between bites of a massive BBQ-bacon-cheeseburger, I asked him a question I like asking smart people:
“What would you do with your time if money wasn’t an obstacle?”
Without hesitation, he answered that he would work with his hands. He likes working on projects around the house. He gets immediate satisfaction from completing a repair or making an improvement.
His answer was great and very relatable. My years as a landlord has taught me the same feeling of satisfaction in completing a project.
What stood out to me the most was how quickly he answered the question. He knew exactly what he would do if money was not an obstacle.
This simple question helps illustrate what I mean when we talk about financial independence. It’s not an easy goal to accomplish, but I can’t think of a better goal to strive for.
You are financially independent when money is not an obstacle.
One of the biggest misconceptions in personal finance is that people that make a lot of money don’t have money worries.
I’m not saying that we should feel sorry for people that are high earners. I’m pointing out that personal finance education is important for all of us.
It’s not your fault if you’ve made poor money choices, up to a point.
I don’t blame anyone, high earners included, for making poor money choices (up to a point). Most people never learn basic personal finance skills.
Think about an emergency room physician. He was likely one of the top students in his class his entire life. He’s proven that he can learn complex matters. He can do the hardest things imaginable, like saving someone’s life.
The problem is he was never taught to use his brain to manage his own personal finances.
If that ER doctor is living paycheck to paycheck, he likely won’t receive much sympathy. He’s probably blamed for not making better money choices.
People will say he makes plenty of money. It’s his own fault. He must be irresponsible or selfish or craves expensive things.
Personal finance education is for all stages of our lives.
Personal finance education needs to continue throughout adulthood. So many of the concepts we talk about won’t resonate with high school kids who are still provided for by their parents.
One of my priorities with Think and Talk Money is to help you learn these core principles before you feel too much pain.
If you’re in the early stages of your career, there is no better time than now to develop strong money habits. It can be very difficult to correct bad habits as time goes on. A better plan is to work on developing good money habits now.
Don’t blame yourself or feel ashamed. Like the ER doctor, personal finance education wasn’t something you knew you needed. Now you know better. Time is still on your side, if you get started today.
Talking about money is not taboo.
One of my other priorities with Think and Talk Money is to confront the negative money stereotypes that dominate society. To start with, I’m on a mission against the common refrain that it’s taboo to talk about money with our family and friends.
Are we supposed to accept that it’s better to struggle alone?
That we should isolate ourselves in a constant state of worry?
That we are forbidden from seeking out help by talking to the people we trust the most?
I refuse to accept any of that.
Who even said talking about money is taboo in the first place?
I can keep going all day. I think you get the point. Talking money is not taboo.
Keep an eye out for posts about the current money conversations I’m having.
In the spirit of convincing you that talking money is not taboo, we are introducing a new post series this week. So in this continuing series, I will highlight the current money conversations that I’m having with my friends and family.
In our first of these posts later this week, I’ll share how my wife and I recently talked through our decision to split our Later Money between emergency savings, college savings and mortgage debt.
Let’s turn this simple question into a hypothetical scenario.
It’s time to learn one final (for now) important personal finance tracking metric, known as “saving rate.”
Congratulations on your raise!
Let’s say you’ve been at your job for a few years. Your current salary is $100,000.
It’s salary review time, and you set up a meeting with your boss. You want to make sure she remembers all your major contributions from the past year.
Prior to the meeting, you send her a letter setting forth your top accomplishments. It’s a hard letter to write. It doesn’t feel like a normal thing to have to brag about yourself.
You remember seeing a quote somewhere, “If you don’t advocate for yourself, nobody else will.” You push on and send your boss the letter.
On the day of your meeting, you’re nervous walking into your boss’ office. Why did I ask for this? She’s going to be so annoyed.
Before you even sit down, she puts your mind at ease. Your boss has a welcoming smile on her face.
She immediately thanks you for your thoughtful letter. She appreciates the reminder of all your accomplishments throughout the year.
Your boss tells you that you’ve always been a valuable member of the team. She thanks you again for reminding here of some of the specific projects you worked on that year.
It’s not a long conversation. Before you go, she asks what else the company can do to enhance your work experience. You walk out of her office feeling like a valuable member of the team.
You’re happy that you initiated the meeting, even though you didn’t enjoy the process.
A couple of weeks later, you receive an email that your salary is increasing by $20,000.
You couldn’t be happier. You earned it.
Wait, a raise?
Work continues as normal the rest of the week. By the time your next paycheck hits your bank account, you sort of forgot that you’re now making more money.
After taxes and retirement contributions, your biweekly (every 2 weeks) paycheck is now for roughly $538 more. That comes out to $1,166 more money per month, which of course, is a very good thing.
But, you need to figure out what you’re going to do with that money.
Ideally, you’ll have a plan in place before you receive the money. Whether it’s a raise, a bonus, or you switch jobs and earn a higher salary, the thought process remains the same.
Thinking about what to do with this new money is what I’m getting at when I ask, “What would you do right now with $20,000?”
No, it’s not coming in one lump sump payment.
Fine, you have to pay taxes on the $20,000 so it’s more like $14,000 in new money.
The point of the question doesn’t change. What are you going to do with this money?
3 options for what to do when you earn more money.
You now have more income coming in each month. Let’s talk through some of the options on what you can choose to do with that excess money.
Option 2: You tell yourself, “Man, I’m flush!” You start looking for a nicer apartment. And, you upgrade your plane ticket on your upcoming trip. You stop taking the train to work and instead opt for Ubers. Congratulations, you’ve become the real life, really lost boy.
I also find it most useful to express your saving rate as a percentage. To see your saving rate percentage, all you need to do is multiply your saving rate by 100.
Moving forward, when I refer to saving rate, I will be talking about your saving rate percentage. It’s more informative to see what percentage of your money you are saving, rather than an amount with no context.
What I mean is this: if someone asked me if saving $10,000 per year was a good target, I wouldn’t be able to comment with more context.
If that person was making $75,000 per year, I would say that seems pretty good. That’s a saving rate of more than 13%.
If someone told me they were making $750,000 per year, and only saving $10,000, I would recommend that person revisit their Budget After Thinking. That’s a saving rate of only 1.3%.
Follow these tips for calculating your saving rate.
Just like we talked about when creating your budget, don’t overcomplicate this process. Here are some suggestions to help you easily calculate your saving rate:
When you calculate your saving rate, be sure to use your take-home pay for “Money Earned.” This means the amount of money that hits your bank account after taxes and retirement contributions.
This next part gets a little bit tricky to explain, but it’s important.
If you get paid biweekly (every other week), that means you will receive 26 paychecks every year (52 weeks / 2 = 26). If you are paid twice per month, like on the 1st and 15th of every month, you only receive 24 paychecks.
OK, so what?
To determine your monthly take-home pay so you can calculate your saving rate, you need to know the amount you earn for the whole year.
To figure out how much you earn in a full year, multiply the amount you receive in one paycheck by 26 (or 24). That’s your annual take home pay.
Then, to calculate how much you earn per month, divide your annual take home pay by 12. This is the amount you’re going to use for “Money Earned.”
For “Money Saved,” include all of the money you are putting towards your Later Money goals each month (except your retirement contributions through work).
I know it’s called “saving rate,” but for this purpose, include all your Later Money in the saving rate equation.
Of course, we know that “saving” is different from “investing.” Saving is also different than paying down debt or any other personal financial goal you’ve set.
It doesn’t matter. When calculating your saving rate, your goal is to see what percentage of your take-home pay is fueling our Later Money goals.
When it comes down to it, there are really only two ways to improve your saving rate.
You can spend less, and save more, of the money you’re currently making.
You can make more money and save most of that money, all while keeping your expenses the same.
Combining those two ideas is even better. Like we just said, make more money, spend about the same.
Use the excess money you make to fuel your Later Money goals.
If you can do that, your saving rate and your net worth will steadily climb. You’ll experience that your Later Money goals are closer to becoming reality than you think.
Let’s do the saving rate math together.
Now that we know what our saving rate is and why it’s such a useful metric, let’s revisit our $20,000 raise to do some math together.
Going back to our hypothetical, you were making $100,000 before your raise. Let’s assume that your take home pay was $70,000 per year after taxes and retirement plan contributions.
Let’s also assume you were putting $1,000 per month towards your Later Money goals.
Using our saving rate percentage formulas above, we see that:
Money Earned = $5,833 per month ($70,000 / 12)
Money Saved = $1,000 per month
Saving Rate = $1,000 / $5,833 = .17
Saving Rate Percentage = 17%
17% of your take home pay to fuel your Later Money goals is great!
Now, let’s see what happens if you add your entire raise to fuel your Later Money goals.
Earlier, we assumed that after taxes and retirement contributions, your take home pay increased by roughly $1,166 per month. With your raise, your annual take home pay has now climbed to $84,000, or $7,000 per month.
Look what happens to your saving rate percentage when you add the full $1,166 to Money Saved (instead of spending it)
Money Earned = $7,000 per month ($84,000 / 12)
Money Saved = $2,166 per month
Saving Rate = .31
Saving Rate Percentage = 31%
You more than doubled your monthly savings contributions and improved your saving rate to 31%!
Think about how much more quickly you can reach your goals by planning out this one decision.
In this week’s Q&A, we talk about how the timing was right to launch Think and Talk Money, why you should consider a side hustle, and what comes next for the website.
As always, please email your questions or leave a comment below or on socials.
You have a lot on your plate. Lawyer, teacher, landlord, young kids… why launch Think and Talk Money now?
I had been thinking about writing a book or starting a website for a couple years. Over the holidays, my dad gave me the final push I needed.
We were casually chatting while the kids played in the other room. Out of nowhere, he said, “Matt, you should do it.”
Do what?
“You should write a book.”
Oh, no biggie.
I didn’t expect him to say that. He went on to explain how you get to a certain age and you look back on life and wonder where it all went. You think about all the things that you wanted to do but never got around to doing.
No regrets, blogging then book.
He knew I had been thinking about writing a book for a while and didn’t want me to regret not doing it.
I thought about it and realized he was right. I would never forgive myself if I didn’t take this chance.
Now that I’ve thrown this out there, I have to do it, right?
There’s never a perfect time in life. If I didn’t start Think and Talk Money now, I might never have gotten around to it. Something always comes up. It’s too easy to make excuses.
It’s true we have a lot going on. Fortunately, I had a system already in place that gives me time to write thanks to Hal Elrod’s The Morning Miracle.
I hesitate to say a certain book “changed my life.” This might be one of them.
For almost 10 years now, I’ve been waking up at 5:30 a.m. to read, journal, and relax. It’s so beneficial to have that time for myself, especially now with kids, before the day gets away from me.
Since launching Think and Talk Money, I use my mornings to blog instead of reading. I like teaching and writing about personal finance, so my mornings are still enjoyable.
We’ll spend some time in a future post talking about all the advantages of having a side hustle.
The obvious advantage is you can make more money. The important thing is what you do with that money to make the side hustle worth it. A side hustle is another time commitment, after all. If you’re going to take on the responsibility, make sure it counts.
