Author: Matthew Adair

  • 529 Plans for Sky High College Costs

    529 Plans for Sky High College Costs

    My five-year-old has already decided that she’s not going to college.

    She doesn’t want to sleep there, she says. Instead, her plan is to move in with her aunt.

    At least that’s one kid I don’t have to worry about when it comes to paying for college.

    In case your five-year-old hasn’t already decided her future, read on to learn about 529 educational savings plans, one of the best ways to pay for college.

    My students are already worried about paying for college for their unborn children.

    Whenever I teach personal finance to law students, we take some time to at the beginning of class to discuss what each of us would do with financial freedom.

    This is always my favorite part of class.

    Over the years, I’ve had students who want to travel the world, start businesses, pursue hobbies, and take care of aging parents.

    I’ll never forget the student who wants to coach high school football after working as a lawyer. Or, the student who simply wants the time to exercise every day. As she put it, “look good, feel good.”

    Of all the goals I’ve heard, there is one that comes up more than any other: paying for their children’s education.

    A lot of times, I hear this goal from students who don’t even have kids yet. I think that shows how important education is for many people. It also shows how worrisome it is to think about paying for college.

    What’s troubling is that my students typically have their own student loans to pay back. And, before they’ve even started their careers, they’re thinking about paying for the education of their unborn children.

    That’s intense. But, understandable.

    Some students share that they want to pay for their children’s college because they benefitted from their parents paying for college. These students were grateful for the opportunities their parents gave them.

    For other students, they want to pay for their children’s college because their parents did not pay for their college. They want to help their children avoid student loan debt as they begin their careers.

    For most people, saving for college is a top priority.

    According to a recent study by Fidelity, 74% of parents say they are currently saving for college.

    77% of parents think that the value of a college education is worth the cost.

    At a time when there is a lot of uncertainty surrounding student loans, it’s never been more important to have a plan to pay for your kid’s education.

    One of the best ways to do that is with a 529 college savings plan.

    In today’s post, we’ll discuss the major advantages of 529 plans. We’ll also learn how you can estimate the cost of college for your child so you can figure out how much you should be saving today.

    Be warned, the numbers are scary.

    What is a 529 college savings plan?

    529 college savings plans are state-sponsored, tax-advantaged investment accounts. The name stems from Section 529 of the Internal Revenue Code.

    While there are certainly other ways to save for college, 529 plans are hard to beat.

    The reason 529 plans are such a great way to save for college is because you receive triple tax benefits:

    1. Most states offer tax breaks on contributions to its residents for participating in the in-state plan. For example, as Illinois residents, my wife and I can deduct up to $20,000 in contributions to the Illinois-sponsored 529 plan from our state income each year.
    2. Your investment earnings grow tax-deferred, meaning your investments will benefit from tax-free compound interest. That means your savings will grow faster without being hindered by taxes.
    3. Investment earnings are 100% free from both federal and state taxes when used for eligible education expenses. Eligible education expenses include things like tuition, room and board, books, computers and other standard costs associated with college.

    An investment opportunity with triple tax benefits like this is almost unheard of.

    How do 529 plans work?

    In basic terms, 529 plans are investment vehicles designed to grow your contributions and make paying for college easier. When you invest in a 529 plan, you are generally investing in some combination of stocks and bonds.

    That means there is risk involved, just like with any other investment.

    Once you open your 529 account, you will choose how to invest your contributions. In this sense, 529 plans are similar to a 401(k) plan offered by your employer.

    Like with your 401(k) at work, a 529 plan will typically provide you different investment choices within the plan. You can choose how aggressive or conservative you want to be with your investments.

    The investment options will vary depending on which state’s 529 plan you choose.

    Every state offers a 529 plan.

    Every state offers a 529 plan. You don’t have to be a resident of that state to use its plan. You also don’t have to use your 529 savings for a school located within that state.

    Regardless of what plan you choose, the federal tax incentive remains the same. Money invested in 529 plans grows tax free. That means no federal taxes on your 529 earnings as long as the money is used for qualified educational expenses.

    While you also won’t have to pay state tax on earnings (same as federal), there are some additional state tax implications to be aware of.

    These state tax benefits are a bit more complicated because they vary state-to-state.

    Blue USA map with borders of the states and names on grunge background illustrating that each state offers a different 529 college savings plan.

    Remember, there is no federal tax benefit when you make your original contributions. But, most states do offer its residents a tax break on their original contributions for investing in-state.

    Morningstar has a detailed breakdown of which states offer additional tax benefits to its own residents.

    If your state offers tax benefits to invest in-state, that’s usually a good reason to choose your in-state plan.

    My wife and I use Illinois’ 529 plan, called Bright Start 529, for the added tax benefits we receive as Illinois residents.

    Besides the state tax benefits, keep in mind that not all 529 plans are created equal. 529 plans may offer different investment options or charge different fees. States may also provide different level of oversight, which may be important to protect your investments.

    You should always do your homework before choosing a plan to find one that matches your goals.

    I’ve found Morningstar’s rankings and analysis of each state’s plan to be the most helpful tool. According to Morningstar’s most recent rankings, the top 529 plans are offered by:

    1. Alaska
    2. Illinois
    3. Massachusetts
    4. Pennsylvania
    5. Utah

    To recap, when choosing which 529 plan to participate in, pay attention to what investment options are available within that plan. Also, look to see if you will qualify for additional state tax benefits.

    How much can I contribute to a 529 plan?

    Besides choosing the type of investments in your 529 plan, you can also choose how and when to contribute.

    Some people prefer automatic monthly contributions. Others prefer to contribute sporadically throughout the year, like when they receive a bonus at work.

    Unlike with most retirement plans, there are no yearly contribution limits for 529 plans. Instead, each state sets lifetime contribution limits per beneficiary, typically ranging from $235,000 to $550,000.

    This is a good time to point out that you can have a separate account for each of your kids. This allows you to save more money overall sine the contribution limits apply separately to each kid.

    It’s also a good idea to have separate accounts when you have different investment horizons based on the ages of your kids.

    For a complete list of the contribution limits by state, click here.

    By the way, if those limits sound incredibly high to you, you may be in for a shock when it comes time to pay for college.

    Keep reading to see what the projected costs of attending college are for a current kindergarten student.

    What happens if my kid does not go to college or I have money left over?

    If you have money left over in your 529 plan, you have some options. You can use that money for one of your other kids, without penalty. You can save it for a grandchild.

    As of 2024, you can roll extra 529 funds into a Roth IRA for the beneficiary, with some limitations. This was a terrific development for families worried about having too much money saved for college.

    If none of the available options work for you, rest assured that your money will always still be your money. You will have to pay a penalty and some taxes. Any unused earnings are subject to a 10% federal tax penalty plus income tax.

    How much should I be saving in my 529 college savings account?

    This is the ultimate question, right?

    While nobody can say for certain how much college will cost or how your investments will perform, we can make reasonable estimates to help form your strategy using an online calculator.

    I like the calculator available on Illinois Bright Start 529 website. What’s nice about this website is you can look up the future estimated cost of attending specific schools around the country.

    I also like using calculator.net. They have a College Cost Calculator where you can see how much college costs on average today and how much it is estimated to cost when your child starts college.

    Whatever online calculator you use, you’ll have to make some assumptions when you start plugging in numbers.

    For example, nobody can predict what your exact investment return rate will be. That said, you still need to plug a number into the calculator.

    What number should you use for investment return rate?

    • Bankrate.com and NerdWallet each suggest using an investment return rate of 10% annually (before inflation) based on historical stock market performance.

    10% seems like a reasonable number to use, keeping in mind that we’re just looking for an estimate to help us decide how much to save for college. Your actual returns may be lower.

    Besides the estimated return rate, you’ll also need to account for the rising costs of college. Most of the online calculators recommend you assume the cost of college will increase by 5% each year. That also sounds reasonable to me.

    One last thing: it’s never a bad idea to run through different investment scenarios to get a more complete picture. Try playing around with what the numbers look like if your investments only return 8% per year. Or, see what happens if college costs increase by 6% per year.

    With these assumptions in mind, you can start to get an idea of how much you should be saving for college today.

    Be warned, the dollar amount will probably scare you.

    Let’s look at an example using a current kindergarten student.

    Illinois’ Bright Start 529 calculator estimates that the cost of this kindergarten student attending the University of Illinois Urbana-Champaign will be $264,735.

    Assuming you don’t have any current savings and you estimate a 10% annual rate of return, the Bright Start 529 calculator indicates you should save $10,796 per year.

    Does that sound like a lot of money?

    Want to really be scared?

    What if your kindergarten student is interested in private school for college? Maybe your child has his heart set on Northwestern University?

    Bright Start 529 estimates the cost of Northwestern University for your kindergarten student will be $691,942. That means if you have no current savings, you should be contributing $28,217 per year.

    Yikes.

    And that’s only for one kid.

    How are you supposed to save that much money for college?

    If these numbers sound scary to you, what can you do about it?

    I have some thoughts:

    1. First, you need to spend some time thinking and talking about why it’s important to you to be good with money. Maybe the reason is as simple as paying for your kids’ college. Whatever your money motivations are, write them down. This is what I did with my Tiara Goals for Financial Freedom.
    2. With the right motivation in mind, you then need to make a Budget After Thinking. The overall purpose of your budget is to generate fuel for your future goals, including paying for college.
    3. Next, you need to stick to that budget by tracking two simple numbers. Making a budget does you no good if you aren’t sticking to it.
    4. Monitor your savings rate and aim for steady improvement over time, even if you’re only able to save a small amount to begin with.
    5. While you start to build your savings for college, avoid the three big causes for why many of us fall into debt, which can cancel out all your progress.
    6. Along the way, talk to your people. Remember the cardinal rule of Think and Talk Money: talking about money is not taboo. You are not alone in trying to save for college or trying to live a financially responsible life. Talking to your people will help you stay on track when times seem tough.

    The most important thing is that you take responsibility for your own money life.

    Nobody else can do this for you.

    The good news is that embracing these tips will help you beyond just paying for college. These are the exact strategies that will lead you to a life of financial freedom, the ultimate goal for many of us.

    It’s not supposed to be easy. If it were easy, everybody we do it.

    By educating yourself on 529 plans and talking to your people about money, you are way ahead of the curve.

    Do you have a plan to save for college?

    • Have you started saving for college?
    • Are you currently using a 529 college savings plan?
    • How do you motivate yourself to make regular contributions in light of other financial goals?

    Let us know in the comments below!

  • The Time is Now: Student Loan Basics

    The Time is Now: Student Loan Basics

    Have you noticed all the attention on student loans lately?

