When I teach personal finance to law students, I always ask them to share their biggest money worries with me. I encourage them to think about long-term and short-term financial concerns.
I’ve taught for enough years now that I’ve come to expect a handful of common responses.
For example, long-term, law students are obviously worried about student loans. No surprise there.
Student loans can feel heavy and can be a major drag on our finances. That’s why paying off debt is a point of emphasis in my course.
Regarding short-term money worries, one response comes up more than any other: how to budget for inconsistent expenses that pop up throughout the year.
This worry is highlighted during the holiday season.
My students commonly worry about buying gifts during the holiday season.
I totally get it.
During the holiday season, we tend to spend more money than we do during other times of year. This can be very stressful. The challenge is coming up with a plan to handle this temporary increase in spending.
Think about it: throughout the rest of the year, people don’t tend to worry about buying gifts as part of their regular monthly budget.
That’s because we can typically handle the occasional birthday or anniversary gift within our Budget After Thinking.
Usually, staying on budget is as simple as making a quick tradeoff: buy a gift for my mom’s birthday instead of going out to dinner this weekend.
Sure, you have to “sacrifice” dinner out with your friends, but that’s a one-time decision that allows you to stay on budget and get a gift for mom.
However, things all change when it comes to spending during the holiday season.
The trade-off is not so simple as skipping one dinner out.
During the holiday season, we’re not just shopping for mom. We have significant others, kids, nieces/nephews, parents, and siblings.
And, don’t forget about gifts for your kids’ teachers, the babysitter, your assistant at the office, and anyone else who helps make your life easier throughout the year.
You get the idea.
Expenditures balloon during the holiday season. If you’re not prepared, this can cause a lot of unnecessary stress.
If this sounds familiar to you, don’t beat yourself up. Inconsistent expenses, like holiday shopping, are challenging for even the most dedicated budgeters.
The truth is there’s nothing worse than dedicating yourself to your budget for 11 months out of the year only to blow it during the holiday season.
Let’s not let that happen.
Today, I’ll share four tips to help you stay on budget and avoid common spending pitfalls during the holiday season.
First, let’s talk about budget busters.
Holiday Shopping Tip No. 1: Plan ahead for budget busters.
Holiday shopping is an example of inconsistent, but unavoidable, spending that I refer to as budget busters.
Generally, budget busters are any inconsistent expenditures, good or bad, that can derail your finances if not properly planned for.
Good budget busters might include trips, weddings, and of course, holiday shopping.
Bad budget busters include unexpected car repairs, home repairs, or medical expenses.
The key with budget busters is that you need to plan ahead.
Holiday shopping is the easiest budget buster to plan for- we know that these expenses are going to occur every year from the end of November (Black Friday) through New Year’s Eve.
With the proper planning, you can handle holiday shopping so it doesn’t become a budget buster for you.
I recommend including two separate line items for budget busters in your Budget After Thinking.
Have one line item in your Now Money category (bad budget busters) and one line item in your Life Money category (good budget busters).
Holiday shopping is part of your Life Money category.
You likely won’t end up spending your budget buster money every month. That’s a good thing.
For example, let’s say you allocate $200 per month to your Life Money budget buster category.
By the end of the year, if you haven’t spent the money elsewhere, you’ll have $2,400 saved up to help you cover holiday shopping expenses.
The key is that each month that you don’t spend your budget buster money, transfer it to your savings account so it’s there when you need it, like when it’s time to buy holiday gifts.
This is an important step. You don’t want to let that hard-earned money sit in your checking account. Those dollars will disappear long before Black Friday.
By transferring them to savings, those dollars will be at your disposal when needed.
What kind of savings account am I talking about?
Be sure to have a separate savings account for budget busters. It’s always a good idea to keep your savings separate from your everyday spending.
Ideally, you should open up a savings account at a different bank than your checking account. This helps isolate those funds so those dollars don’t disappear and are available come holiday season.
There are lots of good options for high-yield, online savings accounts. I used to bank with CapitalOne, but then they burned me and thousands of other customers. Never again.
I now use BMO Alto for my savings account. They offer a good interest rate and a no-frills product. Very simple and straightforward.
Come holiday season, I can use the budget buster money I had saved throughout the year in my BMO Alto account to cover me if I overspend.
Holiday Shopping Tip No. 2: Cut back in November and January.
If you overspend in December, don’t get discouraged and give up. Before all your hard budgeting work goes to waste, take the month of January to course correct.
For example, if you overspent by $300 in December, make it a priority to underspend by $300 in January.
Even better is if you can also intentionally underspend in November anticipating higher spending in December.
For instance, if you want to have $500 more to spend in December, cut back $250 of spending in November and another $250 in January.