Before you consider a side hustle, have a plan in place for why you want additional money. Are you looking to pay down debt faster? Save for a wedding? Invest in your first rental property?
One of my favorite experiences teaching personal finance to law students involved a side hustle. A couple of years ago, a student approached me during a break and told me about his credit card debt. It had been weighing heavily on him.
After our discussion about side hustles, he committed himself to driving for DoorDash and using the income to pay off his credit card balance.
Six months later he sought me out to share that the plan worked. His side hustle allowed him to pay off his credit card in less than six months. All while working a full-time job and attending law school par-time. I couldn’t have been happier.
To help you think through why you might want a side hustle, check out these three posts:
BTW, you’re not too busy or important for a side hustle.
Some people reading this will automatically think, “I’m way too busy to even think about another job.”
In my personal finance class for law students, we spend a lot of time challenging that notion. Very few people- and I mean very few- are too important or too busy to take on a side hustle.
You may think you’re one of those “too important” people. I would challenge you to assess whether you’re confusing “too important” with “too stressed.”
Setting that conundrum aside, the ideal side hustle is something you enjoy doing that can earn you extra money at the same time. Some examples my students have come up with in class include:
Bartending. Entice your friends to come to your bar by offering cheap drinks. You get to hang out with them and get paid at the same time.
Fitness instructor. Instead of paying $48 for the spin class you love, become the instructor and get paid to lead the class.
Dog Walker. If you love dogs and don’t currently have one of your own, what better way to fill that void in your life while making money. The same applies to babysitting.
Home Baker. Make homemade treats with your kids and sell them to parents who don’t have the time.
I’m reminded of another conversation my dad and I had when I was in high school.
Growing up, my siblings and I were busy kids. Sports, clubs, performances, classes, you name it. I made a remark to my dad about it at one point.
He responded that being busy wasn’t a bad thing because you don’t have time to fool around. When you have no choice other than to stay focused, you actually perform better in all facets of life.
You’re not thrown off by distractions because you’re locked in on accomplishing your goals.
After launching Think and Talk Money, I feel a heightened sense of focus. It’s benefitting me in all of my pursuits. I take care of business as best I can, while prioritizing my family and my health.
I can see your eye rolls through your screen.
This guys is nuts. He’s a workaholic.He has no life.
Have you ever used a HELOC to invest in real estate?
Yes, I’ve used HELOCs, which stands for Home Equity Lines of Credit, to scale my real estate portfolio.
This question leads to so many concepts we need to discuss, from debt and credit to investing. We’ll come back to HELOCs more fully in a separate post.
The bottom line is using HELOCs to scale your investment portfolio is a more advanced strategy that I would not recommend for everyone. I probably wouldn’t recommend it for most people, even experienced real estate investors.
I say that for good reason. When you hear HELOC, think debt. For many of us, debt is problematic and leads to negative emotions.
If you satisfy all of the above, a HELOC may be useful to scale your real estate portfolio. If you’re thinking about using a HELOC in the near future and want to talk it out, please feel free to reach out.
What’s it like being a blogger?
It’s only been five weeks, but I’m happy I took the chance to launch Think and Talk Money.
It’s been fun.
And, it’s been hard.
First, the fun stuff. I’ve enjoyed writing and talking about personal finance concepts that are important to me. I’ve especially enjoyed all the interactions with our readers.
One unexpected element I’ve appreciated is the sense of accomplishment that comes with publishing every post. This is very different from my experience as a lawyer where we typically work on a case for years before its conclusion.
I’ve also had fun writing in a new style. I haven’t ever blogged before. I haven’t done any writing other than legal writing since college. If you’ve ever had the pleasure of reading a legal brief or court opinion, first off, I’m sorry. Second, you understand how different legal writing is from blog writing.
Even though the writing styles are different, there is certainly some overlap in the fundamentals. My aim in both styles of writing is to be clear, concise, and informative. I hope to be somewhat interesting, as well.
As a blogger, I’m still finding my voice, as they say.
It can be challenging to make core personal finance concepts- like budgeting and saving money- educational, simple, and entertaining. If I’m doing my job, then my personal finance content should also be relatable and understandable.
Please let me know you have any feedback on what’s working (or not working for you)!
So, what’s hard about blogging?
Now, for the hard stuff.
My wife and I launched Think and Talk Money with zero knowledge, skills, or experience in starting a website.
Can you tell? Be nice.
We have no tech background whatsoever. Two months ago, I had no idea what SEO, caching, or plugins were.
If you’ve ever started a website, you know exactly what I mean. Creating the content is only the first step. So much more goes into it behind the scenes. We’re still only scratching the surface.
To sum it up, the tech stuff has been challenging and time consuming. We’ve learned so much already but have so much more to learn.
Thank you to everyone who has reached out with tips and suggestions!
What’s the end game for Think and Talk Money?
I completely understand why this is an important question to think about. The truth is we’re just getting started and haven’t thought about Think and Talk Money in terms of an end game.
I’ve always liked to teach and write, and this lets me do more of both. For now, our mission is to introduce the most important concepts of personal finance through the blog.
We post three times per week on Mondays, Wednesdays, and Fridays.
Some of the posts cover core personal finance topics in depth. Other posts are more targeted and address specific strategies or lessons.
There’s an intentional order to the way we’ve been introducing concepts. The order is important and mirrors the curriculum in my personal finance class for new lawyers.
Using this template, my wife and I have been tracking and discussing our net worth for years.
It takes me about 20 minutes to update my TATM Net Worth Tracker™️ each month. The hardest part is remembering all the passwords for our accounts.
When I finish entering the new account values, I study the TATM Net Worth Tracker™️ for about two minutes.
I hope to see that our money efforts that month resulted in our assets increasing in value and our debts decreasing.
When I’m finished with the updates, my wife grabs her coffee and sits with me. She will likewise study the TATM Net Worth Tracker™️ for about two minutes.
We’ll then spend about three minutes talking about the changes from the previous month.
And, that’s it.
It takes us less than 30 minutes each month to track and discuss what I consider the most important metric in personal finance.
That’s all the time it takes to know if we are progressing towards our most important goals.
By tracking our net worth, we can quickly see if we are making good money decisions or need to make adjustments.
I recommend everybody, no matter where you are in your financial journey, track your net worth.
Think of tracking your net worth in terms of keeping score during a basketball game.
If you don’t know the score of the game, you don’t know if your strategy is working. You don’t know if you need to make adjustments before time runs out.
The same applies to tracking your next worth. The point is to educate yourself on your current financial situation so you can make adjustments while there is still time.
In this post, we’ll talk about what “net worth” means, how to track it, and why it’s so important.
Let’s start with a little story about when I first learned what net worth means.
Going into hiding straight from a London pub.
One night when I was studying abroad in London, my good friend, Kais, and I were talking in a pub.
I don’t remember what we were talking about when, out of nowhere, he said something like:
“If I was in trouble and needed to go into hiding, I could sell everything that I own, pay all my debts, put the leftover money in the bank, and be fine for a couple of years.”
Uhh, OK…
At the time, I had no idea what he was talking about.
Still, I had to admit that it seemed pretty cool that he had that kind of financial flexibility.
I knew I couldn’t survive for a couple of weeks, let alone a couple of years.
It’s up to you to decide what assets to include in your balance sheet. There is no strict science to it.
That said, there’s no point in overstating (or understating) your assets. You (and your family) are the only ones who will be reviewing your balance sheet.
I personally don’t include all of our household items, but you are certainly welcome to. For me, it’s not worth the time and effort to determine how much I could earn by selling my TV or snowboard.
It’s perfectly acceptable if you want to tally up the value of your items. I think it makes sense to do so if you have a lot of nice things. If you choose to do so, aim for estimates, rather than precise values, to make your life easier.
Why it is so important to acquire assets.
Assets can, but don’t always, appreciate (increase in value) over time.
For example, a property may appreciate over the long term, but a typical car will do the opposite and depreciate (lose value over time).
Assets can also generate income, but don’t always. A good rental property should generate monthly cashflow. A stock portfolio can generate dividends (payments from companies to investors).
On the other hand, a designer bag won’t generate income, unless you charge people to borrow it. Even so, a designer bag is still considered an asset because you could exchange it for money.
To state the obvious, owning assets is a very good idea. Especially assets that appreciate and assets that generate income.
When you own these types of assets, your net worth will increase over time without much extra effort on your part.
You don’t have to specifically trade your time for money with these types of assets.
Think of it like this: the best way to achieve financial independence is to own assets that increase in value over time and generate income.
By tracking your net worth each month, you’ll know how your assets are doing.
Does my home count as an asset?
Some people, like personal finance legend Robert Kiyosaki, don’t think you should count your home as an asset. The argument goes something like, “You can’t really sell your home because then you wouldn’t have anywhere to live. So, you shouldn’t count it as an asset.”
I couldn’t possibly disagree more.
For many of us, our homes are our most important purchase in our lives. Over the long run, most of our homes will appreciate in value, even if not as much as we hoped.
We spend years working to make money so we can pay down the mortgage. Each payment we make reduces our debt and increases our equity in the home, thereby improving our net worth.
Don’t overcomplicate it. Include your home as part of your net worth. Just don’t forget to include the mortgage as a liability (we’ll discuss below).
How do you determine the value of your home for purposes of tracking your net worth?
Make it easy on yourself. The goal is to obtain a reasonable estimate. If you’ve worked with a real estate broker, ask her for the current value of your home.
She will use recent “comps”, meaning similar comparable properties in the area, to come up with a fair value.
You can also make a decent estimate of the value of your home by studying comps yourself. Platforms like Redfin or Zillow make it easy to see what homes have sold in your neighborhood.
Look for homes as similar to yours as you can find. Focus on size, the number of bedrooms and bathrooms, and the quality of the finishes.
Remember, this is not an exact science. We’re aiming for an estimate of your home value only for the purpose of measuring your net worth.
On our family balance sheet, I only update the estimated value of our properties once per year. That’s good enough for me, and all you really need to do.
Now that we know what assets are, we need to figure out what liabilities are to calculate our net worth.
Don’t let that discourage you from tracking your net worth. Even if you’re in negative territory, each month is a chance to shrink that negative number, which means your net worth is increasing.
Whether you are paying down debt, or adding to your savings or investments, the result is the same: your net worth increases.
The reason for tracking your net worth also remains the same: individual progress, over time.
Now that we know what assets and liabilities are, we can use the TATM Net Worth Tracker™️ to determine our net worth.
On the bottom, the rows represent the liabilities or debts you owe.
Each of the 12 columns (one column for each month) in the spreadsheet indicates the value of each asset at the end of the month.
The reason there’s a new column for each month, instead of just updating the values in a single column, is so you can easily see how your net worth has changed over time.
Once all 12 months for the year are filled in, start a new sheet and repeat the process. This helps you track how your net worth has changed over the long run.
Since your TATM Net Worth Tracker™️ is for your eyes only (or your family’s eyes), you can edit the asset and liability rows to match your personal situation.
You’ll notice there are different categories depending on what kind of asset you own.