    To say there is some confusion and uncertainty would be an understatement.

    I don’t have any better idea than you do about what may happen in the student loan landscape.

    No matter what happens, the way I see it, you have two options .

    The first option is to do nothing, get angry, and blame everyone else.

    The second option is to take ownership, get prepared, and educate yourself about the student loan system so you’re ready for whatever comes next.

    If you’ve chosen the second option, you’re in the right place. That means you’re determined to not let outside factors you can’t control hinder your progress towards financial freedom.

    In this post, we’ll cover the basics about federal and private student loans so you can begin to make informed decisions to most efficiently eliminate your student loan debt.

    Whether you are finishing up school or currently paying off loans, this is a good place to start. No matter how the student loan landscape changes, it’s a fair bet that these basic concepts will remain in place.

    In the end, paying off student loan debt is really not that different from paying off any other form of debt. However before we start playing the game of conquering student loan debt, we need to understand some key ground rules.

    Let’s dive in.

    Student loan debt is a major obstacle to reaching financial freedom.

    Student loan debt is one of the major obstacles for people striving for financial freedom. That makes sense given that more than 42 million people in the United States currently have student loan debt.

    It’s not just about the number of people who have student loan debt. It’s the dollar amount of those loan balances. In my opinion, I don’t see how someone can be truly financially free when burdened by student loan debt.

    This is especially true for professionals with advanced degrees. According to the Education Data Initiative:

    • The average person with a graduate degree owes up to $102,790 in federal student loan debt.
    • 54.0% of all graduate school students have federal student loan debt.
    • 55.2% of people with master’s degrees have federal student loan debt.
    • 74.8% of people with professional doctorates have federal student loan debt.
    • 76.2% of doctors have student loan debt.

    It’s because so many of us rely on student loans to pay for school that there is no shortage of information available online. The problem is there’s so much information, it’s hard to know where to start.

    Let me help you get started.

    Federal loans are better than private loans.

    The first thing to know about student loans is that there are two entirely different types: federal loans and private loans.

    Federal loans are funded by the United States government. You can access the main federal student loan website at studentaid.gov.

    Private loans are funded by lenders, like banks. Some of the most popular private student loan companies are SoFi, College Ave, and Sallie Mae.

    When you hear about student loans in the news, you’re hearing about changes to the federal loan system. There may be some side effects for the private loan system, but the federal system is getting all the attention right now.

    There’s no real dispute that federal loans have long been a better option for borrowers than private loans. Federal loans almost always offer the best rates and terms. Even the private loan companies admit as much.

    The reason people have both federal and private loans is because federal loan amounts are capped. Once you’ve taken out all the federal loans you are eligible for, private loans become necessary to fill whatever funding gap remains.

    With tuition costs rising for college and grad school, it’s likely you’ll leave school with both federal and private loans.

    Understanding the available options and differences for each type of loan will help you eliminate your student loan debt as efficiently as possible.

    What to Know about Federal Student Loans

    Even with a changing landscape, below are the key aspects to keep in mind regarding federal loans.

    With this background in mind, you’ll be better equipped to make adjustments to your student loan payoff strategy should that time come.

    graduates holding piggy banks saving concept illustrating taking responsibility for student loan repayment on the way to financial freedom.

    There are 3 main types of federal student loans.

    There are three main types of federal student loans: Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct PLUS Loans.

    Direct Subsidized Loans offer the best rates and terms and are designed for undergraduate students with financial need.

    The main advantage of subsidized loans is that the federal government pays the interest for the borrower for a certain period of time, like when the borrower is still in school. That could be major savings.

    Direct Unsubsidized Loans are available for undergraduate and graduate students and are not restricted to students with financial need. However, the borrower is responsible for all the interest on the loan.

    Your school determines which type of loan you are eligible for. Keep in mind there is cap to the amount you can borrow for each type of loan. We’ll discuss the caps in a moment.

    Your credit score does not factor into Direct Subsidized or Unsubsidized Loans.

    Unlike with private loans, Direct loans do not depend on your credit score. This is a key advantage of federal loans for people who have no credit history or poor credit history.

    Direct PLUS Loans are available for parents and graduate students.

    Direct PLUS Loans are for eligible parents and graduate and professional students.

    The other main differences with PLUS loans relate to the amount you can borrow and the interest rate you’ll pay, as seen below.

    Also, with PLUS loans, the borrower’s credit history is a factor considered during the application process. These loans are not available to people with poor credit.

    Federal Loans are capped depending on the loan type and education level.

    The amount you can borrow in federal loans depends on the loan type and education level (undergraduate or graduate/professional).

    With these caps in mind (besides PLUS loans), you can see how federal loans alone are usually insufficient to cover the full costs of higher education.

    Federal loans offer the best interest rates and lowest fees.

    As mentioned above, federal loans have long offered the best interest rates and lowest fees.

    Rates are always subject to change. For illustration purposes, here are the current interest rates for federal loans:

    Loan TypeLevelInterest Rate
    Direct Subsidized and UnsubsidizedUndergraduate6.53%
    Direct UnsubsidizedGraduate/Professional8.08%
    Direct PLUSParents or Graduate/Professional9.08%

    In addition to interest, most federal loans also include loan fees. These fees are taken out of the loan at the time the loan is first disbursed. That means the amount you’re borrowing and responsible for paying back is more than the amount you actually receive.

    Loan fees for Direct Subsidized and Unsubsidized loans is currently set at 1.057%.

    Loan fees for PLUS loans is currently set at 4.228%.

    As you can see, even within federal loans, the interest rate and fees charged vary depending on the type of loan and level of education.

    The federal government contracts with loan servicers to manage your loans.

    The federal government will assign your loan to a loan servicer to handle billing and other services. When you need information or have questions about your federal loans, you’ll need to contact your loan servicer.

    The federal government currently works with the following loan servicers:

    Keep your loan servicer’s contact information close by, especially these days.

    Your first federal loan payment is typically due six months after leaving school.

    With federal loans, you will usually have a six month grace period after you leave school before your first loan payment is due.

    Not all federal loans have a grace period, and interest usually will accrue during the grace period. You are allowed to pay this accrued interest before you enter repayment.

    The federal government offers a number of loan repayment plans, for now.

    The federal government offers a number of loan repayment plans.

    At least, for now.

    It’s anyone’s guess if these repayment plans will continue to exist and who may be impacted.

    For up-to-date information on the available repayment plans, please visit studentaid.gov or contact your loan servicer.

    So, what is a loan repayment plan?

    Generally speaking, a standard repayment plan means paying your loans back in equal monthly payments spread over ten years.

    In addition to the standard repayment plans, there are a number of plans currently available to reduce your monthly payment and extend your repayment term. These plans are typically based off of income level.

    The idea behind most of these repayment plans is to help you pay back your loans while still affording your other monthly expenses.

    Your loan servicer will work with you to determine the best repayment plan for your situation.

    With federal loans, there should be no prepayment penalty if you accelerate your loan payments on your way to financial freedom.

    One important note: regardless of the repayment plan you choose, you are still responsible to pay back the entire loan. If you choose a plan that offers lower monthly payments spread over a longer time period, you will end up paying more in total interest.

    Loan Deferment, Forbearance, Forgiveness and Discharge

    With federal loans, you typically have better options when you are struggling to repay your loans. Note that just because you may have more options does not mean you’ll be let off the hook.

    Loan forgiveness may be available to people who work in eligible public service jobs who make loan payments for ten years.

    Again, this may be all in flux.

    For up-to-date information on the available repayment plans, please visit studentaid.gov or contact your loan servicer.

    What to Know about Private Student Loans.

    With a basic understanding of federal loans as context, it’s not too difficult to understand how private loans work.

    The key here is that when it comes to private loans, there are more variables to consider. Lenders may have different rates, loan terms, and repayment schedules.

    Be aware that private loans likely will not offer loan forgiveness and may involve additional fees and potential penalties.

    The best thing you can do is to compare the various options for private student loans. A good place to start is with three of the most common private lenders:

    Each of these lenders provides detailed information on its websites. Even if you don’t choose any of these lenders, you can still do your homework on their websites.

    Besides just the interest rate on a potential loan, pay attention to other important factors like:

    • Loan fees
    • Repayment options
    • When the first loan payment is due
    • Prepayment penalties
    • Consolidation options and fees
    • Quality of service and responsiveness

    In the end, you’ll likely find that most private loan lenders offer comparable rates and terms. They are competing with each other for your business, after all.

    Where are you in your student loan journey?

    Ultimately, only you are responsible for your loans. You can blame everyone else for the changing landscape or you can educate yourself and make a plan.

    Whether you are finishing up school or currently paying off loans, this post is intended to provide student loan basics that should hold true no matter how the student landscape changes.

    Now that you understand the basic ground rules, you can work on a plan to pay off your loans as efficiently as possible on your way to financial freedom.

    Where are you in your student loan journey?

    Do you know anyone who would benefit from taking about student loan basics?

  • Student Loans and Financial Freedom

    Student Loans and Financial Freedom

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

    Student loans and financial freedom go hand-in-hand.

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

    All debt acts as a roadblock to financial freedom. Student loans are no different.

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

    When considering student loans and financial freedom, look no further than these recent stats provided by the Education Data Initiative:

    • The average person with a graduate degree owes up to $102,790 in federal student loan debt.
    • 54.0% of all graduate school students have federal student loan debt.
    • 55.2% of people with master’s degrees have federal student loan debt.
    • 74.8% of people with professional doctorates have federal student loan debt.
    • 76.2% of doctors have student loan debt.

    This is why it’s especially important for professionals to realize the connection between student loans and financial freedom.

    Hold on before you tune out because you don’t have any student loan debt.

    The journey towards financial freedom is often a shared journey for many of us.

    This data shows that even if you don’t personally have any student loan debt, the odds are you are going to marry someone who does. Or, you’re the parent, or will someday be the parent, of someone who has student loans.

    That’s why we all need to learn about student loans and financial freedom. You may soon find yourself in a relationship where you’ll want these student loan strategies.

    If nothing else, your prior experiences with student loans can help someone else if you’re just willing to talk about them.

    I’ll never forget the day I made my last student loan payment.

    My family was heading out to Colorado around Christmas time for some snowboarding and skiing. Don’t worry, I didn’t break a wrist that trip.

    My goal that year had been to finish paying off my student loans entirely. However, I can’t take credit for wanting to pay off my loans that year.

    That credit goes to my wife. She was the first person who helped me appreciate the interconnection between student loans and financial freedom.

    Here’s what happened.

    About 11-12 months before that trip to Colorado, my (future) wife and I talked about how we wanted to start our marriage debt-free. We were thinking about buying a home and starting a family. Student loan debt did not fit into this picture.