The key is to make sure you address the overspending issue in November and January and not let too much more time go by without course-correcting. If you wait, you’ll just never get around to addressing it.
Is this easier said than done?
Well, sure. It’s always easier to say you’re going to do something. The hard part is following through. It takes discipline.
What will drive that discipline?
Your ultimate life motivations that we talk so much about (and will always continue to talk about). Without that clear vision of your ideal life in front of you, no budget will ever last.
If your ultimate life motivations are not important enough for you to cut back on spending for a month or two, you need to revisit those motivations.
Tip No. 3: Make a game out of it, like the $500 Challenge.
If you go overboard with holiday shopping in December, don’t get down on yourself. You’re human. It happens.
In January, it’s time to play a game that I call “The $500 Challenge.”
My wife and I started playing The $500 Challenge years ago. The game was simple. Each of us had to limit our Life Money for the month to just $500. Whoever spent the least that month, won the game.
I’ve never won the game. My wife is… competitive. I cope by lying to myself that she wins because I enjoy paying on date nights.
We’ve played this game many times to course-correct after a high spending month.
January is the perfect time of year for this game since the holidays in December often result in overspending.
When we succeeded playing The $500 Challenge, we’d be right back on track for our goals.
Even if we couldn’t quite stay under $500 (never an issue for my wife), this game still reminded us to prioritize the experiences and things in life that truly mattered to us.
My favorite part of the game was it forced us to get creative with our nights out. One of my favorite date nights was a product of the $500 challenge.
We had just moved to our new neighborhood. It was a Friday night. People were out and the city was bumping, per usual in summertime Chicago. We set out for a walk to explore with only one rule: we had $20 to spend or less on dinner for two.
We weren’t going to waste that money on an Uber, so we just started walking. A couple miles later, having learned all about our new surroundings, we ended up at a casual restaurant we had never been to.
We ordered a plate of nachos to share off the happy hour menu. We even had enough money left for one of us to wash it down with a cold beer. The nachos were great and the vibe was perfect. The check, with tip? 19 bucks.
We walked home, which helped digest our dinner, and went to bed feeling light in the belly and heavy in the wallet.
The $500 Challenge is the perfect way to get back on track in January after overspending in December.
Tip No. 4: Buy it on Black Friday, but only if it’s on sale.
About 10 years ago, my mom bought me a jacket for a birthday present. It was the exact jacket I wanted. How did she know, I asked her.
“You mentioned it when we were downtown four months ago.”
Four months ago!
I shouldn’t have been surprised. My mom has one of those steel trap memories.
If you only met her for five minutes and then saw her again two years later, don’t be surprised when she asks about your consulting gig, your trip to New Orleans, and that blue dress that she really liked.
I learned from my mom’s gift strategy and now apply it to holiday shopping. I don’t have her memory, but I do have a phone with a notes function.
When my kids see something that they want from Santa, I make a note in my phone. I do the same thing when my wife or I see something that we might want.
On Black Friday, I pull out my list and start online shopping.
Many of the items I could have purchased earlier are on sale during Black Friday. If it’s not on sale, I can decide if I still want to buy it. Most times, I pass on the full-price items.
The benefit of this strategy is that I can sit down with my laptop in a controlled environment knowing that I have a certain amount to spend. Once I hit my spending limit, I stop shopping.
By waiting until Black Friday, I can buy more gifts for the same amount of money.
I can also take my time to think about whether I still want that item. More times than not, I no longer want whatever it was that tempted me in the moment.
Compare this strategy to randomly buying full-priced gifts throughout the month where it’s difficult to even know how much you’re spending.
By keeping a list and waiting to shop until Black Friday, you can save money, get more gifts, and stay on budget.
Don’t let holiday shopping stress you out.
With the proper planning, you don’t have to let holiday shopping stress you out.
Like with most personal finance concepts, the key is to think and make intentional choices.
When you put a little effort in ahead of time, you can stay on budget and continue progressing towards your life goals.
Do you plan ahead for holiday shopping?
What are your favorite strategies to say on budget?
What about the type that gets mad at airport security lines?
I was in an airport security line recently where multiple lines were merging into one when I heard a guy say to another traveler who he thought cut in front of, “I’m in line, too!”
Clearly, he’s the type who gets mad in airport security lines.
This always puzzles me.
You know there’s going to be traffic. There’s always traffic.
You know airport security lines are chaotic.
Why do we let these things bother us?
My theory is that because we didn’t plan ahead. We didn’t check the directions before leaving the house to avoid traffic. Or, we didn’t get to the airport early enough to not stress about security lines.
The point is that you can’t stop traffic from happening just like you can’t avoid security lines at the airport.
But, with the right planning, these inconveniences don’t have to ruin your day.
What does this have to do with personal finance?