I like separating it this way because it helps me quickly visualize if my net worth is concentrated in a particular category.
If our net worth is decreasing, it means we need to consider making adjustments.
Sometimes our net worth decreases because the markets are heading down. If that’s the case, we don’t do anything. At this stage in our lives, we can afford to wait for the markets to tick back up.
If the issue is that our debt is increasing, or we haven’t fueled our investments that month, we make adjustments.
By studying our net worth each month, we can catch these setbacks before they become a continuous problem.
Let’s start with recent news that impacted me personally.
A reminder to consistently evaluate your banking relationships.
For a long time, I used Capital One for all my savings accounts. When I started law school in 2006, there was a Capital One cafe right next to my school. You could get a cup of coffee for $.75 and talk to a banker at the same time. It was a cool concept and convinced me to bank with Capital One.
I told everyone about how great Capital One was. I had Capital One savings accounts and a Capital One credit card. You could say I was a huge Capital One fan.
One day that November, for whatever reason, I logged into my Capital One account to see what rate I was earning. I was sure it would be in the 4% range, and probably closer to 5%, since Capital One was a leader in online banking.
When my statement loaded, I was shocked.
0.30%!
Shocked probably isn’t the right word. I was disgusted.
0.30% in 2023 might as well have been 0.0%… from a bank that had been a leader in online savings accounts that I had banked with for 17 years.
What the heck happened?
Capital One, unbeknownst to me, switched my savings from its high interest platform into an account with the much lower interest rate. At the same time, Capital One was still advertising and offering top rates to new customers.
When I discovered the sneaky switch, I immediately closed all of my accounts and transferred my money to a new bank. I no longer have a Capital One credit card, either.
Capital One, of course, denies the allegations. Maybe they did nothing legally wrong. For me, I saw the deceit in my own statement and the damage was already done.
Why do stories like Capital One’s alleged deceptive practices matter?
It wasn’t the amount of interest I lost out on that bothered me.
For me, it was about the principle. I don’t want to have any relationship with a bank that would do that to its customers, especially long-term customers like me.
That said, I have to admit that writing this post is reopening old wounds.
I did a quick search in my inbox and found a Capital One statement from December 2022 showing a 0.30% interest rate. That means Capital One had deceived me for at least a year before I caught on.
Now I’m getting hot all over again.
“Take a deep breath,” as my son says to his sister when she’s crying.
On the bright side, this experience was a good reminder of how important it is to look at our accounts regularly.
As The WSJ notes, “Bigger credit-card balances mean people are paying more in interest charges, with rates hovering around their highest levels on records. The average credit-card rate was around 21% late last year, according to data from the Federal Reserve.”
It’s because I’ve personally felt the negative emotions tied to credit card debt that I never like seeing stories like these.
I understand that some people don’t have options besides using credit cards because of life circumstances. I’m hopeful that through money wellness education, more and more people will realize that they do have options.
Let’s look at one of the potential issues with articles like these. Empower reports that the average balance for someone in their 50’s is $592,285, and the median balance is $252,850.
That’s a big difference. Let’s refer back to high school math (ok fine, Google) for a refresher on what “average” and “median” are.
The average balance is calculated by adding up everyone’s account balance and dividing by the total number of people. The median reflects the middle account balance if we list everyone’s balance from smallest to largest.
Using Empower’s data, the average balance seems skewed on the high side. This is likely because of a subset of high net worth individuals driving the average up. The median value is probably a more informative number for the average American.
Let’s put this all another way. Whether my colleague has $50,000 saved or $500,000 saved should not impact my retirement planning. The amount he has saved doesn’t matter to me.
Instead of talking about his numbers, I can still benefit from talking to him about his goals. I should be talking to him about his money mindset, like what motivates him to save in the first place.
Am I saving too little or too much for retirement?
My perspective on work, family, and life has undoubtedly been shaped by visiting with my clients in their homes and talking about their life experiences. I am forever grateful for what I have learned in these moments.
I also think about Bill Perkins and his excellent book, Die with Zero. You can read more about Perkins and his philosophy that many of us are saving too much for retirement on the Die with Zero website.
For my own money decisions, I’m still sorting out these three competing realities:
Some people, like my mesothelioma clients, don’t get to enjoy a full retirement;
Others outlive their money in retirement; and
Still other people saved more than they’ll ever spend in retirement.
My main takeaway is that I want to make choices today that allow me to spend more time with the people I love and more time doing the work that I love. However those three realities play out in my own life, I’m confident I won’t regret living this way.
This mindset is what led me to start Think and Talk Money. I enjoy helping people think through these types of choices.
Please help me spread the word about Think and Talk Money so more of us can consider these important concepts.
In our last post, we talked about the importance of fueling your savings and how savings differ from investments.
Here, we’ll discuss how to best optimize your savings so you are protected in times of emergency and can achieve your short-term goals.
We’ll also talk about whether you should automating your savings, and if it makes sense to start saving while you’re paying off debt.
Let’s begin with the most important savings account we all need: an emergency savings account.
The first savings account you need is an emergency savings account.
The first savings account you need is commonly referred to as an emergency savings account. This is your ultimate security blanket for whatever life throws at you.
For example, if you lose your source of income, your emergency savings will keep you afloat until you find a new source of income. The idea is to use your savings so you don’t have to pull from your long-term investments.
Your emergency savings is not just for when you lose your job. Your emergency savings will also protect you in times of emergency (brilliant, huh?), like unexpected medical bills or expensive home repairs.
The idea remains the same: instead of pulling from your investments, you will have cash available in your savings account to cover your needs.
Aim for 3-6 months of Now Money saved for emergencies.
Aim for building up 3-6 months of your Now Money saved in a dedicated emergency savings account.
Because Now Money represents the consistent, reoccurring expenses that you need to pay every month to take care of yourself and your family. Since you will only be using this money in times of emergency, you can, and should, forego some of life’s luxuries until you get back on track.
The same is true for fueling your Later Money goals. Take a pause until you sort out whatever it was that caused you to spend your emergency savings in the first place.
Come on Matt, should I save 3 or 6 months of Now Money?
It depends! Personal finance is personal.
If you have no dependents, 3 months worth of savings is a good benchmark. In most circumstances, that should give you enough time to get back on your feet.
If you have dependents, that means you are responsible for additional humans, sometimes tiny humans. These humans are counting on you for support. Targeting 6 months of savings is a good idea so you can continue to provide for them.
You should also consider your source and consistency of income when deciding how much you’ll need saved for emergencies. If you are not paid regularly throughout the year, you should target a larger amount in your emergency savings to cover those longer gaps between pay.
When you are part of a dual-income household, you may be able to get away with less emergency savings since two people are contributing to the monthly bills. If one of you suffers a sudden job loss, the other person’s income can still be used to keep the household afloat.
One last thing: Building up to 3-6 months of emergency savings will take time. Don’t pressure yourself to accomplish this goal overnight. Each month, you can add to this account until you reach your target. Any and all progress is good progress.
Do not rely on credit cards for emergencies.
Unfortunately, many of us rely on credit cards to pay our bills. When we do this, our debt grows and cancels out any gains we’re making through our savings and investments.
Just as you shouldn’t pull from your investments in times of emergency, you should not rely on credit cards to protect you.
Savings is also for more fun, short-term goals.
We just talked about the first savings account you need, an emergency savings account. I agree with you that thinking about emergency savings is not exactly fun. Job loss… medical treatment… car repairs. Yup, not fun.
Let’s talk about more fun stuff. Savings is also for short-term goals, whatever those goals are for you. This is your Later Money in action fueling your life goals.
Remember, we said emergency savings was your first account. Not your only account.
Once you’ve identified your specific Later Money goals, it’s a good idea to create separate savings accounts, or buckets, for each goal. This will help you visualize the progress you’re making towards each goal. It will also help you not use your savings that was intended for one goal on something else.
What kind of savings buckets might you have? Before I got married, I had separate savings accounts for:
Engagement ring
Wedding
Down payment on a home
Travel
Cubs Season Tickets
Emergency Savings
Budget Busters
I had a specific amount in mind for each category and would make transfers each month into those buckets. Not each account received an equal amount.
For example, I knew how much I needed for Cubs tickets, usually payable at the end of the year, and divided that amount by 12 months.
The amount needed to purchase something like an engagement ring was more… fluid.
My students in recent years have suggested other savings buckets, as well. We’ve talked in class about saving for a car, saving for holiday presents, and saving for kids’ schooling.
Whatever your savings goals are, using separate buckets will help you stay on track.
Setting up separate savings accounts online is easy.
It’s easy to set up separate savings accounts online with most major banks. Once you create your initial account, you can create sub-accounts that will appear on the same landing page as your primary account. Each account will have an individual account number, and you can label them however you like.
When you do set up your savings accounts, it’s a good idea to have a different bank for your primary checking account and your savings accounts. This will help you resist the temptation to spend your savings. Out of sight, out of mind, and all that.
I’ll soon have a post on my favorite online savings accounts. There are a number of them out there that offer good interest rates and a solid user experience.
Automating your savings is a good idea, but I don’t personally automate.
I automate a lot of my money tasks, like setting up automatic bill payment for every bill that comes to mind. This includes my mortgages. I also have automatic deductions taken from my paycheck for my 401k plan.
Automating your money is a very good idea. In The Automatic Millionaire, David Bach explains how the single step of automating your finances can help you live rich and retire richer. You can learn more about Bach’s philosophy on his website.
I don’t disagree with Bach and implement many of his strategies in my own life. The Automatic Millionaire is definitely worth a read.
Still, I don’t automate my savings transfers.
I automated my savings transfers in the past and learned that I prefer the emotional high of manually making savings transfers.
I like how it makes me feel to go into my checking account and transfer that month’s Later Money to my savings. It makes me feel good to see the pop up on my computer: “Your transfer is complete!”
I like that feeling so much that I’m not worried about skipping a savings transfer. That moment gives me a lot of joy.
If you have debt, should you still build up your emergency savings?
During my money wellness class, I usually get a question like this:
“Should I build up my savings while I’m paying off student loans or other debt?”
My recommendation is different depending on the type of debt. That’s because interest rates are generally much lower for student loans or mortgages than for credit card debt.
In a future post, we’ll talk about what is commonly referred to as “good debt” and “bad debt.” Student loans and mortgages, in my opinion, represent good debt. Credit card debt is almost universally considered bad debt.
Typically, good debt has much lower interest rates than bad debt. You might be paying 20% or more on your credit cards and closer to 8% on your student loans (and probably even lower on your mortgage).
If you have high interest credit card debt, pay that off first before you prioritize savings. It doesn’t make any sense to pay 20% interest to a credit card company just so you can earn 4% interest in a savings account.
On the other hand, if you have student loan debt or mortgage debt, I recommend you start building your emergency savings account while you’re simultaneously paying down that debt.
Yes, paying 8% interest is mathematically worse than earning 4% in savings account. If you are driven strictly by the math, you should pay off that 8% debt before you start saving in a 4% interest account.
Never forget that money is emotional.