    She was the one who initiated the conversation.

    She knew long before I did that talking about money is not taboo.

    All these years later, I’m still so grateful that she didn’t shy away from having that important conversation.

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    Why I wanted to pay off my student loans before I got married.

    M wife and I met in the days where I was just starting to tackle my credit card debt after law school. She knew how heavy that debt felt for me.

    She saw how focused I was in creating a Budget After Thinking and how important it was for me to stick with it.

    My wife also experienced firsthand how much better I felt once I had a plan to pay off my debt. She wasn’t just an observer, either. She was an active participant.

    Whether it was budgeting games like the $500 challenge or sharing a hotel room with my friends for a wedding, she was part of my journey.

    So, when I had finally paid off all of my credit card debt, it was time to focus all that financial energy on my student loan debt.

    This may sound odd, but I was excited to move on to a new challenge. Not that paying off debt is ever easy. But, with my student loans, I knew it was going to be easier than paying off my credit card debt.

    That’s because I had already learned and experienced the hardest part of paying off debt with my credit card experience. I had already shifted my money mindset.

    By this point, I wanted to be good with money. Not only for myself, but for my future family.

    Money mindset is so important to student loans and financial freedom.

    Once your money mindset is in the right place, you can make informed and intentional choices about debt. It doesn’t matter if you’re paying off credit cards, student loans, or even HELOC debt.

    When you’re honest and dedicated to fostering a healthy money mindset, you’re better able to establish habits like budgeting and saving. That’s how you create fuel for your Later Money goals, like eliminating debt.

    Personally, my money mindset was in a much different place by the time I prioritized paying off student loan debt compared to paying off credit card debt.

    With my credit card debt, it took waking up one day and feeling ashamed for how irresponsible I was with my spending before I committed to paying it off. I felt down and discouraged.

    On the bright side, those negative feelings are what set me on the path to learn and eventually teach personal finance.

    With my student loans, I wasn’t starting from a feeling of failure. It was quite the opposite, actually. I had a much better attitude because I had proven to myself that I could pay off debt. I had experienced how good that felt.

    So, when my wife and I talked about eliminating my student loan debt before we got married, that was just one final incentive.

    My wife would say that I’m a quietly competitive person. When she initiated that talk about paying off my student loans before we got married, it was game on for me.

    I didn’t need any extra motivation, but I sure felt extra motivated after that talk.

    I prioritized paying off my student loans the rest of that year.

    For the next 11-12 months, I made it my priority to eliminate my student loan debt. I had been making the required payments each month for years, but eliminating my student loans always took a back seat to my other goals. Now, it was time to prioritize eliminating my student loans.

    Using the Debt Snowball method, I used whatever excess money I had each month to pay off the remaining balance on one loan at a time.

    This was before we owned any real estate, but I had begun my side hustle as a law school professor. Whenever I got a paycheck from the law school, I immediately put it towards my student loans.

    When I earned a raise that year, I put the whole raise towards my student loans. I did the same thing with irregular earnings, like from commissions, bonuses and even my tax refund.

    Snowy mountains in the distance illustrating that the journey of student loans and financial freedom are interconnected.
    “Snow Mountain” by Jeff Hollett/ CC0 1.0

    As our Colorado trip was approaching, I knew that the finish line was in sight. I waited to tell my future wife just how close I was until after I had made the final payment. I’ve always liked surprising her.

    I remember telling her I just made the last payment on the day before we left for the trip. She was thrilled, and surprised, at how quickly I accomplished the goal.

    I thanked her for motivating me.

    The next day in Colorado, I shared the news with my parents that I had pay off my student loans. They were even happier than my wife and I were. All my siblings were there with us. We had a toast and celebrated. It was a night I’ll never forget.

    It’s natural to worry about paying back student loan debt.

    When I teach personal finance for lawyers, student loan debt is always one of the most important topics. It’s natural to worry about paying back such a large sum of money as you are beginning your career.

    Even if I didn’t realize before, I now fully appreciate the relationship between student loans and financial freedom.

    My hope is that by thinking and talking even a little bit about your student loans, you won’t have to worry. You’ll have a plan to pay back your loans in the most efficient way possible on your way to financial freedom.

    In our initial series on student loans, we’ll learn how to:

    • Find your loan balance, set up payments, and other important basics when you’re just getting started.
    • Choose a repayment plan that works best for your personal situation.
    • Strategize to pay off student loan debt within the context of your overall life goals.
    • Navigate the ever-changing landscape of student loans.

    Then, you’ll have your own reason to celebrate with your loved ones just like I did in Colorado.

    Have you thought about student loans and financial freedom?

    Where are you currently with your student loans? Just starting out, nearing completion, or somewhere in the middle?

    Are you the partner or parent of someone with student loans? Have you discussed a plan for paying those loans off?

    Let us know so we can learn from each other’s experiences in the comments below.

  • When to Think Cash Instead of Credit

    When to Think Cash Instead of Credit

    Do you use credit cards for every purchase?

    If you would have asked me this a couple years ago, the answer would have been “100% yes.”

    I’ve long been a big fan of using credit cards to earn rewards points and to help track my spending. As long as you pay your credit card bills on-time and in-full every month, credit card rewards can be quite valuable.

    The best vacations I’ve ever had were paid for using points instead of cash. 

    My wife and I have taken some amazing vacations that we would have never gone on if we had to pay in cash.

    We used points to fly first class to Florence for our honeymoon. We’ve used points to stay at luxury hotels in Paris, Barcelona, and Santorini that normally charge more than a thousand dollars a night.

    When my wife and I were still dating, we went to New York for a wedding. We got out there two nights early, and I used points to book us a room at the Waldorf Astoria. This was back in my real life, really lost boy days when I didn’t have any spare cash for something like this.

    My wife and I had a great time at the Waldorf before heading out to Long Island for the wedding.

    I may have forgotten to tell my wife that in Long Island, we’d be sharing a room with two (turned out to be three) of my buddies. I didn’t have any points left for this hotel. Oops.

    She was a good sport. Not even the surprise ice storm from the groom in the middle of the night bothered her. She was a keeper.

    I could go on and on. The point is there was a long period of time where all of our vacations were paid for using points instead of cash.

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    Using points also helped me stay on budget and build my net worth. 

    Besides the incredible memories, the other major benefit to using points was that we could save more money every year. We could then use those savings to fuel our Later Money goals, like investing in real estate.

    That meant our net worth grew in the background while we were out having these amazing experiences.

    I also have long been a fan of using credit cards to help me stay on budget. With credit cards, I can quickly track my spending online during the month to see if I’m on pace for a good month.

    If I notice that I’ve overspent, I can slow down my spending to get back on track.

    Between the rewards points and the ability to track my spending, I still am a big fan of using credit cards for most everyday purchases.

    When used responsibly, meaning paying your credit card bill in full and on-time every month, credit cards can be part of a healthy financial life.

    That said, nowadays, I’ve started using cash more frequently. 

    I’ve started using cash more often these days. 

    I still use credit cards more than cash, but I’m starting to use cash more often than I used to.

    There are a couple main reasons for this.

    I use cash for the convenience for smaller transactions.

    I now use cash regularly for smaller or quicker transactions, like going to the farmer’s market, grabbing ice cream for the kids, or paying for taxis.

    Yes, I still take taxis. I work as a mesothelioma attorney in downtown Chicago near the courthouse. Taxis are plentiful and a lot of times quicker and cheaper than ride share companies.

    And, there are ATM’s on just about every corner near my office in Chicago, so it’s not inconvenient to keep cash on hand.

    For these types of transactions, I value the convenience of paying with cash more than the small amount of credit card points I would earn.

    I also like to pay cash to help out these types of small businesses because they seem to generally prefer being paid in cash. I leave whatever change I’m owed as a tip.

    Also, I’m no longer worried about precisely tracking my cash spending in my Budget After Thinking.

    Instead, I simply account for a few hundred dollars of spending using cash each month. I generally know what types of things I’m spending cash on, so I don’t worry about tracking each expenditure specifically.

    Besides convenience, there’s another reason I use cash more frequently now. 

    Besides convenience, I’ve started to use cash regularly for another reason.

    It’s not that the rewards have changed very much. Or, that I no longer like tracking my spending.

    It’s for a different, and somewhat disappointing, reason:

    More and more service providers, retailers, and restaurants are charging fees to use credit cards. These fees can be as high as 4% of the purchase price.

    These additional fees are sometimes referred to as “surcharges” or “processing fees.”

    Be warned, sometimes these fees are cloaked as “discounts for cash payments.” Don’t be fooled. This is just a sneaky way to say you will be penalized for using a credit card.

    Why do businesses charge processing fees?

    For a little bit of context, credit card companies make money by charging businesses a “merchant fee” or “interchange free” whenever customers pay with a credit card.

    Most businesses pay these merchant fees. That’s because there are plenty of incentives for businesses to accept credit cards. 

    For one, many customers prefer to pay with credit cards, like me. Businesses typically don’t want to lose out on these customers who prefer to pay with credit cards.

    For another, businesses are well aware of the fact that people tend to spend more money when using credit cards instead of cash. Obviously, it’s good for business when people spend more.

    There are certainly other incentives, as well. The point is that businesses have long paid these merchant fees in exchange for benefits provided by credit card companies.

    In recent years, more and more businesses have decided to pass these fees onto customers.

    Businesses, especially smaller businesses, commonly point to the past few years of surging inflation for why they need to pass these processing fees onto customers.

    Have you also noticed these fees popping up seemingly everywhere these days?

    As a consumer, whether we like it or not, these processing fees seem to be sticking around.

    So, what can we do about it?

    We can choose to use cash instead of credit, or we can choose to not spend our money at that business.

    Let’s look at an example to help you make that decision for yourself.

    Who really cares about a small processing fee anyways?  

    A processing fee of 4% may or may not sound like a lot to you. 

    Let’s look at an example to put some real numbers on it. 

    Let’s assume you’re going to buy a new TV that costs $1,000.00 (all taxes included) from a reputable store. A 4% processing fee on the purchase of a $1,000.00 TV means adding $40 to the price of that TV.

    That TV now costs you $1,040.00 with the processing fee.

    That’s a $40 penalty simply for using a credit card instead of cash. That’s a penalty that the next customer paying in cash doesn’t have to pay for the exact same TV. 

    Keep in mind this is a $40 penalty charged on just this one purchase. Consider all the other purchases you make with a credit card and what those total penalties could add up to.

    Since you really shouldn’t be buying that TV unless you have the cash available to pay for it, is there any good reason to willingly pay a $40 penalty?

    We’re assuming you’re shopping at a reputable store, so you shouldn’t have to worry about purchase protection.

    So, that really leaves only one potential benefit to using a credit card for this purchase.

    What about the points you can earn?

    Let’s play that out so you can decide for yourself.

    Aren’t points worth more than whatever the processing fee is?

    Let’s continue our same example of purchasing the TV for $1,000. 

    Including the 4% fee, the TV costs $1,040.00.

    Let’s assume you buy this TV using the Chase Freedom Unlimited, which is the actual card I would use if I were making this purchase. 

    The Chase Freedom Unlimited offers 1.5 points per dollar spent. That means this TV purchase of $1,040.00 would earn you 1,560 points (1040 x 1.5 =1,560). 

    Next, let’s look at my favorite website for valuing rewards points, The Points Guy. Currently, The Points Guy values each Chase Ultimate Reward point at 2.05 cents.

    So, 1,560 points, valued at 2.05 cents per point, is worth $31.98 ((1,560 x 2.05)/100=31.98).

    Now, we can decide if paying the 4% service fee to earn points is worth it. 

    In this example, by choosing to use your credit card with the $40 processing fee, you’ll earn $31.98 worth of points.

    In other words, even accounting for the points you’ll earn, this transaction still costs you an extra $8.02.

    Does that sound like a good deal to you?

    Personally, I would rather keep the $40 in my bank account instead of earning $31.98 worth of points.

    To me, this is not even a close call.

    No deal or a good deal? Hand turns a dice and changes the expression "no deal" to "good deal", or vice versa illustrating the thought processs of using a credit card with a processing fee or using cash.

    It doesn’t make a lot of sense to trade in a higher amount of cash for a lesser amount of points. Not only are you technically losing money, cash is more flexible than credit card points. You can use cash everywhere.

    I don’t think it’s a stretch to say you’d be hard pressed to find anyone who would take $31.98 worth of points instead of $40 in cash.

    What if the processing fee was lower?

    Even if the processing fee was lower, say 3%, my decision wouldn’t change.

    At a 3% fee, the TV would cost $1,030 and you would earn 1,545 points valued at $31.67.

    In this scenario, it’s true that the points are worth $1.67 more than the processing fee.

    I’d still rather have the cash. I value the flexibility that $30 in cash provides me more than a comparable value in points.

    Admittedly, it’s a closer call when the processing fee is 3%. I won’t argue with you if you’d rather go strictly by the math and have the points in this scenario.

    Money is emotional, after all, like we saw when choosing to pay down debt using the Debt Snowball method.

    I went through this exact process when paying my property taxes recently.

    Recently, I went through this exact thought process when paying my property taxes. I had the option to use a credit card and pay a 2.1% convenience fee. 

    I chose to pay cash, even though the points I would have earned were worth $170 more than the convenience fee.

    The math indicated I should have taken the points. Still, I didn’t like the idea of paying another 2.1% on top of my already sky-high property taxes. 

    Even though I lost out on valuable points, money decisions are emotional. It felt better to not pay the extra 2.1% and to keep that cash in the bank.

    Setting aside the math and the value of credit card points, there’s another reason I have started using cash more frequently these days because of processing fees.

    These processing fees really bother me on principle. 

    You may disagree, but I don’t think it’s right for businesses to pass this fee onto customers when businesses do benefit by accepting credit cards.

    I especially don’t think it’s fair when businesses spring this fee on a customer when he is standing at the register about to pay.

    Maybe it’s just me, but these fees annoy me so much that I won’t go back to a business that passes these fees onto customers.

    If it’s a business that I simply can’t live without, and there are very few businesses that reach this level, I’ll pay cash instead of using credit.

    I’m not insensitive to the fact that certain businesses are struggling with inflation. If a business is having a hard time staying profitable without charging a 4% fee, I would prefer that it raises its prices by 4% instead of surprising me at the cash register with this extra fee.

    At least then, I can make an informed decision ahead of time about whether I want to eat at that restaurant or purchase that item before it’s time to pay.

    I know this is a polarizing debate. There are business owners who I’m sure would vehemently disagree with my thoughts on the matter. That’s OK.

    Businesses are of course free to choose how to run their businesses. As a consumer, I am free to choose to avoid certain businesses.

    Have you noticed this processing fees more often lately?

    Where do you come out on paying a processing fee to use a credit card?

    Do you want the points or the savings?

    Or, do you avoid that business altogether?

    Let us know in the comments below.

  • Good Credit Card Perks Besides Points

    Good Credit Card Perks Besides Points

    We recently discussed 10 credit card tips so you can benefit from credit card reward points without suffering from the penalties.

    Today, we’ll look at one of the other major benefits to using credit cards: the ability to easily track your monthly spending.

    This one perk can make staying on budget and fueling your Later Money bucket that much easier each month.

    When you consistently fuel your Later Money bucket, you’re moving closer and closer to financial freedom.

    Let’s take a closer look at how you can use credit cards as part of a healthy financial life.

    How to use credit cards to track your spending.

    Tracking your spending is a crucial first step in the budgeting process. But, that doesn’t mean that anybody actually likes doing it.

    The good news is that once you have created a Budget After Thinking and developed consistent habits, you no longer need to track every penny.

    Instead, you can track two simple numbers to stay on budget.

    Credit cards make it very easy to track these two numbers.

    Here’s exactly how I use credit cards to track my spending.

    When I get my monthly statement for each credit card, the first thing I do I add the amount and due date to my Notes app.

    I’ve been doing this for years now, which means I have a clear understanding of my family’s usual spending habits.

    I can then quickly assess whether it was a good spending month. For example, if I normally spend $4,000 per month on my card, and this month I spent $5,000, I’ll know very quickly that something is off.

    Sometimes, it’s obvious why I overspent. Maybe it was something like buying airplane tickets for a family vacation. If that’s the case, I don’t need to study my credit card statement too closely because I already know why my spending was more than usual.

    Other times, it’s not so obvious. When I don’t immediately understand why my spending was higher than normal, I take a closer look at my statement.

    In just a few minutes, I can look at an entire month’s worth of spending to determine where my money went so I can make thoughtful adjustments during the next month.

    This is how I stay on budget with two simple numbers.

    This same process also helps me track that month’s savings transfers to make sure I maintain a strong savings rate.

    Why I also track the payment due date in Notes.

    The reason I write the payment due date is to make sure I never miss a payment. This is the most important rule of responsible credit card use.

    If you miss even one payment on a single credit card, that missed payment will appear on your credit report. Your credit score will also drop.

    As a landlord, I play close attention to any potential tenant’s credit history and score. I am not willing to risk entering in a financial relationship with someone who has a history of missed payments.

    We recently received an application from someone who has missed 8 of her last 25 payments on her auto loan. That was a major red flag.

    I automate some, but not all, of my monthly payments.

    While we automate most of our monthly payments and transfers, we don’t automate all of them.

    Even though my wife and I only use two credit cards for our personal spending, we have business credit cards for our real estate properties.

    We also have mortgages and HELOCs that need to get paid at various times each month. I use the Notes function to remind me when these payments are due.

    For each credit account, I have automatic payments set up to pay the minimum required amount each month. I then pay the full balance each month manually.

    That’s because we have various sources of income that come in sporadically throughout the month. It’s simpler for me to pay certain bills manually instead of automatically.

    When you have multiple income streams, you have Parachute Money. Currently, our Parachute Money includes:

    • 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

    Using the Notes function helps me make the required payments each month after these income streams hit my checking account.

    What other benefits do credit cards offer?

    Credit cards offer a variety of other benefits to entice customers. Besides tracking your spending, two of my favorite perks are purchase protection and credit score monitoring.

    Purchase Protection and Fraudulent Charges

    Purchase protection is so important in today’s world. The last thing any of us needs is for our personal finances to get wrecked by scam purchases or fraudulent charges.

    Let’s say you buy something with Zelle, debit card, or cash. There are very little, if any, protections to get your money back if that transaction needs to be cancelled.

    Credit cards help prevent against fraudulent transfers, which is one of the best benefits to using credit cards besides reward points.

    Credit cards, on the other hand, typically offer the best purchase protection available. If you’ve been scammed or deceived in any way, your best bet at fixing that issue is to work with your credit card company.

    Also, credit card companies are generally very proactive and helpful in addressing fraudulent charges. If you do encounter any fraudulent charges, your credit card company will work with you to fix the problem.

    While credit card companies are pretty good these days at spotting fraudulent charges, I like to double check my online account to protect myself. To make sure I have not been targeted, I take about 30 seconds to look at my credit card transactions each week.

    Credit Score Monitoring

    Most credit card companies today offer free credit score monitoring through one of the major credit agencies, like Experian. You can see your credit score right in your online account.

    Your credit score will automatically update, usually once per month. You can see how your score changes from month to month and what factors currently influence your score.

    This is a very nice perk, as long as you don’t obsess over your credit score.

    How can I see all the benefits my credit card offers?

    Because there are so many credit card options on the market, the best thing to do is look up the card you have or are thinking about applying for.

    I prefer to visit websites like thepointsguy.com for thorough breakdowns and even valuations on each card’s offerings. This makes it easy to compare credit cards from different banks.

    You can also visit the credit card company’s website directly to learn the full extent of the benefits offered by each card.

    I use the Chase Sapphire Reserve and Chase Freedom Unlimited. Each card has a detailed webpage that details all of the benefits offered with the card.

    My favorite credit card benefit is still the ability to easily track your spending.

    Even with all these other benefits, my favorite credit card benefit is still the ability to easily track your spending.

    I’ve found this to be the easiest way to ensure I’m staying on budget and hitting my financial freedom goals.

    Do you use your credit cards to track your spending?

    What are your favorite benefits to using credit cards, other than reward points?

  • 10 Credit Card Tips for Lawyers and Professionals

    10 Credit Card Tips for Lawyers and Professionals

    In today’s post, we’ll discuss 10 credit card tips for lawyers and professionals so you can benefit from the perks of credit cards without suffering from the penalties.

    I’ll also share what two credit cards I carry in my wallet for all of my everyday spending.

    I’m a big fan of earning credit card points on everyday spending and turning those points into once-in-a-lifetime vacations.

    My wife and I have traveled all over the world together using credit card points. Using points, we’ve stayed at some incredible hotels like the Mandarin Oriental in Lake Como and the Park Hyatt in Sydney.

    The key is to recognize that credit cards are a privilege, like any other form of credit. If you abuse the privilege, you’ll face severe personal finance consequences.