But, money is emotional. I think it’s worth paying the interest on your good debt so you can experience your savings growing.
Plus, if you do have an emergency that requires you to tap into your savings, you won’t have to rely on credit cards and pay the much higher penalty.
Keep in mind that if you go this route, you still need to make your required debt payments. We are only talking about extra money that you have available that could go towards additional debt payments or to savings.
The temptation to ignore your savings is real, especially when you have debt.
The temptation will be there to pay off whatever debt you have as quickly as possible and forego saving altogether.
I still feel this temptation every month. Should I contribute my next dollar to building up savings or paying down mortgages?
For most of the past year, I was laser focused on paying down mortgage debt. More recently, I’ve reassessed and have been working to build up my savings.
Having talked it over with my wife, we want to make sure we’re protected should something unexpected happen, even if that means temporarily slowing down our progress on our mortgages.
This way, we won’t end up in a cycle of using credit cards to cover us in times of need.
If you’re faced with a similar decision, know that you’re already ahead of the game by even thinking about how to use your Later Money to fuel your goals.
Whether you are paying down debt or increasing your savings, you are heading in the right direction.
Please drop a comment below if you have any additional tips to share!
Do you prefer automatic savings or manual transfers?
What are some of your favorite savings buckets you’ve used?
Only 10% of households are completely satisfied with the amount of money they have saved.
Only 20% reported saving more in 2024 than in 2023.
These numbers are scary. You can read more here. The scariest part for me is that these results aren’t surprising at all. They closely mirror the stats I first showed my students back in 2021 when discussing savings.
Why are these numbers so scary?
In the abstract, I can understand why these stats may not seem too scary to you.
Let’s look at another stat that illustrates what happens when we don’t have adequate savings:
About 33% of households would not be able to pay their bills or expenses for one month, if faced with a sudden loss of income.
This number rises to 38% of Gen Z and 41% of Millennials who report they could not pay their bills for even a month.
What do these numbers mean?
1 in 3 people currently reading this post, in the comfort of their homes they have worked so hard for, would not be able to afford those homes for even one month if they suddenly lost their jobs. It’s worse for Gen Z and Millennials.
Maybe you’re on the train commuting to work while reading this. How many people are in the train car with you? 30 or so? Pick out 10 passengers, really look at their faces.
They’re just like you, typically good people, working a job to provide for themselves and their families. If these 10 people suddenly lost their jobs, they wouldn’t be able to pay their bills next month.
Count me in the group of people not completely satisfied with their savings.
If you read these stats and are honestly not worried about your savings, you are in the minority and are doing a tremendous job managing your personal finances.
Keep up the good work and please let us know in the comments below what strategies are working for you.
On the other hand, if you’re being honest with yourself, you’re most likely in the 90% of people that are not completely satisfied with their savings.
We now have work to do to build our savings back up. Instead of presently shopping for investment properties, we are now focused on paying down mortgage debt and increasing our savings.
Most people attribute their low savings to rising cost of living.
What is the most common explanation given by people that have so little saved? Rising cost of living across the nation:
Nearly 66% of Americans believe that the cost of living for the average family is not affordable in their area.
Millennials and Gen X are the most worried about the cost of living, with more than 70% of each group feeling unprepared. 64% of Gen Z and 59% of Baby Boomers likewise feel unprepared.
Cost of living includes necessary expenses like housing, food, transportation, and healthcare. In other words, Now Money.
There are any number of reasons we can point to that are combining to drive up the cost of living, like limited housing inventory, higher interest rates, and more expensive groceries.
Whatever the reason for why costs are going up, I’m more interested in adapting and thriving in the current environment rather than making excuses.
So, what exactly can we do to improve our savings?
The next part, figuring out what to do with that money you generated for savings, is much easier. Before we talk about specific savings tips, let’s make sure we’re on the same page as to what we are trying to accomplish through saving.
Savings are for short term protection and short term goals.
When we talk about savings, what exactly are we talking about anyways?
Savings (pleural) means “the excess of income over consumption expenditures.” Much better.
That’s about as simple as it gets. Savings is the money you have left over that you didn’t otherwise spend. In Think and Talk Money vocabulary, it’s your Later Money.
In The Richest Man in Babylon, George Clason described savings with one of my favorite quotes in all of personal finance:
Actively saving money to fuel your Later Money goals is a non-negotiable step towards financial independence.
You can use your savings to protect yourself and your family in times of need. You can also use your savings for short-term goals, like paying for a wedding or a downpayment on a house.
Think of it this way, your savings make it so all those hours you spend on the job- the time away from your family or your passions- was not for nothing.
What is the difference between saving and investing?
Keep in mind that savings is different from investments, although both count towards your Later Money.
Savings is for (1) short term protection and (2) short term fuel for your life goals. Your savings is your security blanket for the here and now so you don’t have to take away from your wealth-generating investments at the wrong time.
Keep this money in a dedicated savings account (or accounts) so the money is readily available when you need it.
Investments are assets that you purchase with the goal of making a profit over time. That might be through the stock market, real estate, or any number of other options. Think of investing as the best way to supercharge your wealth over the long term.
Investing is a major component of overall money wellness, but investing comes with risk. As the saying goes, “you don’t get something for nothing.”
Because you can lose your money in any investment, it’s not a good idea to expect that money will immediately be there when you need it. That’s one reason why you should have savings distinct from your investments.
One way to counteract investment risk is to invest for the long-term, so you don’t want to interrupt those investments for short-term goals. This is another reason why we need savings in the short term.
One final point about saving vs. investing. There is a point when you will have enough saved in the bank that you can solely focus on growing your investments. This is a very comfortable place to be and where I am currently focused on returning.
Saving is an essential part of overall money wellness.
To recap, saving money to fuel our Later Money goals is crucial to overall money wellness. Sometimes, we’ll use our savings for protection, like in times of emergency. Other times, we’ll save with a clear goal in mind, like paying for a wedding or a house.
Saving is not the same as investing, although both are important. The reason we save money, rather than invest it, is so that money is readily available when we need it.
In our next post, we’ll discuss what to do with the money we are saving for maximum results. We’ll cover some key strategies for what to do with the money you have generated so your savings align with your overall money goals.
Let me know in the comments below if you’re not completely satisfied with your savings, like me.
Have you taken any steps to join the 10% of Americans who are completely satisfied?
My favorite teachers share a common gift of using analogies to make a teaching point more clear. My mentor and moot court coach in law school (he preferred we call him Sensei) was an expert at analogies.
Back in law school, after working for months on a brief for a moot court competition, my team messed up and submitted a brief with a bad formatting error on the cover page.
We knew we were going to get penalized, but after months of working on it, we still felt proud of our work. And, it felt good to be done.
We called Sensei in celebration that we were finished. When we told him about the formatting error, he was… not pleased.
“You fumbled the ball on the one yard line!”
I told you he was good with analogies.
Analogies can help us internalize key money concepts.
I’ve found that analogies work well when trying to implement key money wellness habits into our lives. Like the idea of generating fuel for our ultimate life goals through our budgeting choices.
I’m always on the lookout for new analogies to help make money concepts more relatable. It probably has to do with the common misconception that being good with money means knowing the ins-and-outs of the stock market.
Relating money concepts to other familiar areas of life can help with that.
This is one of the things I like best about teaching personal finance. Money touches all aspects of our lives, whether we like it or not. So, talking about money is really just talking about life. Sometimes that means using analogies.
Which leads us to Peloton.
See you on the leaderboard.
My wife and I bought a Peloton bike during the pandemic, probably like a lot of you. I’m still a big fan, especially because of the flexibility an at-home workout provides when juggling life with kids.
It occurred to me the other day that my friends and I talk about Peloton a fair amount. I pretty much know who all their favorite instructors are and what type of music they ride to. I’ve been accused of having a hot bike that juices my score, which I continue to deny.
There’s nothing better than doing a Peloton ride at home and seeing that your friend is doing the same ride. It gives you a jolt of energy to know your friend, in that exact moment, is doing the same thing as you.
You know where I’m going with this Peloton analogy.
It’s long been normal to talk about and motivate each other to exercise. But, it’s still considered taboo to talk about money.
Why can’t we talk about money the same way we talk about exercising?
I’m guessing that you know exactly what your closest friends and family members do for exercise. Weights? Yoga? Jogging? You also know which people do nothing at all.
I’m also guessing you have no clue what motivates each of these people to work 2,000 plus hours per year to make money.
Or, what their strategies are for using that money they make to fuel their life goals.
Exercising has long been made better with a personal trainer or a friend to keep you on track. Those days when you don’t feel like working out, having someone to push you is a great advantage.
Why shouldn’t we seek out that same great advantage when it comes to our money, something that touches every aspect of our lives?
This idea extends well beyond exercise habits. I’m sure you know your friends’ current favorite travel destinations, books, and food?
For me, it’s paying down mortgage debt on our rental properties.
What are you waiting for?
When we moved to our new neighborhood, the first people we met at the playground were a lovely couple that own a local fitness center. They’re also real estate investors and have young kids, like us.
We’ve become friends and have had some amazing talks about life and money. In one such talk, I mentioned that I was thinking about starting Think and Talk Money.
My friend heard me out and didn’t say a word until I finished. He then looked me square in the eyes, like only a coach could do, and said, “What are you waiting for?”
He was absolutely right. A few months later, I launched Think and Talk Money and sent him a message thanking him. I was grateful for our talk about life. He was happy to have motivated me.
Our friends can help with money just like they can help with exercise.
Lately, I’ve thought about how much my friends and I can help each other if we talked about money concepts just like we talk about Peloton.
One thing to mention, I don’t want to give you the idea that we’re constantly talking about exercise. It comes up from time to time, every once in a while. That’s enough of a reminder to pay attention to our fitness. Talking money is the same thing.
You don’t have to bring up money with your friends every week or even every month. How about just every once in a while when it’s on your mind? I think you’ll find your friends are the best people to help you stop worrying about money.
I think you’ll also find that you can be the one helping and motivating your friends. You don’t have to be an expert. Sharing any ideas can help jumpstart the thought process for your friends. That’s a really good feeling.
Always remember, the amount of money we have doesn’t matter anymore than our scores on the bike. There’s no reason to talk about numbers unless the people in your life are comfortable with that.
One caveat, I encourage you to talk specifics with certain people who are impacted by your money choices, like a spouse or partner.
The point of talking money is not to compare yourself to others.
Fitness instructors know that it’s not helpful to tell people to compare themselves to each other. We’re all built physically different and emotionally different. Instead, they encourage us to seek personal improvement, consistently over time.
That’s how we should be talking money with our friends.
We all basically agree with this concept, right? That it’s not helpful to compare ourselves to others. That’s a lesson that’s been drilled into our brains since we were kids.
Let’s remember that lesson when we start approaching our friends to talk money. It’s not how much money any of us have, it’s what we’re doing with that money to fuel our goals that matters.
Do you talk to your friends about paying for college?
Many of my friends have young kids like me and saving for college is a common goal we share.
Wouldn’t it be beneficial for us to talk about how we’re planning to pay for it?