    With that underlying principle in mind, here are ten credit card tips for lawyers and professionals:

    10 Credit Card Tips for Lawyers and Professionals

    1. Only charge what you can afford to pay off.
    2. Avoid overspending because you’re using credit instead of cash.
    3. Do not treat your credit card like an emergency savings account.
    4. Understand how credit card interest works.
    5. Never miss a credit card payment.
    6. Know the fees associated with your account.
    7. Learn how much points are actually worth.
    8. Use points for travel instead of cash back.
    9. Be strategic about what, and how many, credit cards you have.
    10. Don’t spend money just to earn points.

    1. Only charge what you can afford to pay off.

    While it may seem obvious to only charge what you can afford to pay off, many of us have trouble following this primary rule of responsible credit card use.

    Let’s look at some scary stats about credit card use to solidify this point:

    Before you read the rest of my credit card tips for lawyers and professionals, you have to internalize this first rule.

    You need to commit yourself to only charging what you can afford to pay off.

    This means creating a Budget After Thinking and staying within that budget.

    If you’re having trouble with that, check out this post on my top ten strategies for staying on budget.

    2. Avoid overspending because you’re using credit instead of cash.

    Making a purchase with a credit card instead of cash makes it seem like we’re not spending real money.

    We have all fallen victim to this tendency to overspend because of how easy it is to swipe a credit card.

    Whether it’s the daily Starbucks habit, running up a bar tab, or buying another new toy for your kid, it’s a lot less painful in that moment to use a credit card instead of cash.

    If you’re honest with yourself and know that you tend to overspend when using a credit card, try leaving your credit card at home. Bring some cash with you instead.

    The simple act of needing to pay with cash instead of credit is oftentimes enough to stop you from spending on that thing you don’t really want anyways.

    3. Do not treat your credit card like an emergency savings account.

    This may be the single most problematic area we’ll discuss in my credit card tips for lawyers and professionals.

    33% of Americans report they have more credit card debt than emergency savings.

    The main causes of credit card debt are unexpected medical bills (15%), car repairs (9%) and home repairs (7%).

    None of us are immune from these types of unexpected expenses.

    Be sure to establish an emergency savings account so you don’t end up relying on your credit card when the unexpected happens.

    These unexpected expenses can be substantial and result in monthly credit card balances that accrue large amounts of interest.

    4. Understand how credit card interest works.

    If you’re going to use credit cards as part of your everyday life, you should understand the basics on how interest is charged.

    This may be the most overlooked of my credit card tips for lawyers and professionals.

    Credit card interest is typically expressed as an annual percentage rate, or APR.

    If you carry a balance on your card, the credit card company charges interest by multiplying your average daily balance by your daily interest rate. You will be charged this interest until your balance is paid off in full.

    Credit card interest rates are typically variable, meaning they can change over time.

    In the abstract, it can be difficult to fully appreciate how penalizing credit card interest is on our finances.

    Let’s look at an example to better understand the consequences of carrying a balance.

    Let’s say you just moved to a new apartment and purchased a $1,400 TV using a credit card. You don’t have enough money saved up for the full purchase, so you decide to pay off $100 each month. Your credit card charges 23% interest.

    At that interest rate, it will take you 17 months to pay for that TV. You will end up paying a total of $1,645, which includes $245 in interest.

    The $245 in interest equals 15% of the original price of the TV. That means you paid 15% more than the TV actually cost.

    If that doesn’t catch your attention, don’t forget this is just the interest on one purchase after moving to a new apartment.

    What if you want to buy a new sofa to go with your TV? How about a coffee table and a rug? Floor lamp? End table?

    You can see how a 15% penalty on each of these purchases can start to add up quickly.

    5. Never miss a credit card payment.

    Write this rule down in stone: never miss a credit card payment.

    If you don’t remember any of the other credit card tips for lawyers and professionals, remember this one.

    It may seem unfair, but even a single missed payment can severely impact your credit history and credit score.

    Because the consequences of a missed payment are so severe, it’s a good idea to set up your account for automatic payments.

    You have options when setting up automatic payments. Ideally, you can pay your full balance automatically each month.

    If that won’t work for your situation, you can set up automatic payments for the minimum required amount to stay in compliance with your account terms.

    By paying at least the minimum amount required on-time each month, you will not be penalized with a missed payment.

    What is the minimum required payment?

    Credit card companies typically only require customers to make a minimum payment towards their balance each month. The minimum payment is generally 2% to 4% of your balance, or a predetermined minimum fee of around $35.

    It may sound enticing to only pay the minimum. However, you will be charged interest on that remaining balance. That interest compounds and will be a major drag on your finances.

    Candid shot of focused woman wearing headband and casual shirt paying credit card bills online after reading credit card tips for lawyers and professionals on Think and Talk Money.

    Let’s look at another example to see what happens when you only make the minimum required payment.

    Let’s say you have a credit card balance of $2,000. Your minimum required payment will likely be between $40 and $80 to stay in compliance with your account terms.

    In this example, assume the minimum required payment is $40. If you make the minimum payment of $40 out of your total balance of $2,000, that means your remaining balance is $1,960.

    On the next billing cycle, you will be charged interest on that remaining balance of $1,960. At 23% interest, you will be charged $37.39, which gets added to your total balance.

    So, on the next billing cycle, your total balance will be $1,997.39.

    Let that sink in.

    Even though you paid $40 last month, your balance only decreased by $2.61. Ouch!

    Note: this example is for illustration purposes only and may not be precisely how your credit card company calculates interest.

    By the way, credit card companies want you to only pay the minimum each month. That’s how they make so much money.

    How much money do credit card companies make in interest and fees?

    Hundreds of billions of dollars each year.

    6. Know the fees associated with your account.

    Beyond interest, credit card companies profit by charging fees, such as late fees and balance transfer fees.

    For these credit card tips for lawyers and professionals, I want to focus on the annual fees tied to rewards credit cards. These fees can cost hundreds of dollars annually and cancel out the value of any points you earn.

    For example, if you have a credit card that charges an annual fee of $500, and you only earn $400 worth of points each year, that’s a losing proposition.

    You’d likely be better off using a credit card that does not charge an annual fee, even if that means losing out on some points.

    For that reason, it’s important to do your homework before applying for a new card.

    So, how can you determine if you’re getting enough value out of your card to justify the annual fee?

    That leads us to our next tip.

    7. Learn how much points are actually worth.

    This is not an easy thing to do. Luckily, there are some great websites that are dedicated to credit card rewards that have done these calculations for you.

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

    To give you an idea, The Points Guy currently values Chase Ultimate Rewards points at 2.05 cents/point and American Express Membership Rewards at 2 cents/point.

    With that information, you can then determine if a certain credit card is worth having in your wallet.

    For example, let’s say a particular Chase card you have charges an annual fee of $500 per year. When you look at your total spending from the previous year, you see that you earned 20,000 points using that Chase card.

    Using The Points Guy valuation of 2.05 cents/point, that means you earned $410 worth of points. That’s $90 less than what you paid as an annual fee to have the card. That’s obviously not a good tradeoff.

    Yes, credit cards come with other benefits that may add value to you. These benefits are oftentimes related to travel. If you travel frequently, these benefits may be worth it. If you don’t travel often, these benefits may not offer much value to you.

    Keep in mind there are plenty of credit cards available that do not charge an annual fee and still offer points.

    The takeaway is that you should regularly evaluate your spending habits and credit card reward programs to ensure you are still getting value from that card.

    8. Use points for travel instead of cash back.

    Many credit cards offer various options to redeem points. The easiest redemption option is to convert your points into cash that then gets applied to your balance.

    While cash back is the easiest redemption option, it is typically the least valuable. You’ll get far more value by redeeming your points for travel rewards.

    Traveler with mobile phone camera and map in hand looking at a cathedral after reading credit card tips for lawyers and professionals.

    Credit card companies like Chase and American Express have partnerships with airlines, hotels and other travel providers. You can transfer your credit card points to these travel programs to maximize the value of those points.

    If you’re reading a blog on credit card tips for lawyers and professionals, I’m guessing travel is a part of your life. Whether for leisure, business, or necessity, there should be plenty of opportunities to use your points for travel.

    To figure out the best redemption options, it takes a little bit of effort. There are endless options and entire websites dedicated to point redemption strategies.

    Before you get overwhelmed, I’d suggest first talking to your friends and family to see if any of them have already investigated the best redemption option for your personal situation.

    Did you know that talking about money, and credit card points, is not taboo?

    9. Be strategic about what, and how many, credit cards you have.

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

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

    My wallet was thicker than a Harry Potter book.

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

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

    In these credit card tips for lawyers and professionals, I recommend you keep things simple.

    I now have only two credit cards in my wallet: Chase Sapphire Reserve and Chase Freedom Unlimited.

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

    We still earn plenty of points and our finances are much simpler.

    One other suggestion: if you’re in a relationship and share finances, I suggest you align your credit card strategies. Most major credit card companies allow you to combine points with a household member.

    You can more quickly accumulate points by focusing on a single rewards program, instead of spreading out those points among various programs.

    Same as me, my wife only carries the Sapphire Reserve and Freedom Unlimited.

    10. Don’t spend money just to earn points.

    As crazy as it sounds, you may be tempted to spend money you otherwise wouldn’t because you want to earn more points.

    It’s possible to become so obsessed with collecting points that you forget about the strong personal finance habits you’ve worked so hard to establish.

    It can be easier to justify careless spending when we trick ourselves into thinking that spending will eventually lead to a vacation. For example, if you have a credit card that offers bonus points at restaurants, you may be tempted to spend more money when you eat out.

    Or, you may be tempted to pick up the tab for your friends even though that spending doesn’t align with your budget.

    The temptation to earn points can overwhelm your plans to stay on budget. This logic applies to any type of spending, not just dining out and bar tabs.

    Use your credit cards to spend within your Budget After Thinking, not as an excuse to justify blowing your budget.

    To recap, here are my ten credit card tips for lawyers and professionals:

    10 Credit Card Tips for Lawyers and Professionals

    1. Only charge what you can afford to pay off.
    2. Avoid overspending because you’re using credit instead of cash.
    3. Do not treat your credit card like an emergency savings account.
    4. Understand how credit card interest works.
    5. Never miss a credit card payment.
    6. Know the fees associated with your account.
    7. Learn how much points are actually worth.
    8. Use points for travel instead of cash back.
    9. Be strategic about what, and how many, credit cards you have.
    10. Don’t spend money just to earn points.

    Let us know your best credit card tips for lawyers and professionals in the comments below!

  • Money on My Mind: Global Happiness

    Money on My Mind: Global Happiness

    This week, we discuss recent reports on global happiness and starting families.