By talking about paying for kids’ college educations with your friends, you may learn about education-specific investment accounts, like 529 plans, which is a common strategy we’ll soon discuss.
You may also learn less common, but potentially more appealing, strategies for your situation. An example is buying an investment property when your kids are young with the intention of selling it years later to pay for college. This is what Brandon Turner did, and he’s a very smart guy.
The idea is you may learn something that makes it more likely to achieve your goals, whether that’s paying for college or anything else, like saving up for a wedding or paying off student loans.
Is there a stronger motivation than helping your friends and loved ones?
You don’t have to talk numbers. Talk about the strategy and help each other stay consistent. You both will benefit.
Is there any stronger motivation in life than helping our friends and loved ones? On the same note, what better people to learn from than your friends, people you know and trust.
That’s what talking money is all about.
Leave a comment below if you’ve talked money with any of your friends lately.
How did it go?
Did you learn anything that you’d recommend when approaching the topic of money?
When people learn that I’ve been teaching money wellness to law students, I usually get a reaction like, “I need that class! I know nothing about investments and the stock market.”
It’s a fair reaction. Investing in the stock market can be complicated. Most of us never learn basic stock market principles, let alone how to manage an investment portfolio.
It’s also a reaction that has always fascinated me. Yes, wanting to learn about investing is important. But, it’s not where money wellness begins.
I often wonder, why do people automatically assume that money wellness means investing? There are so many things that we need to get right before we can focus on investing.
Learning about the stock market wasn’t going to help me when I was struggling with debt. I needed to first figure out how to make better spending choices and get out of debt. I needed to play defense before I could go on offense.
Yes, investing is important.
No, it shouldn’t be the first thing we think of when we hear money wellness.
We’ve hardly mentioned investing so far in this blog.
Have you noticed that so far in the Think and Talk Money blog we have hardly even mentioned the word “invest”?
That’s because in order to invest, we first need available money.
We will talk about investing once we have a plan to continuously generate money to invest.
We will soon talk about investing. A lot. Don’t worry. In my money wellness class, we discuss in depth the importance of investing to create wealth.
Here at Think and Talk Money, we will also talk extensively about investing, including in the stock market and in my preferred asset class, real estate.
Investing is not as hard as generating money to invest.
For now, our goal is to establish sound habits so we have real money to consistently invest over time. It doesn’t make sense to learn how to invest until we have a strong foundation in place.
I think you’ll also find that investing is really not that hard. If learning how to do it on your own doesn’t sound like something you want to do, there are professionals that can do it for you. Whether it’s a good idea to go that route is something we’ll discuss so you can make an informed decision.
If you do hire a professional to invest your money, you still need to know enough so you can talk to this person.
Plus, this person will likely tell you that your ongoing mission is to generate more cash to fuel investments. That’s what we’re focusing on now.
The fun part is once you’ve discovered your motivations and established strong habits, you will consistently have money available so you can invest month after month for the rest of your life.
You could be a terrific investor. If you only have $1,000 to invest a single time, your upside will be limited. If you continuously generate $1,000/month of Later Money to invest, your options (and your wealth) will grow exponentially.
My wife and I would not own five properties today if we didn’t first learn personal money wellness.
My wife and I would not own five properties (11 rental units) today if we had not first learned money wellness fundamentals. I don’t just mean we wouldn’t have had money available to invest, although that is certainly true.
I also mean we wouldn’t have the skills and knowledge to successfully run our real estate business. If you’ve ever wanted to be a business owner or investor, working on personal finance skills now is critical.
Maybe that’s not your path. Still, these skills are critical whether you are a consultant, a writer, or a teacher. Would you agree that having money issues and stress at home can distract you from performing your job at the highest level?
How many hours per year do you work to make money?
Lately, when people ask me why I’m so passionate about money wellness, I respond with a question of my own that goes something like this:
“Let’s say we work 2,000 hours per year to make money (40 hours per week, 50 weeks per year).
We won’t even count all the hours we spend getting dressed and commuting to our jobs.
We also will pretend we’re not looking at our emails in the evening and on weekends.
We definitely won’t count the hours we’re staring at the ceiling fan because we can’t sleep.
OK, so that’s 2,000 hours (plus) per year, to make money.
How many hours per year do we think about what to do with that money?”
Let that sink in for a moment.
How many hours do you work every year to make money? 2,000? 3,000? I’m guessing a lot of those hours are stressful.
Now, how many hours do you think about what to do with that money?
Do you spend any hours at all talking about what to do with that money?
This is why I am passionate about money wellness. Most people spend the vast majority of their lives worried about making money and practically no time at all thinking about what to do with that money.
No, I’m not suggesting that you need to think about money for 2,000 hours per year.
What I am suggesting is that even that little bit of time each week spent thinking and talking about money is just as important as the time you spent earning it.
Think and Talk Money is about encouraging each other to make purposeful money choices.
Robert Kiyosaki put it best in Rich Dad Poor Dad, “It’s not how much money you make. It’s how much money you keep.”
If you knew someone that made $1,000,000 per year, and at the end of the year, had only invested $20,000, what would your reaction be?
What if you knew someone who made $100,000 per year and invested $20,000? Did your reaction change?
Think and Talk Money is all about actively thinking and talking about money so we can help each other make informed choices with our hard earned money.
Whether you make a lot of money or a little money, it doesn’t matter. What you choose to do with that money is up to. It’s your life.
All I want is for you to make those choices from a position of informed confidence.
One response to “Better at Making or Keeping Money?”
Most of us humans are pretty good at avoiding things we don’t like. The things I’ve done to avoid mayonnaise…
Budgeting falls into this category of avoidance. Even though most of us can appreciate that budgeting is a crucial step in money wellness, we still avoid it.
Some of us give it a shot, and usually quit before we notice meaningful improvements. Just as problematic, some of us obsess over our budgets in an unhealthy and unsustainable way. This was me for a while. My obsession was mint.com.
I didn’t have a healthy relationship with budgeting apps.
If you used mint.com like I did before it ended, do you also have nightmares about those red tracking bars? Mint.com users know exactly what I mean. Overspend $11 on groceries? Red bar. One too many lunches downtown? Red bar! A last minute Saturday morning yoga class? RED! BAR!
It still pains me to think about how many hours of my life I wasted trying to recategorize expenditures so those red bars would turn green. If I just move this box of cereal from Groceries to Social Life, that Groceries bar will turn green. Oh wait, now Social Life is red. OK, move those movie tickets to Car Repairs.
When my wife was still courting me, I introduced her to mint.com. You might be thinking, “Matt, why on earth would you introduce her to something that drove you crazy!?” Valid question.
She was a good sport and gave it a shot for a little while. Thankfully, she was smart enough to realize tracking every penny wasn’t for her. The whole thing gave her more anxiety about money. Think about that. The idea was to create a plan for her next dollar so she didn’t have to worry about money. All I did was make it worse by introducing her to a budgeting app.
There’s an alternative to tracking every penny for the rest of your life.
That experience paved the way for my preferred budgeting method that my wife and I still use today. We discussed this method briefly in our recent Q&A post.
Please keep in mind this method is for people who have already created a Budget After Thinking and are honestly dedicated to creating fuel for their Later Money. Only when you get to that point will you no longer need to track every penny. At that point, your money motivations will be so strong that you’ll stay on track without needing to track every expenditure.
If you’re not there yet, don’t worry. You will be soon. Follow my top ten budgeting strategies until good habits become second nature. Then, move on to this simple plan.
My preferred tracking method is a version of zero-based budgeting.
Zero-based budgeting was first introduced in the 1970s by Peter Pyhrr. (I don’t love the name, either.) The main idea is that every dollar has a job, something we already talked about in our conversation about eliminating disappearing dollars.
In my version of zero-based budgeting, you don’t need to track every penny. You don’t need budgeting apps or complicated spreadsheets.
You’ll only need to focus on two numbers each month to know whether you are on track or falling behind. I’ll show you those two numbers below.
Before you get too excited, I need to reiterate this key point: if you want to succeed with zero-based budgeting, you still need to first create a Budget After Thinking. Otherwise, you won’t be able to figure out the key two numbers that you need to focus on.
This step is for those people who have already tracked their spending for at least three months, made thoughtful adjustments so their spending is in line with their values, and now know exactly how much fuel they can generate for their Later Money every month.
OK, so how does this all work?
I mentioned there are only two key numbers you’ll need to focus on each month:
Your checking account cushion.
Your Later Money transfer amount.
Let’s explore each number.
1. Your checking account cushion is your safety net.
A checking account cushion is the amount of money in your checking account that you don’t plan to spend. The purpose of the cushion is to give you a little breathing room so you can pay your bills, even if you overspend in one month.
Without the cushion, if you have a tough spending month, you either need to skip paying certain bills or skip making your Later Money transfer. Neither option is acceptable. The first option leads you into debt. The second option halts progress on your most important life goals.
The checking account cushion gives you protection.
How much of a checking account cushion do you need?
How much of a cushion do you need? It depends on whether you have consistent income (regular paychecks), or are paid inconsistently (commissions, freelance, contract, etc.)
If you are paid with consistent paychecks, I recommend your checking account cushion equal the amount you’ve planned to spend in your Now Money category from your Budget After Thinking (don’t worry, example below). This amount should give you a comfortable safety net without leaving too much money in your checking account that could be better used elsewhere.
If your pay is inconsistent, you’ll need a larger cushion to cover the larger gaps between pay days. I recommend you have double the amount of your Now Money. Note, you may have to tweak this amount based on your unique situation.
In our really lost boy example, he received paychecks biweekly. A good checking account cushion was $3,600 (equal to his Now Money).
This means that there should be $3,600 in his checking account to start each month. At the end of the month, after paying all of his bills and making his Later Money transfers, he should still have $3,600 left in his checking account. That’s his checking account cushion.
It’s OK if your checking account cushion temporarily dips below the amount you started the month with. This could happen during the time of the month when you pay certain bills, like your rent or mortgage. Don’t worry. The amount in your account will climb back up once you receive your next paycheck.
A final point: don’t spend this cushion. Fight the temptation to use your checking account cushion to pay off bills or debt. Without that safety net, zero-based budgeting does not work.
2. Your Later Money transfer is the main reason you’re budgeting in the first place.
This number reflects the whole purpose of budgeting in the first place: to create fuel for your ultimate goals in life. If you don’t know what your goals are, revisit our conversation on why you should want to be good with money. It all starts with what you truly want from your life and how you can use your money to get it.
When you’ve created your Budget After Thinking, you’ll know exactly what this amount is. In our really lost boy example, the total Later Money transfers added up to $2,050. In future posts, we will discuss where to transfer and what to do with this Later Money. No matter what, the goal is to put this money to work for you to progress towards your goals.
By focusing on just these two numbers, (1) your checking account cushion and (2) your Later Money transfer amount, you don’t have to track every penny. You’ll know if you are hitting your goals or falling behind just by looking at these numbers.
Now that we know the two key numbers to focus on, let’s see how this all works.
How to ensure you are on track with your money goals with just two numbers.
Sticking with our really lost boy, he predetermined that his checking account cushion is $3,600 and his Later Money transfer amount is $2,050.
At the start of the month, that means he had $3,600 in his checking account. Throughout the month, his checking account balance increased when he got paid (our really lost boy earned $7,500 per month). His checking account balance decreased whenever he paid for things like rent ($2,200) and any other bills.
The checking account cushion ensured that he had enough to cover all of his expenditures throughout the month. For example, if his rent was due on Wednesday, and he wasn’t getting paid until Friday, his checking account cushion ensured that he had enough in his account to pay the rent on time. His cushion might fall temporarily below $3,600, but his next paycheck would soon replenish his account.
As the month went on, various bills came due. Utilities may be due on the 7th of the month. Credit card bills on the 15th. These payments can all be automated so he didn’t have to actively worry about them. Again, his checking account cushion guaranteed he had enough in his checking account to pay them.
Towards the end of the month, in a perfect world, our really lost boy would have exactly $5,650 left after paying all of his bills. He could then transfer the predetermined $2,050 of Later Money to his various Later Money accounts. He’s then left with a checking account cushion of $3,600 and is ready to begin the next month.
This is not a “set it and forget it” budgeting method.
This is not a “set it and forget it” budgeting method. Think and Talk Money is all about exerting a little bit of mental energy on your money every week. This budgeting method is a good illustration of what that means. You don’t need to track every penny, but you still need to pay attention to your money choices.
To help you with that, I suggest that you glance at your banking or credit cards apps once a week to monitor your spending. If you use credit cards or electronic payments for most expenditures, it is quick and simple.
The reason it’s a good idea to glance at your banking apps is to make sure you are relatively close to your spending targets. If you notice that you’re overspending in the first half of the month, you can make the appropriate adjustments before the month ends.
This small amount of effort throughout the month is worth it. Every time you make that Later Money transfer at the end of the month, you’ll feel exactly what I mean.
Don’t strive for perfection.
I said above “in a perfect world” to highlight that we’re not striving for perfection. That’s an impossible standard. One month, our really lost boy might have only had $3,300 left after making his Later Money transfer. That’s fine. It’s a temporary blip that he could easily fix, if he’s honestly dedicated to his life goals. He had a couple of options.
His first option was to course correct the next month by spending $300 less. That could mean temporary adjustments in his Now Money or Life Money, such as skipping a couple dinners out, doing yoga at home, and buying chicken instead of steak at the grocery store.
His second option was to replenish his checking account cushion from his specific budget busters savings account. What is that, you ask? It’s a separate savings account to cover you if you have one of these higher-spending months so you can keep your money plan progressing.
In some months, you will actually underspend.
Where do you get the funds for such an account? Believe it or not, in some months, your spending will come in under budget. Let’s say our really lost boy had one of these good spending months in January. Maybe he did Dry January and ate all his meals at home for health reasons to compensate for all the holiday celebrations.
In this example, the result was he spent $500 less in January than he had budgeted for. Instead of leaving that $500 in his checking account (bringing his cushion up to $4,100) where it turns into disappearing dollars, he transferred it to his budget busters savings account.
Then, when he had a high spending month, he could make a transfer back into his checking account to keep his cushion at $3,600. All while continuing to make his Later Money transfers every month.
If you constantly run out of money before making your Later Money transfers, this method is not for you, yet.
Always remember the goal of your Budget After Thinking is to generate fuel for your life goals. If you’re not making these Later Money transfers, you’ve defeated the purpose of having a budget in the first place.
Don’t feel embarrassed or sad if that happens to you. Take it as a sign that you need to explore your Now Money and Life Money spending to see what adjustments you can make. Once you’ve found those adjustments, you can come right back to my version of zero-based budgeting.
If you want this plan to work, where you only need to focus on two numbers instead of tracking every penny, you need to be honest with yourself that you’re ready for this.
Decide for yourself what budgeting method works best for you.
If you’ve been successful tracking your spending in a spreadsheet or a budgeting app, and enjoy the process, you should continue to do so. If it ain’t broke, don’t fix it, right?
On the other hand, if you’ve created a Budget After Thinking and consistently hit your Later Money goals, you’re probably ready to stop tracking every penny, if you’d like.
To recap, my version of zero-based budgeting is for those people who want to continue to fuel their Later Money goals without the anxiety of the spreadsheet. Instead, focus on those two numbers: (1) your checking account cushion and (2) your Later Money transfers. This is what I’ve been doing for years and it has worked.
If your cushion falls short one month, that’s OK. We are not striving for perfection. Make up for it the next month or use your budget buster savings account to replenish your checking account. And, keep making your Later Money transfers.
Has anyone else experienced mint.com anxiety? Are you currently using a budgeting app? How do you like it? Has any tried zero-based budgeting?
Think and Talk Money’s motto is “Money Wellness Together.” The more we all talk, the more we all benefit. The best way to keep the conversation going? Ask questions!
I’ve learned through teaching in law schools for the past 15 years that most of us prefer seminars with questions and answers to long lectures. Thanks for all the great questions so far! I’m hoping we can do a Q&A post like this just about every week.
Please keep the questions coming in the comments on any post, by responding to our newsletter, or on Instagram.
In our first Q&A post, we’ll cover my favorite personal finance books, whether you should keep your condo as a rental unit, and the most important question of all: what is Italian beef?
1. Do you have a favorite personal finance book that you would recommend?
What a great question. I always recommend starting with books that focus on money mindset. Like we always talk about, the first step is getting our money mindset in the right place. I would start with:
1. Rich Dad Poor Dad by Robert Kiyosaki. There’s a reason this is the best selling personal finance book of all time. If you read Rich Dad Poor Dad, your entire money mindset will be changed. Kiyosaki brilliantly shares the stories he learned growing up from his Rich Dad (really his best friend’s dad, very successful real estate investor/business owner) and his Poor Dad (his actual dad, highly educated/traditional career path). Using these two role models in his life, he makes a very compelling and easy to follow case that most of us go about life and money all wrong.
Read Rich Dad Poor Dad. It will light a fire under you like no other book I’ve read.
2. Think and Grow Rich by Napoleon Hill. Another longtime classic that will shift your money mindset. I first read this book in college when I learned my friend’s dad offered him $50 if he read this book. $50 to read a book? I’m in.
Originally published in 1937 and recently updated, Think and Grow Rich, will convince you that we can all be successful. Hill studied innovators like Henry Ford and Thomas Edison. In the updated version, you’ll learn about modern figures like Bill Gates and Mary Kay Ash. To translate the title into my own words: Wake up! Use your brain! You can be successful in any walk of life if you just stop sleepwalking through life like everyone else and do something!
Read Think and Grow Rich. You will be motivated to do that thing you’ve been saying you would do, but haven’t yet.
3. The Richest Man in Babylon by George S. Clason. A third classic originally published nearly 100 years ago. Clason wrote a simple collection of fables set in the ancient city of Babylon to illustrate the power of fundamental money habits: earn, save, invest, protect. Through his stories, you’ll see how you can get ahead in life by practicing strong financial wellness habits.
4. Your Money or Your Life by Vicki Robin and Joe Dominguez. Vicki Robin and Joe Dominguez are often credited for laying the groundwork for the Financially Independent Retire Early (FIRE) movement. They have a lot to say about the relationship between money, work, and time.
Most of us are doing it all wrong. We chase money at the cost of our precious time. 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.
5. Die with Zero by Bill Perkins. Perkins makes a strong case that many of us are saving too much for retirement. We work too many hours and save more money than we’ll ever need. Instead, we could be using that money during the best years of our lives to create lifelong memories.
Perkins also questions the conventional wisdom of waiting until we die to pass money onto our kids. He suggests helping our kids earlier in life when the money will be more meaningful.
Read Die With Zero. You won’t wait any longer to book that vacation you’ve been putting off for no good reason.
If you have read these books already, but it was some time ago, read them again. I didn’t fully appreciate all the lessons until I was years into my career and knew what it felt like to work for money.
2. $500 Challenge? I could never do that!
In Part 3 of our series on budgeting, I gave you 10 of my favorite tips to help stay on budget. One of the tips involved a game my wife and I play called the “$500 Challenge.”
If $500 is a nonstarter for you, increase the amount of the game. Whether you play with $750 or $1,000 or more, the point of the game remains the same. If $500 is too much for you, pick a smaller number that works. The amount doesn’t matter. The point is to set a number for yourself that will get you back on track after overspending in the previous month. January is a great time to play the game.
3. When I’m creating my budget categories, does my health club membership count as Now Money or Life Money?
In a 50-30-20 framework, you must choose what category to put your health club membership in. Same with every other borderline expenditure. What if you think working out should be Now Money, but it pushes you over 50%? OK, just move it to Life Money. Wait, now I’m over 30% in my Life Money. Why is this so hard?
Take it from me and my students who have attempted 50-30-20 budgeting, making these choices gets to be very frustrating. What is the point in agonizing over decisions like this?
So, what should you do with your health club membership?
It doesn’t matter! You saw in our really lost boy’s budget that I counted it as Now Money. Today, I’d actually probably count it as Life Money. How’s that for an answer!?
Instead of agonizing, pick a category and leave it there. The whole purpose of our budget is to generate fuel for our Later Money. Whether that fuel comes from adjustments to Now Money or Life Money is irrelevant.
In our Budget After Thinking, we’re not limiting ourselves by rigid frameworks and agonizing over spending categories. We’ve got better things to focus on, like creating more fuel for our dreams.
4. Do I need to actively budget forever?
Nope! I’m going to do a post soon on what I recommend for people that have done the budgeting thing for a while and have a pretty good idea what their spending is. If you’re at that point, and are relatively responsible, you won’t need to track your spending anymore.
Let’s look at a quick example. Say you learned that your Budget After Thinking includes $1,000 of Later Money. That means each month, your top priority is to put that $1,000 of fuel towards your financial goals.
In this plan, you’ll need a “cushion” in your checking account to make it work. In this example, let’s use $5,000 as our cushion. At the end of the month, after you’ve made your Later Money transfers out of your checking account, and you’ve paid all your bills and credit cards, you should have $5,000 left.
If you have less than $5,000 left, compensate the next month by spending less so you get back to $5,000 at the end of month 2. If you’ve way overspent, that’s an indication you are not ready to stop budgeting.
No matter what, don’t short your Later Money. Do the $500 challenge if you need to. If you have more than $5,000 left, transfer the surplus to your savings account so you can use the excess to cover budget busters or top off your checking account if you overspent a little the previous month.
This budgeting process is similar to zero-based budgeting, a concept that’s been around for a long time. I find this method takes almost all of the anxiety out of budgeting. The key is you just have to be disciplined enough that if you have less than $5,000 left at the end of month 1, you course correct in month 2 so you’re back on track.
5. I am thinking about either selling my condo or keeping it as a rental unit. What should I do?
I’m a real estate investor, so my mind always goes first to keeping the condo as a longterm rental unit. Based on the question, it seems this reader is interested in real estate investing, too. If that’s true and your financial situation permits, I would consider keeping the condo as a rental unit.