    We also discuss lessons from successful businesses that we can apply to our personal lives.

    The World Happiness Report 2025

    Since 2012, an organization known as The World Happiness Report (WHR) has studied global wellbeing and how to improve it.

    Each year, they analyze data from 140 countries and publish their findings in an effort to give everyone the knowledge to create more happiness for themselves and others.

    That sounds like a great mission to me.

    They also publish a global happiness ranking of all the countries studied. The rankings are based on answers to a single question:

    Please imagine a ladder with steps numbered from 0 at the bottom to 10 at the top. The top of the ladder represents the best possible life for you and the bottom of the ladder represents the worst possible life for you. On which step of the ladder would you say you personally feel you stand at this time?

    WHR explains that this “life evaluation” question empowers people to make their own judgments about what matters most.

    As part of its analysis, WHR uses economic modeling to explain countries’ average life evaluation scores. They look at six variables, and one of them jump out at me:

    “Freedom to make life choices.”

    What countries would you guess scored the highest on the 2025 rankings?

    The top five countries in the happiness rankings are:

    1. Finland
    2. Denmark
    3. Iceland
    4. Sweden
    5. Netherlands

    Each of these nations has ranked near the top for a long time.

    Where is the United States on the happiness chart?

    The United States fell to number 24, its lowest happiness ranking ever.

    The United States’ highest ranking was 11th place way back in 2011.

    I’m not totally surprised that the United States’ ranking is as low as it’s ever been.

    We’ve discussed some theories that may help explain this drop:

    I wasn’t surprised to see the United States rank 24th in the global happiness rankings, but I was shocked by the sub-ranking for this specific question:

    Are you satisfied or dissatisfied with your freedom to choose what you do with your life?

    The United States ranked 115th out of 147 countries in response to the freedom question!

    That ranking truly shocked me.

    It also helps explain one of the primary goals of Think and Talk Money: to help each of us reach financial freedom.

    When we are financially free, we can choose to live life on our own terms. To me, that sounds a lot like what the WHR freedom question is trying to answer.

    When you have financial freedom, you can make important decisions based on what truly matters. When you don’t have financial freedom, you risk making unsatisfactory decisions for money reasons.

    We can choose to spend more time with the people who are meaningful to us.

    We can choose to use our skills for work that is meaningful to us.

    Group of happy friends posing for a selfie on a spring day as they party together outdoors because they understand happiness is tied to financial freedom.

    Most of us grow up thinking that life only revolves around getting an education and then getting a job. We don’t allow ourselves to believe that financial freedom is possible for us.

    This was exactly how I felt before I wrote down my Tiara Goals one day on the beach in 2017.

    My goal with Think and Talk Money is to help us all realize that financial independence is within our reach. If we can think and talk about our money choices even a little bit every week, we can make sure our money life remains in balance with the rest of our life.

    By practicing strong personal finance habits, each of us can feel more satisfied with our freedom to choose what to do with our lives.

    How would you rank yourself on the freedom question?

    Are you satisfied with your freedom to choose what you do with your life?

    What are your core values?

    Have you ever written down your core values?

    Do you know what you’re striving for?

    Successful businesses look at these questions regularly. I find it helpful to learn how successful businesses operate so I can apply similar principles to my own life.

    For example, there’s a great business book called Traction by Gino Wickman. In the book, Wickman encourages businesses to focus on vision, mission, and values.

    It seems like a pretty good idea for all of us to think about vision, mission, and values as they apply to our own lives.

    For example, if you’re one of the nearly half of Americans not taking your PTO, are you making that choice based on your core values?

    It’s possible that you are. Perhaps you’re being strategic and have formulated a plan to benefit from all those extra hours at the office.

    Or, it’s possible that you’ve never really stopped to think about why you’re working so much. You’ve never paused to articulate to yourself what you want out of life.

    In Traction, Wickman makes a compelling argument why businesses should not skip this crucial step.

    We all should take the same step in our personal lives. In 2017, I wrote down my core values, what I call my Tiara Goals.

    Looking at the big picture, my Tiara Goals have helped me visualize what I truly want out of life.

    In the short term, my Tiara Goals help guide me through difficult decisions. As long as I’m clear with myself about what I want in the long run, I can make daily decisions to get my closer to those goals.

    Millennials want more kids but can’t afford them.

    According to a recent report from Business Insider, Millennials want more kids but can’t afford them.

    This makes me sad.

    The study points to rising costs, as well as the reality that Millennials are saddled with large amounts of student loan debt.

    Combined, it makes sense that Millennials are worried about money.

    If you want to start a family, or grow your family, what better motivation could there be to spend a little bit of time each week thinking and talking about money.

    If this is your reality, or you know someone in this position, establishing strong personal finance habits is crucial.

    Each week at Think and Talk Money, we focus on developing these strong personal finance habits.

    Please share Think and Talk Money with your friends and loved ones.

    I hope that in spreading the word about Think and Talk Money, we can all help each other make big life decisions without worrying about money.

    This is important whether you are hoping to start a family or have other life goals in mind.

    We can all benefit from making intentional and informed decisions with our money.

  • How to Use HELOC to Buy Investment Property

    How to Use HELOC to Buy Investment Property

    Have you ever wondered how successful real estate investors seem to acquire properties so quickly? The answer is usually related to “OPM”, or Other People’s Money. In today’s post, we’ll discuss how I’ve used a common form of OPM, a Home Equity Line of Credit or HELOC to buy investment property.

    The best part is that you can use and repeat this strategy to acquire multiple properties. On three separate occasions, my wife and I successfully used a HELOC to buy investment property.

    Besides acquiring properties, as a real estate investor, you can also use a HELOC to update a property. My wife and I have done both. We’ve used HELOCs to help with the initial downpayment to acquire properties. We’ve also used HELOCs to improve properties after we’ve purchased them to increase its value.

    Read on to learn what a HELOC is and how to use a HELOC to buy investment property.

    What is a HELOC?

    A Home Equity Line of Credit (HELOC) allows you to borrow money, in the form of a loan, against the equity in your home. Equity is the value of your home less what you owe on a mortgage.

    Think of a HELOC as a second mortgage on your property that works like a credit card. That means you will be charged interest when you use your HELOC funds.

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

    Just like a credit card, you can choose when and how to use a HELOC. And, you can use your HELOC over and over again, as long as you pay down the balance. Use it, pay it off, use it again. This is what my wife and I have done.

    Of course, this is one of the best parts about HELOCs. Whether you want to use a HELOC to buy an investment property, or for any other purpose, you can tap the funds repeatedly and don’t get charged any interest until you use them.

    This point is worth repeating. You can open a HELOC and not use it right away. You won’t be charged interest while you wait for an opportunity to present itself.

    That opportunity might be using your HELOC to buy investment property.

    Or, it might mean using your HELOC to renovate your home or buy a car. This is what my wife and I did recently. When we bought a new car last year, we decided to use our HELOC funds instead of taking out a new auto loan.

    Extract equity or obtain funds from your property using a home equity loan or a HELOC to buy investment property.

    Keep in mind that when you decide to use your HELOC, you will be charged interest until you pay it back, just like a credit card. This is a major consideration to keep in mind if you’re thinking about using a HELOC to buy an investment property.

    To recap, a HELOC is really just a form of credit card, available to you for a set period of time, secured by the equity in your home.

    You can use those HELOC funds for any purpose. You can choose to use your HELOC to buy investment property, renovate your home, buy a car, or for pretty much any other purpose.

    What to know about paying off a HELOC.

    If this all sounds too good to be true, don’t forget that you do have to pay off your HELOC, with interest. Just like any other debt, whether it’s Good Debt or Bad Debt, a HELOC needs to be paid off.

    HELOCs are generally broken out into two phases, the “draw period” and the “repayment period.”

    The first phase is known as the borrowing period, or draw period. You can continue to use your HELOC funds for the duration of the draw period. Most HELOCs have a draw period of 10 years.

    During the draw period, your loan balance will accrue interest. Generally, you are required to make minimum payments during the draw period.

    These payments are usually referred to as “interest only” payments. This means you must pay the interest accrued during the previous month, but you don’t have to pay down the principle owed.

    At the close of the draw period, the repayment period begins. During the repayment period, you can no longer borrow from your HELOC.

    The repayment period typically lasts 10 or 20 years. Your lender will set a schedule for monthly payments to pay off the balance in full, similar to a mortgage.

    Four advantages to using a HELOC to buy investment property.

    Here are the four main reasons why I’ve used a HELOC to buy investment property. These same advantages apply to any other major purchase.

    1. You can use a HELOC as you would use cash, including for a downpayment.

    Once your HELOC is open, you can use the funds as you would cash. All you need to do is link your HELOC account to your primary checking account. You can make transfers into your checking account, as needed, up to your full HELOC credit limit.

    With a HELOC, once the transfer hits your checking account, you can spend that money just as you would any other money.

    This is a huge advantage if you want to use a HELOC to buy investment property.

    That’s because lenders heavily scrutinize where you are getting the funds you plan to use to close on a property. HELOC funds are almost always allowed to be used for a downpayment.

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

    2. HELOCs charge lower interest rates.

    The interest rate charged on HELOCs will typically be lower than the interest rate charged by credit cards and other personal loans.

    Interest rates on HELOCs are similar to prevailing mortgage rates, but typically charge about 1-2% more. This is to compensate the HELOC lender for the added risk of being the second mortgage on a property.

    According to Bankrate, here are the current average interest rates:

    As you can see, if you need to borrow money for any reason, using a HELOC usually gives you the best rate. This is a major reason why people generally use HELOCs.

    It’s also the primary reason why I have used a HELOC to buy investment property.

    Keep in mind that HELOCs generally charge a variable interest rate that may change monthly depending on market conditions outside your control. This is again to protect the HELOC lender, and is a factor to consider before you use your HELOC funds.

    In fact, this is one of the key risks with using HELOCs. You may apply for a HELOC when interest rates are low, but that can change. You may be faced with a significantly higher rate when you pay off the balance.

    From a real estate investor’s perspective, a higher interest rate may end up eating into all of your cashflow. Before using a HELOC to buy investment property, make sure the cashflow on the property can cover the higher loan payments.

    3. You only pay interest on HELOCs during the draw period.

    As discussed above, you typically only have to pay the interest on a HELOC during the draw period. That means your monthly payment is lower. As long as you make the minimum payment, the overall balance will not grow month to month.

    Then, during the repayment period, you have 10 to 20 years to pay off the balance. This lengthy period helps spread out the balance over time, which keeps the required payment lower each month. This long payoff period is extremely beneficial when paying off larger purchases, such as a home renovation.