It could be a great way to see if you like being a landlord without putting time and resources into acquiring a different property. Best case scenario, you hold the condo for many years and it turns out to be a great investment. Worst case scenario, you sell it in a year or two if being a landlord isn’t your thing.
Of course, there are so many factors that go into real estate investing. You need to do your homework first on whether your condo is a plausible rental unit. Leave a comment below or reach out on Instagram if you need some help deciding if your condo might be a good rental unit.
6. What is Italian Beef?
This person, I cannot help.
Fortunately, there’s a current Emmy winning show out there about Chicago and Italian beef!
Thanks for all the questions! Please keep them coming in the comments on any post, by responding to our newsletter, or on Instagram.
Coming up, we’re going to do our first Q&A post where I’ll answer questions from readers. So many good questions have already come in. Please keep them coming! Leave a comment below, subscribe to our newsletter, or find us on Instagram.
One question we already received was so good, I’ve answered it here in a dedicated post. The question came from someone that I love to talk money with. He read the Think and Talk Money Welcome Post where I mentioned that my credit card debt was partially due to having Chicago Cubs season tickets.
He knows that I’m a big Cubs fan and asked me if I would I really trade all those great experiences and memories just to save money.
It’s such a good question because it points to the intersection of money and life. It took me all of two seconds to know and feel the answer was, of course, “No, I would not have given up my Cubs tickets.”
He was absolutely right. If I gave up my tickets in 2010 when I was struggling with debt, I never would have been in the stadium in 2016 with my family for the Cubs’ World Series run. Those are some of the best memories I have.
In hindsight, I would have done some things differently so I could enjoy the experiences without the money worries. Let’s talk about that.
But first, story time.
Our nice friends, Phil and April.
Throughout that World Series run, we sat next to the nicest couple in the world, Phil and April. Phil was a diehard Cubs fan. April was more reserved. Both were smart and very friendly. They were enjoyable people to sit with. We chatted baseball, mostly. Pitching changes. Send the runner. Question the manager. That sort of thing. Completely normal, unremarkable stuff.
Game 5 was played on a crisp, October evening. Jackets and beanies weather in Chicago. Phil and April were sitting next to my brother and I, as usual. Mike Napoli was playing first base for Cleveland.
Around the 3rd inning, a jerk four rows in front of us taunted Napoli with a crude, juvenile insult. It was apparent the jerk was doing his part to keep Old Style in business for another year.
Phil was nice…and tough.
Anyway, the rest of our section was none too pleased with the jerk’s shameful display. Nobody was more displeased than Phil, who did what the rest of us were thinking but were too scared to do ourselves. Phil stood up. In so many words, Phil sternly recommended that the jerk knock it off and show some class.
The jerk turned around, aggressively scanning the crowd for the man who had publicly shamed him. The jerk had that unmistakable look in his eye that meant, “Let’s dance.” My brother and I were a bit worried for our nice… and all of a sudden tough…friend, Phil.
April did not look worried. She sat there like nothing strange was happening. Almost like she had seen this movie before.
When the jerk locked eyes with Phil, he immediately saw that Phil was happy to accept the invitation to tango. Well, the jerk was sloppy, but he had enough sense to recognize that he wanted no piece of Phil. He wisely turned back around and sat down quietly.
That was the last we heard from the jerk that night. Our nice, and now confirmed tough friend Phil had restored order.
Phil’s on TV!
On the day of the Cubs’ championship parade, my brother called me excitedly, “Phil’s on TV! Phil’s on TV!” It didn’t register right away who he was talking about. When I turned on the TV, sure enough, there was Phil, our World Series friend. I was so confused. Phil was giving an interview on set with the Cubs announcers. Our nice (and tough) friend, Phil? On TV?
I turned up the volume and listened to Phil talk about his experience watching the Cubs win the World Series. Maybe I was hoping he’d mention his nice friend, Matt. He didn’t.
I still couldn’t figure out why Phil was on TV. Why won’t they just put his name on the screen already!?
It wasn’t until the end of the interview that I learned who Phil was. All I could do was laugh.
Our nice, and confirmed tough, friend Phil is better known as World Wresting Entertainment (WWE) champion and icon, CM Punk.
His wife? WWE champion and bestselling author, AJ Mendez.
Life, huh?
A memory I wouldn’t trade for anything.
As much fun as the World Series was, my favorite Cubs memory actually took place during the 2015 season, the year before they won the World Series. It was during the 7th inning of Game 4 of the NLDS. This was the game where the Cubs knocked the rival St. Louis Cardinals out of the playoffs.
The entire stadium was rocking so loud, you could feel the ground shaking beneath your feet. Every fan was jumping up and down, hugging anyone close enough to touch. We were all dancing like nobody was watching. That moment was pure happiness.
I was there with my mom. A lifelong Chicagoan, she too was jumping up and down and high-fiving all the other diehard fans in our section. After the game, we met up with my wife at a restaurant and relived the victory over Champagne.
What does this have to do with money?
What does any of this have to do with money? When I said money was emotional, this is what I meant. I wouldn’t trade that memory with my mom for anything. My brother and I still joke about our nice friends, Phil and April.
These are the types of experiences that I want more of. These memories, and the desire for more like them, continue to motivate me today. I want to be good with money, not so I can stash it in the bank, but so I can use that money to create joy for me and my family.
So, to get back to my friend’s question. Would I really have given up my Cubs tickets? No, absolutely not.
What would I have done differently to keep the tickets but not the worries?
In hindsight, what could I have done differently so my Cubs tickets were not a major source of financial worry?
Even back then, I knew and felt that spending money on Cubs tickets was money well spent. I didn’t need to wait for hindsight to come to that conclusion.
That said, I would have put more thought into solutions to keep the tickets and the experiences without the debt and the shame. I would have looked at expenditures in my Now Money and Life Money buckets that were ripe for adjustment.
Maybe that would have meant giving up something else less meaningful, like my gym membership. Or, I could have looked into a side hustle as a way to earn more money, something we’ll explore at another time.
Whatever the solution was, I would have been more intentional with my decisions so my experiences were not overshadowed by my worries.
Talking money is really just talking life.
This was such a good question to illustrate a foundational concept of Think and Talk Money. Yes, we discuss money. But, we’re really talking about our lives and our experiences. Money is just a tool to help us.
And before you get cynical on me, of course money is not required for good experiences. That’s not the point. What I’m suggesting is that if you’re spending most of your time each week at your job, like most of us do, shouldn’t we think about the money we earn so we can maximize experiences like I had with my mom?
Think and Talk Money is all about awakening that thought process so we can use the tool of money to fuel meaningful lives. Would you use that tool to get you Cubs tickets? Or, do you prefer trips to Disney World? What if money is just the currency that you trade to get your time back, so you can do more of what you want with who you want?
Whatever it is that you’re after in life, thinking and talking about money will help get you there.
In Part 1 of our series on budgeting, we learned how to eliminate disappearing dollars by creating a plan for Now Money, Life Money, and Later Money.
In Part 2, we used a real life example to work through the budgeting process together. We learned that even seemingly minor adjustments can add major fuel to your Later Money bucket.
Here in Part 3, we’ll take a deep dive into my top 10 strategies for making thoughtful adjustments so we can consistently win the budget game.
1. See the ball go through the hoop.
When I was playing basketball growing up, I learned the concept of “seeing the ball go through the hoop.” When I was struggling to make a shot, my coach encouraged me to drive to the basket and make an easy shot.
Once I saw that I could make an easy shot, I had my confidence back.
By seeing the ball go through the hoop, I subconsciously reminded myself that I could do it. There was nothing wrong with me. I was ready for more challenging shots.
Anyone who has been around young kids has witnessed this same phenomenon. My son is learning to swim. When he proudly drifted (with a life vest on) two feet from me on his own, he proudly exclaimed, “I’m swimming! I’m swimming!”
It didn’t matter that neither his arms nor his legs were moving.
Once he saw that he could enjoy the pool without holding onto dad for dear life, he wanted nothing to do with me. He knew for himself that he could do it.
This concept works in a lot of different money situations, especially when making thoughtful adjustments to your budget. In our really lost boy example, we made small adjustments to our grocery budget, phone and internet bills, and social life spending.
These adjustments were easy to implement and added major fuel to our Later Money. Just as importantly, there was an additional psychological benefit in proving to ourselves that we could make improvements.
Start small. See the ball go through the hoop.
2. Don’t cancel your social life.
The point of starting small is to identify beneficial adjustments that are relatively painless. Focus on the “relatively painless” part. Canceling your social life will not be relatively painless.
Your social life consists of ongoing experiences that bring you happiness. We always should strive for more of those experiences, not less. So, don’t cancel your social life.
Looking again to our really lost boy, you probably noticed that I made small adjustments to my Life Money. However, even those small adjustments did not result in less time with my friends.
This is a key point: I didn’t spend any less time with my friends than I did before. Instead, I thought and talked about alternatives so I could still see them without spending a lot of money.
In recent years, my students have thought and talked about some great examples of this concept in action. For example, say your friends are going out to dinner on Friday night. You know it’s going to be more expensive than what your Life Money permits.
Instead of going to the dinner (and wrecking your budget), or not going to the dinner (and being sad at home), what alternatives can you think of?
One student suggested you can meet your friends beforehand for happy hour. Another student suggested you take a pass on dinner and invite your friends over to your place later that weekend for coffee and bagels.
If you don’t want to spend your Life Money to go see Taylor Swift in concert, invite your friends over to watch the documentary on Netflix.
The common theme is that you still get to spend time with your friends, while keeping more money in your pocket.
3. Talk to your friends about Life Money.
Surprise, surprise! More talking! I recommend you talk to your friends about the thoughtful adjustments you’re implementing with your Life Money. Like in most life situations, communication is key.
Once your friends know that you are working on thoughtful choices in your Budget After Thinking, they will happily support you. They’ll know that you aren’t blowing them off.
In the rare instance that they don’t support you in striving for your dreams? You may need to question if these are the right friends for you.
The art of budgeting is not about cutting, especially when it comes to things you love. Budgeting is about thinking and talking to find solutions or alternatives.
You can keep doing the things that bring you happiness at the same time you’re making progress on your life goals. It just takes a little bit of mental effort.
4. Keep on traveling.
Making small adjustments works in all areas of your budget, not just your social life. Let’s look at travel, a major expense, but also one of the best sources of life experiences for a lot of people.
For our really lost boy, cutting out travel completely was a nonstarter. My sister lived in Los Angeles, one brother lived in Washington D.C., and the other brother studied abroad in Spain. Plus, my best friends from college lived in New York and Virginia. My grandma was in South Carolina.
If I wanted to see my people, traveling was part of the deal.
Traveling was also a huge expense, and paying for all that travel brought me a lot of stress. I needed to think and talk about a solution so I could travel for less money. You know where this is going, don’t you?
I researched the best credit cards for travel points and how to best use those points for free flights and hotels.