    This is also another key reason why a real estate investor would use a HELOC to buy investment property.

    Spreading out the payments over the long term, and only paying interest during the draw period, means more monthly cashflow. Some real estate investors think differently, but to me, cashflow is king.

    4. You may have access to a larger sum with a HELOC.

    Because a HELOC is secured by the equity in your home, it’s likely you will be eligible for a larger sum than a typical credit card or other personal loan.

    While credit cards also allow cash advances, they are typically capped at a relatively low amount and come with higher interest rates.

    A larger available balance comes in handy when you want to use a HELOC to buy investment property.

    For conventional loans, you’ll typically need 20-25% of the purchase price as a downpayment. That is a lot of money to come up with on your own, even if you are great at fueling your savings.

    The same is true for funding any other major purchase. For example, just the other day, I spoke to a friend who opened up 12 different credit cards to launch his software business.

    If he had access to a HELOC, he would not have needed 12 separate credit accounts. The HELOC would have provided him enough funding.

    How I’ve used HELOCs to scale my real estate portfolio.

    Using HELOCs can be an effective way to scale your real estate portfolio.

    As mentioned above, you can use your HELOC for a downpayment on another investment property.

    This is one of the ways my wife and I scaled our real estate portfolio. We primarily invest in an area of Chicago where properties can get expensive. The same can be said about our vacation rental in Colorado.

    Coming up with a full downpayment in these markets on our own would take years of savings. We’ve made the choice to take on additional debt and added risk to scale more quickly.

    We purchased our first investment property in 2018. After making some improvements and paying down the mortgage, we applied for a HELOC in 2020. We then used those HELOC funds to help with the downpayment for our Colorado ski rental in 2021.

    After a couple years of unexpected appreciation on our ski rental, we took out a HELOC on that property in 2022.

    We then used that HELOC to help purchase a third rental property in Chicago in 2022 and our primary home in 2024.

    As you can see, we’ve used our equity gains in our earlier properties to take out HELOCs to help acquire additional properties.

    Along the way, we have worked on paying down the balances of each of those HELOCs. This way, we reduced our debt and increased our net worth. We can also now repeat the process and again use a HELOC to buy investment property.

    Besides a downpayment, real estate investors can use HELOC funds to make improvements to their properties.

    Real estate investors also use HELOC funds for improvements to their properties. These improvements can lead to equity gains through appreciation and also more monthly cashflow.

    We’ve used HELOCs in this way on multiple occasions. For example, we used our HELOC to install washers and dryers into three of our apartments.

    We then paid off the HELOC balance with the increased rental income generated by those three improved apartments.

    Don’t ignore the biggest risk of using a HELOC to buy investment property.

    With all the advantages of HELOCs, there is one major risk that cannot be ignored. This single risk is so important that is should outweigh all of the advantages for most people.

    HELOC equals debt.

    Like with all debt, if you abuse the privilege, you are going to get yourself in trouble.

    This is why Dave Ramsay is adamant that debt should not be used as a tool to build wealth.

    In his bestselling book, The Total Money Makeover, Ramsey walks you through how to build wealth without relying on debt.

    If you decide to tap your HELOC funds, remember that the loan is tied to the equity in your home. If you fail to comply with the loan terms, your home is at stake.

    That’s a huge risk.

    Before you consider using a HELOC, be sure to have a plan in place for paying back the loan. This is where your Budget After Thinking can really help.

    I would not use a HELOC as a beginner investor.

    While there are upsides to using HELOCs, it is a potentially risky strategy that I would not feel comfortable with as a beginner investor.

    I say that for good reason.

    When you hear HELOC, you should immediately think about debt. For many of us, debt is problematic and leads to negative emotions.

    I’ve experienced these negative emotions associated with debt. I only got comfortable with taking on debt as I learned to trust myself again with the responsibility.

    While I’ve used HELOCs to scale my real estate portfolio, my primary money goal this year is to pay down these HELOCs. I’m tired of having those debt balances hanging over my head.

    If you have proven to yourself that you can responsibly handle debt, using a HELOC may be a worthwhile strategy.

    By responsible with debt, I mean:

    If you have satisfied all of the above, you can then make an informed decision about using debt to scale your real estate portfolio.

    How do you apply for a HELOC?

    Applying for a HELOC is just like applying for a mortgage. The bank will review your finances and determine if it will lend you money against the equity in your home.

    HELOC – Home with a Dollar Sign and Line Graph Symbolizing Borrowing Against Home Equity, which illustrates that using a HELOC to buy investment property can be a useful strategy to scale your real estate portfolio.

    If you’ve ever applied for a mortgage, you know this is not a fun process.

    The key to qualifying for a HELOC is that your home equity needs to have grown in value, either by paying down your primary mortgage or through appreciation.

    Let’s look at an example of using a HELOC to buy investment property.

    Note, you’ll never have to do this math yourself. This is for illustration purposes in case you want to estimate the amount you may be eligible for before you start the application process.

    For easy math, we’ll make some assumptions in this example. Always confer with your mortgage broker or lender for precise calculations.

    In this example, let’s say you bought a home five years ago for $500,000.

    • You put 20% down ($100,000) when you bought the home, so your original mortgage was for $400,000. This means your equity in the home when you bought it was $100,000.
    • For the past five years, you’ve paid down the principle on your mortgage every month. For easy math, let’s assume your remaining mortgage is now $350,000. Because you paid down $50,000 of the mortgage, your equity has increased by $50,000.
    • Not only have you been paying down the mortgage for five years, your home has also appreciated in value and is now worth $600,000. That’s another $100,000 in equity you now have in your home.

    Add it all up and you started with $100,000 in equity (your original downpayment) and now have $250,000 in equity.

    This is because you have paid the mortgage down every month and your home has appreciated in value.

    In this scenario, you may be eligible for a HELOC to buy an investment property.

    How do lenders calculate the amount of your HELOC?

    Each bank may have different standards for qualification and how much they will lend you. Generally, banks will use a metric called Loan-to-value ratio to calculate the amount of your HELOC.

    What is Loan-to-value ratio?

    Loan-to-value ratio is a complicated name for an easy math formula:

    LTVratio = Mortgage amount / Property value.

    In our scenario, your current mortgage amount is $350,000. Your property value is $600,000.

    So, your LTVratio is .5833 ($350,000 / $600,000). In terms of percentage, that’s approximately 58%.

    A typical HELOC lender will allow you to borrow up to a combined LTVratio of 70%.

    That means your existing mortgage plus the HELOC can only add up to 70% of the value of your home.

    The bank does this to protect itself by requiring you to maintain 30% equity in your home.

    To carry out our example, using a combined LTVratio of 70%, you may be eligible for a HELOC of $70,000:

    • Value of home = $600,000.
    • First mortgage = $350,000 (approx. 58%)
    • HELOC = $70,000 (approx. 12% of value of home)
    • Combined mortgage + HELOC= $420,000 (70% of home’s value).
    • Remaining equity in home = $180,000 (30% of home’s value).

    Again, you don’t need to do this math yourself, but it’s helpful if you want to understand what size HELOC you may be eligible for before starting the process with lenders.

    Have you used a HELOC to buy investment property?

    Using a HELOC to buy investment property can be an effective strategy. My wife and I have effectively used this strategy multiple times.

    Before you decide to use a HELOC, be sure to understand the risks associated with taking on additional debt.

    • Have you used a HELOC to buy investment property before?
    • What about using a HELOC for any other purpose?

    Tell us about your experience in the comments below.

  • No Need to Obsess Over Credit Score

    No Need to Obsess Over Credit Score

    Your credit score is very important.

    And, you need to stop obsessing over it.

    Here’s why both those statements are true.

    Your credit history will touch almost every important financial transaction you enter into today. I don’t just mean credit cards and loans.

    If you apply for a job, need insurance, or want to rent an apartment, those companies are going to review your credit report and credit score.

    So, even if you don’t intend to take out loans, your credit history and credit score are still important.

    But, obsessing over your credit score is counter productive.

    Has obsessing over any number ever served you well, anyways?

    GPA…

    Weight…

    Social Media Followers…

    Yes, these things may be important to you. But, obsessing over the number itself is not how they improve. The habits behind the number are more important.

    If you want to improve your GPA, you need to study more.

    To lose weight, you need to practice healthy living.

    For more social media followers, you need to create better content.

    The same logic applies to credit scores.

    If you want a good credit score, the best thing to do is to practice strong personal finance habits that we routinely discuss in the blog.

    Obsessing over your credit score number is a waste of mental energy.

    With this backdrop in mind, we can discuss credit scores.

    What is a credit score?

    As we learned in our post on using credit the right way, credit refers to an agreement to borrow money with the obligation to repay that money later, usually with interest. 

    Credit also refers to a person’s trustworthiness or history of repayment.

    We then learned that a credit report is a document that tracks that history of repayment, as well as the current status of any loans you’ve taken out.

    Your credit report will typically include:

    • Personal information (name, social security number, current and former addresses)
    • Credit accounts (current and historical accounts, including credit cards and any other loans)
    • Collection items (missed payments, loans sent to collections)
    • Public records (liens, foreclosures, bankruptcies)
    • Inquiries (when you apply for a new loan)

    Now, we’ll talk about credit scores.

    A credit score is a three-digit number calculated based on your credit history that represents your present day creditworthiness. 

    Your credit score captures a moment in time. That means it will change over time, sometimes quickly and dramatically.

    We each have multiple credit scores depending on the scoring service. While there are many others, the two main scoring services are FICO and VantageScore.

    Keep in mind that your score may vary depending on the type of loan you are applying for. For example, an auto lender looks at different factors than a mortgage lender.

    For that reason, FICO alone has more than 50 different versions of your score that it may send to lenders.

    What is a good credit score?

    FICO and VantageScore each assign a score ranging between 300-850.

    For both services, if you’re around 800, you’re doing very well. If you drop below 650, you’ve got some work to do.

    Businessman trying to improve credit score with the lessons learned on Think and Talk Money.

    Before we look at the factors that go into your credit score, I can’t emphasize this next point enough:

    Don’t obsess over your credit score.

    You certainly want to pay attention to dramatic changes in your score so you can understand where you need to make adjustments. That said, you should not be concerned with slight movement in either direction.

    For example, FICO considers a score between 800 and 850 as “Exceptional.” Once you’re in that range, it makes no difference whether your score is 804 or 837. You may notice slight variation from month to month. That’s normal and perfectly fine.

    Instead of worrying about fluctuations in your score, spend your time and energy on more important financial wellness strategies, like writing down your Tiara Goals.

    What factors go into your credit score?

    Regardless of the scoring service, your credit score generally consists of these factors:

    • Payment history
    • Current unpaid debt
    • The types of loan accounts
    • Length of credit history
    • New credit inquiries
    • Amount of available credit being used
    • Collections, foreclosures or bankruptcies

    Of course, not each factor counts equally. For example, FICO weighs each factor like this:

    • Payment history: 35%
    • Amounts owed (credit utilization rate): 30%
    • Length of credit history: 15%
    • Credit mix: 10%
    • New credit: 10%

    VantageScore does not assign percentages to each factor, but does define the importance of each factor like this:

    • Payment history: Extremely influential
    • Total credit usage: Highly influential
    • Credit mix and experience: Highly influential
    • New accounts opened: Moderately influential
    • Balance and available credit: Less influential

    In comparing the two main scoring methods, we can see that both methods generally look at the same factors. They both also place the highest emphasis on payment history and place less emphasis on new accounts opened.

    Here’s all you need to know about each factor.

    There’s no reason to overcomplicate what each factor means.

    Here’s all you need to know:

    Payment history reflects whether you consistently make on-time payments.

    Amounts owed, credit utilization rate, and total credit usage refer to how much of your available revolving credit you are currently using.

    Revolving credit mostly refers to credit cards, but could also include loans like a line of credit.

    For example, if you have a credit card with a monthly limit of $1,000, and you are currently charging $300 per month on that card, your credit utilization rate is 30%.

    To maximize your credit score, aim for using 30% or less of your available credit. This ratio applies to each individual account and to your total account balances.

    Length of credit history refers to how long various accounts have been open.

    The longer the accounts have been open, the better your score will be.

    Credit mix looks at what types of loans you have open.

    Generally, lenders prefer to see a variety of loans, like credit cards, auto loans, and mortgages.

    New credit refers to how many loans you’ve applied for recently.

    Applying for too many loans in a short period can negatively impact your score since you may seem desperate for loans to fund your lifestyle.

    What factors are not considered in your credit score?

    Credit scores do not take into account personal information like race, gender, age, or marital status.

    Credit scores also do not consider income or employment history.

    Keep in mind that while personal information or employment history is not a factor in your credit score, it certainly will be considered as part of your application by lenders.

    For example, mortgage lenders and landlords will want to confirm your history of steady employment and income before entering into a financial relationship with you.

    Don’t get caught up in precisely how your score is calculated.

    FICO and VantageScore provide the above information as general guidance. However, each of our credit scores is determined on a unique set of circumstances that changes over time.

    While these factors are generally considered for everyone, specifically how each factor is weighed varies for each of us.

    As FICO explains:

    Your credit report and FICO Scores evolve frequently. Because of this, it’s not possible to measure the exact impact of a single factor in how your FICO Score is calculated without looking at your entire report. Even the levels of importance shown in the FICO Scores chart above are for the general population and may be different for different credit profiles.

    Like we mentioned before, it’s important to not get hung up on the different methodologies that each scoring service uses. For the most part, your score won’t vary significantly from one service to another.

    The key point is to pay attention to the general factors that impact your score but understand that your score is always changing. Don’t waste your energy trying to decipher how much weight is given to each factor.

    How to check your credit score.

    These days, it’s easier than ever to monitor your credit score.

    Most major banks offer free credit scores to their customers.

    You can also sign up for credit monitoring, including credit scores, with the major credit bureaus, Equifax, Experian, and TransUnion. Note that only some services are provided free of charge.

    Of course, there are also no shortage of apps and websites providing similar services, sometimes free and sometimes for a price.

    If you’d like additional guidance on how to obtain your credit score, please reach out on the socials or by replying to our weekly newsletter.

    What should I do instead of obsessing over my credit score?

    Instead of obsessing over your credit score, focus on the strong financial habits we discuss regularly in the blog.

    You should not have to worry about your credit score if you:

    When you can make these habits part of your regular life, your credit score will automatically rise along the way.

    Look at credit scores from a potential lender’s point of view.

    I hope this goes without saying, but lenders are in the business of making money. They make money by gauging risk. The lower an applicant’s credit score, the more the lender’s risk increases.

    When the lender’s risk increases, it may decide to not lend you money. Or, it may choose to lend you money and charge you a higher interest rate to compensate for that higher risk.

    The same logic applies when other entities besides lenders are reviewing your credit score.

    For example, an employer may check your credit score to determine your level of trustworthiness before offering you a job.

    A landlord may check your credit score before agreeing to rent you an apartment to confirm whether you are likely to make the required payment each month.

    Always remember why credit scores are used in the first place.

    If nothing else, remember why credit scores are used in the first place:

    Credit scores are used to measure how risky it would be for someone else to enter into a financial relationship with you.

    In other words, can you be trusted with money.

    If you have a history of not making on-time payments, or not paying loans back, that indicates you are not responsible with money.

    When you are using up most of your current credit and carrying high balances, that demonstrates that you have a hard time limiting your spending.

    If you are constantly applying for new credit, it shows that you may be dependent on credit to fund your life.

    In any of these scenarios, the risk of entering into a financial relationship with you increases.

    Credit scores are especially important before big purchases.

    If you have a big purchase coming up, like buying a home or a car, it’s important to have your credit score in a good spot before applying. This is because your credit score will impact the interest rate you are offered.

    For a big purchase, even slight variations in the interest rate can make a huge difference.

    Because it’s normal for your credit score to change frequently, it is worth waiting to apply for that loan until after you’ve improved your score.

    The best ways to improve your score in the short term are to pay off debt and avoid applying for new credit.

    By paying off debt, you’ll improve your payment history and your credit utilization rate, two of the most important factors in your score regardless of scoring method.

    The best thing you can do to avoid the costly consequences of a poor credit score is to implement the personal finance fundamentals we routinely discuss in the blog.

    Have you ever needlessly obsessed over your credit score?

    Let us know what that felt like in the comments below.

  • Great Talk: Money and Fences

    Great Talk: Money and Fences

    Know anything about fences?

    We need to replace a 20 year-old wood fence at our home that’s one strong storm away from falling over. In these past few weeks, I’ve learned more about fences that I care to admit.

    On the bright side, shopping for a fence has led me to think about and practice many of the personal finance habits we talk about in the blog.

    Let me walk you through my thought process to help you whenever you have a big expenditure in front of you.

    In the world of privacy fences, there seem to be three primary choices available: wood, vinyl, and composite. I won’t bore you with all the details. The key points to consider for our conversation are:

    • Wood is the cheapest, but requires the most upkeep and will eventually need to be replaced.
    • Vinyl (plastic) comes with a lifetime warranty, requires little-to-no upkeep, but is 30-40% more expensive than wood.
    • Composite is the most durable, looks incredible, requires no upkeep whatsoever, has soundproofing ability, is made from recycled materials, comes with a 25-year warranty, but is nearly 3x more expensive than wood.

    We’ve ruled out wood after doing our research and determining that we’ve got too much going on to worry about annual fence upkeep.

    So, that leaves vinyl and composite. From our research, both would be good options. However, there’s really no doubt that composite is the best overall option, if you can stomach the cost.

    Talk to your people about expensive purchases.

    This is a big financial decision, so of course, I’ve been talking to my people for weeks about what they would do.

    I’ve gotten three common responses that go something like this:

    • “You’re planning to live in this home for the long run, make the investment in the best fence possible and never worry about it again.”
    • “How much do you really care about a fence? I’ve never even noticed my fence. Think of what other projects you could spend that money on.”
    • “Dude, leave me alone. I don’t want to talk about your fence.”

    As you can see, talking to your people does not mean that you’re off the hook for making the decision yourself. You will likely get a wide spectrum of advice.

    However, you’ll gain invaluable perspective to consider so you can make the best decision for your personal situation.

    Expensive purchases test your personal finance habits.

    Whenever you have a big purchase ahead of you, many of the strong personal finance habits you’ve been working to establish will be tested. You’ll be asking yourself questions like:

    My wife and I have considered all these questions as we’ve talked through the options.

    Rear view friends sitting on chairs talking at the bar but hiding from each other that they are in credit card debt.

    As of this moment, we’re leaning towards the composite fence so we never have to think about fencing again.

    To help defray the cost, we’re considering a financing option that offers 0% interest for 18 months.

    Important side note: if you ever choose to go with an attractive financing option, always read the fine print first.

    The lender is hoping you fail to pay off the purchase within the 0% interest period so you’re forced to pay insanely high interest on the remaining balance. The financing option we’re looking at jumps from 0% interest to 26% interest if we fail to pay off the loan in 18 months. That’s a serious penalty.

    Financing aside, we’ve also concluded that other projects will have to wait for a while so we don’t crush our money goals for the year.

    We’ll make our final decision this weekend.

    What would you do?

    Leave a comment below to help my wife and I decide.

    Sharing Think and Talk Money with Others.

    Over the past couple days, I’ve heard from several readers who have shared Think and Talk Money with people they care about.

    One reader told me that he shared the blog with his 25 year-old son. The reader was very appreciative because he’s experienced how important personal finance is.

    He knows his son will only benefit in the long run if he implements strong money habits at the beginning of his career.

    Another reader shared the blog with a friend who is now tracking her spending for three months. This is the first time she has ever tracked her spending to learn where her money is going each month.

    She is using her phone and a simple spreadsheet to track her expenses. She reports that even though it’s only been a month, she’s learning things about her money choices she never knew before.

    I love reader stories like this because they reflect one of our core philosophies at Think and Talk Money:

    It’s not taboo to to talk about money.

    When you start the conversation, you’re not just helping yourself, you’re helping people you care about.

    It doesn’t matter if you’re talking about paying for a fence or starting a budget. We all could use help when it comes to making good, consistent money decisions.

    Your friends are likely going through the same money challenges.

    Since writing about my challenges with credit card debt at the beginning of my career, I’ve had some great talks with friends I knew back then.

    Multiple friends have shared with me that they were dealing with the same credit card debt issues at the same time that I was.

    None of us ever knew it at the time. We were hanging out with each other every weekend, spending money we didn’t have. The joke of it all is that we were likely encouraging each other’s poor habits.

    Learning that I was in the same position as my friends all these years later does make me feel at least a little bit better about the mistakes I made back then. But, that’s not the important takeaway.

    The big takeaway for me is that if my friends and I were dealing with the same money challenges back then, we’re probably dealing with similar money challenges today.

    It might not be credit card debt from our social lives, but it might be something like saving for college or paying for a home. Maybe it’s what we should do when the stock market slumps.

    Just like we mentioned above, my friends and I will only benefit from having these kinds of money talks.

    Instead of just talking about mistakes we made in the past, we can talk about how to get it right as we move forward.