I learned the most affordable days of the week to fly and the best times of the year to visit certain places. Yes, this took mental effort. But, this was more preferable mental effort than worrying about money.
Even if you don’t want to take these steps, you can still make thoughtful decisions about cutting back on even one or two trips a year, which I also did. I spent less money, but the added benefit was that I appreciated each trip even more.
I had more time to look forward to that trip and more time to remember it before another trip distracted me.
Do not use credit cards just to earn points.
This is not a recommendation. It’s a requirement. Stay tuned for a future post on responsibly using credit cards to earn free vacations.
For now, the only rule that matters is to not overly spend on your credit cards just to earn points. That is a recipe for disaster.
Using credit cards to travel only works to your advantage if you can pay your bills, in full and on time, each month.
“Triple points!!!”
Years ago, my friend and I were out to dinner with our wives at a nice neighborhood spot in Chicago. When the check came, I pulled out my credit card. He pulled out a debit card. I nearly fell out of my chair.
It’s not that using a debit card is a bad choice. It’s a great choice for a lot of people. In this instance, however, I was shocked because I knew this guy very well.
We had travelled all over Europe together. We had just spent most of dinner talking about trips we had taken and trips we wanted to take. This friend is also one of the smartest guys I know, a statement that I will forever deny and insist that I was hacked, if he ever reads this.
I was shocked he wasn’t using a credit card to earn points so he could travel for free.
I couldn’t help myself and had to ask my friend about the debit card. (What do you want from me, I like to talk about money.) Turns out he just never really thought about using a credit card.
He wasn’t actively avoiding credit cards, he just didn’t know there were advantages to go along with the potential negatives (if you don’t pay your bills).
My friend was an instant convert. He was thrilled (maybe an understatement) to learn about how he could travel for free with credit card points. He began responsibly using credit cards and never looked back.
To this day, he won’t leave me alone any time he earns “TRIPLE POINTS!!!” or books a free vacation for his family. I love it.
5. Spark and cut.
Another one of my favorite tricks was inspired by Marie Kondo, famous for helping people de-clutter their houses by asking a simple question, “Does this item spark joy?” If it does, keep it. If it doesn’t, get rid of it. So simple, and so powerful.
Marie Kondo is an inspiration. In my opinion, there is no clearer display of brilliance than taking a complex matter (like organizing your house) and distilling into a simple, understandable idea.
We can apply the same strategy to any area of our spending. Does this subscription bring me joy? If yes, keep it. If not, cut it.
Does this health club membership bring me joy? This expensive clothing store? What about attending concerts? Sporting events?
If these things don’t honestly bring you joy, cut them from your life and your budget. Italian beef or unagi? Either one is fine, if you’ve determined for yourself that it brings you joy.
When you spark and cut, you’ll create more money to fuel your Later Money goals. Just as important, you’ll likely find that you don’t miss those things or activities.
You’ll value your newfound time and freedom to pursue those remaining parts of your life with more dedication.
6. It’s OK if you occasionally exceed your spending.
What should you do if you overspend one month? Don’t get discouraged and give up. Before all your hard work goes to waste, take the next month to course correct.
If you overspent by $300 in your Life Money in December, make it a priority to underspend by $300 in January.
Is this easier said than done? Well, sure. It’s always easier to say you’re going to do something. The hard part is following through. It will take discipline to get back on track. What will drive that discipline?
Once again, it’s your ultimate life motivations that we’ve talked so much about (and will always continue to talk about). Without that clear vision of your ideal life in front of you, no budget will ever last.
Don’t panic. Course correct. Stay on track.
7. Make a game out of it, like the $500 Challenge.
When I veer off track and have a bad spending month, I try to not get down on myself. I’m human. It happens. So, lemons to lemonade. I make a game out of it called “The $500 Challenge.”
My wife and I started playing The $500 Challenge years ago. The game was simple. Each of us had to limit our Life Money for the month to just $500. Whoever spent the least that month, won the game.
I’ve never won the game. My wife is… competitive. I cope by lying to myself that she wins because I enjoy paying on date nights.
We’ve played this game several times to course correct after a high spending month. January is the perfect time of year for this game since the holidays in December often result in overspending.
The $500 Challenge has many benefits. When we succeeded, we’d be right back on track for our goals. Even if we couldn’t quite stay under $500 (never an issue for my wife), this game still reminded us to to prioritize the experiences and things in life that truly mattered to us.
Get creative with nights out.
My favorite part of the game was it forced us to get creative with our nights out. One of my favorite date nights was a product of the $500 challenge.
We had just moved to our new neighborhood. It was a Friday night. People were out and the city was bumping, per usual in summertime Chicago. We set out for a walk to explore with only one rule: we had $20 to spend or less on dinner for two.
We weren’t going to waste that money on an Uber, so we just started walking. A couple miles later, having learned all about our new surroundings, we ended up at a casual restaurant we had never been to.
We ordered a plate of nachos to share off the happy hour menu. We even had enough money left for one of us to wash it down with a cold beer. The nachos were great and the vibe was perfect. The check, with tip? 19 bucks.
We walked home, which helped digest our dinner, and went to bed feeling light in the belly and heavy in the wallet.
8. Buy it if you want it, but not right away.
About 10 years ago, my mom bought me a jacket for a birthday present. It was the exact jacket I wanted. How did she know, I asked her. “You mentioned it when we were downtown four months ago.” Four months ago!
I shouldn’t have been surprised. My mom has one of those steel trap memories. If you only met her for five minutes and then saw her again two years later, don’t be surprised when she asks about your consulting gig, your trip to New Orleans, and that blue dress that she really liked.
I learned from my mom’s gift strategy and modified it to help myself resist the temptation to make impromptu purchases. I don’t have her memory, but I do have a phone with a notes function.
When I see something that I might want to buy, I do my best to resist the temptation of buying it immediately and make a note in my phone. After a couple weeks, if I still want that thing, I buy it.
More times than not, I no longer want whatever it was that tempted me in the moment.
9. You don’t have to go big or go home.
We’ve been focusing on smaller adjustments, but of course, bigger adjustments can have a bigger impact on your overall budget.
Making bigger adjustments means examining your biggest expenditures, which for most people is housing and transportation.
If your life situation allows for big changes in these areas, you should by all means consider them. After all, reducing your housing costs by $500 by switching to a less expensive apartment opens up a lot of dollars to deploy as fuel elsewhere. That one decision can make a big impact.
The challenge that I have personally experienced with big adjustments and continue to observe in my students today? Making big adjustments is not realistic for everyone.
Let’s talk about switching up your housing situation. By going big in this scenario, you are giving up your home.
This may be a realistic and intelligent decision for someone in their 20s, with no dependents, and living somewhere with ample housing units available.
On the other hand, moving to a new home may not be realistic for someone with children in school and strong roots in a particular community.
To advise that family to pack up their home and move away could be counterproductive. While they’ll save money, they’re giving up a part of their lives that may be very important to their overall happiness. That tradeoff might not be worth it.
The same rationale applies to transportation costs. Like our really lost boy, if you live in a city with public transportation, you probably don’t need a car (or an expensive parking spot).
If you have kids and regularly drive them to dance class, swimming, soccer, gymnastics, piano, music class, ski lessons, and grandma’s house (yes, this is my life right now), giving up your car is not realistic.
How can I adjust my rising housing costs without giving up my home?
It’s because of these complicated tradeoffs that I encourage everyone to start with small adjustments while you’re thinking about bigger adjustments.
As you think and talk about the bigger adjustments, you may unlock other solutions that don’t require you to move.
For example, if you’re renting an apartment, you could negotiate with your landlord about locking in a longer term lease at a fixed rent. That way, you keep your largest Now Money expense consistent and avoid paying more each year as your lease renews.
I employed this strategy with great success when I rented an apartment in Chicago, generating a lot of fuel for my Later Money by staying in the same apartment for seven years.
This strategy works for families, too. A buddy recently moved to a new state with his wife and two kids. Instead of buying a house right away, he signed a four-year lease on the perfect home for his family. He has a wonderful place to live and his costs are fixed for the near future.
What can I do if I’m a homeowner?
If you’re a homeowner, what can you do to reduce your expenses without giving up your home? You may not want to re-finance your mortgage in today’s environment, but could you address other rising home ownership costs?
As an example, I recently re-caulked and re-grouted my shower. I had never done that before, but I watched a lot of YouTube videos like this one. The project took me a while, in small bursts, but doing so saved me close to $1,000.00.
I also felt satisfaction for learning something new and getting a job done despite my many frustrations along the way.
In the long run, is $1,000 saved going to pay off my mortgage? Of course not. This is just one example to illustrate that we can all use our mental energy to think about solutions, without giving up our homes.
This thought process can be repeated endless times, and does not only apply to DIY projects. From your couch, you can work on lowering costs related to home insurance, maintenance, and utilities by making phone calls or sending emails.
When you’ve trained yourself to exert mental energy to solve your rising home ownership costs, those savings will add up. You can lower your expenditures without giving up your house.
10. Plan ahead for budget busters.
Budget busters are any inconsistent expenditures, good or bad, that can derail your planning.
Good budget busters might include trips, weddings, and holiday/birthday gift shopping. Bad budget busters include unexpected car repairs, home repairs, or medical expenses.
Note, budget busters are inconsistent; they are not unexpected. These expenditures are 100% predictable every year, we just don’t always know when they will surface.
Planning ahead for budget busters is crucial to staying on track.
To do so, open up a savings account, preferably at a different bank than your checking account. This helps isolate those funds so those dollars don’t disappear.
As part of our really lost boy’s Budget After Thinking, you’ll recall that we had a separate line item for budget busters in both our Now Money (bad budget busters) and Life Money (good budget busters).
I encourage you to do the same. Each month that you don’t spend your budget buster money, transfer it to your savings account so it’s there when you need it.
One more bonus tip for dealing with budget busters. We talked above about how to course correct when you exceed your budget in one month. On the flip side, what should you do when you’ve had a great month and underspent?
I recommend you transfer the amount you underspent to your budget busters savings account. Don’t let that hard-earned money sit in your checking account.
Those dollars will disappear. By transferring them to savings, those dollars will be at your disposal when needed.
We’ve covered a lot of ground here to help generate fuel for your Later Money. To recap:
My Top 10 Budgeting Tips for Lawyers and Professionals
See the ball go through the hoop.
Don’t cancel your social life.
Talk to your friends about your life money.
Keep on traveling.
Spark and cut.
It’s OK if you occasionally exceed your spending.
Make a game out of it, like the $500 challenge.
Buy it if you want it, but not right away.
You don’t have to go big or go home.
Plan ahead for budget busters.
These are the strategies that have worked for me in the past and continue to work for me today.
I hope you’ve see than budgeting does not have to be hard and nasty. It just takes a little mental energy, exerted ahead of time.
Whether these specific tips work for your personal situation isn’t the point. I promised you before that I won’t tell you what to do with your money.
Review my tips and focus on the thought process to identify solutions that might work for you.
Have you used any of these strategies? What about other strategies that worked for you?
Drop a comment below or on the socials to keep the conversation going.
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