Well, traffic and security lines are unavoidable.
That doesn’t mean you have to like them. You just have to accept that they are part of life and things you can handle.
You know what else is unavoidable?
Budget busters.
What are budget busters?
Budget busters are any inconsistent expenditures, good or bad, that can derail your finances if not properly planned for.
Good budget busters might include trips, weddings, and holiday/birthday gift shopping.
Bad budget busters include unexpected car repairs, home repairs, or medical expenses.
The key with budget busters is that you need to plan ahead. That’s because even though we know budget busters will happen, we just don’t know when they will occur.
When I teach personal finance to young lawyers, this is one of the major areas of concern when it comes to budgeting. It is not uncommon for people to worry about how they’re going to pay for inconsistent, big ticket items.
Remember, budget busters don’t have to be for only “bad” things, like repairing a furnace. More on that below.
Budget busters can also be for fun things, like being a bridesmaid in your best friend’s wedding, which can easily cost you thousands of dollars.
With the proper planning, you can handle these inconsistent expenses, good or bad.
If you don’t plan ahead, budget busters will make you mad in the same way people get mad at traffic and airport security lines.
Budget busters are not unexpected expenses.
You may sometimes see budget busters referred to as “unexpected expenses.”
Nope, that’s wrong.
Budget busters may be inconsistent, but they are not unexpected.
It’s more accurate to say that budget busters are 100% expected expenses. We just don’t know exactly when they’re going to occur.
Like with traffic and lines at the airport, budget busters are inevitable. It’s up to each of us to plan ahead to minimize the inconvenience and stay on track with our finances.
I don’t make many guarantees around here. This is one I’m comfortable making:
I guarantee that each of us will face potential budget busters throughout the year.
In fact, I just experienced a potential budget buster on a cold November morning in Chicagoland.
A couple of weeks ago, on a cold November morning in Chicagoland, I woke up with a broken furnace.
It was certainly inconvenient and potentially a huge drag on my finances. The final cost to replace my furnace was more than $10,000.
As much as I didn’t enjoy this expenditure, it was not an unexpected expense. My furnace was 20-years-old. We knew it was going to need replacing at some point. It was only a matter of time.
That’s why it’s just not accurate to label replacing my furnace as an “unexpected expense.”
No, I didn’t know when my furnace was going to break. But, I knew it was going to happen eventually. Because it was already 20 years-old, I knew it was probably going to happen sooner than later.
Luckily, my wife and I had made it a priority this year to build up our emergency savings. We did not know what we would need the savings for, but we fully expected that something would pop up.
I say “luckily” because in prior years, we would have been scrambling to find the cash to replace a furnace. That’s because we had prioritized buying investment properties at the expense of funding our savings account.
That was a risk that made sense while we were growing our portfolio. Now, we’re more focused on protecting what we’ve built. Hence, prioritizing the emergency savings account.
Because we have been steadily funding our emergency savings account this year, we just moved the money over to our checking account and paid for the furnace.
We didn’t have to rely on credit cards or lines of credit to provide heat for our family.
I even made a game out of it to take a bit of the sting out of this big expense.
Plan for budget busters as line items in your Budget After Thinking.
I recommend including two separate line items for budget busters in your Budget After Thinking.
Have one line item in your Now Money category (bad budget busters) and one line item in your Life Money category (good budget busters).
You likely won’t end up spending your budget buster money every month. That’s a good thing.
The key is that each month that you don’t spend your budget buster money, transfer it to your savings account so it’s there when you need it.
This is an important step. You don’t want to let that hard-earned money sit in your checking account. Those dollars will disappear.
By transferring them to savings, those dollars will be at your disposal when needed.
Be sure to have a separate savings account for emergencies, like budget busters.
It’s a very good idea to keep your savings separate from your everyday spending. That means having a savings account and a checking account.
Of course, the most important savings account you need is an emergency savings account. This is what I used to pay for my furnace.
Ideally, you should open up a savings account at a different bank than your checking account. This helps isolate those funds so those dollars don’t disappear.
There are lots of good options for high-yield, online savings accounts. I used to bank with CapitalOne, but then they burned me and thousands of other customers. Never again.
I now use BMO Alto for my emergency savings account. They offer a good interest rate and a no frills product. Very simple and straightforward.
Don’t be mad at budget busters.
With the proper planning, you don’t have to be mad a budget busters.
Include budget busters as line items in your Budget After Thinking.
Open up an emergency savings account at a different bank than your primary checking account.
When inconsistent expenses pop up, you’re covered.
Save your frustration for traffic and security lines.
Have you dealt with budget busters in the past?
Were you prepared to deal with them? Or, do you wish you had planned better?
When I teach my personal finance seminar to lawyers or law students, I typically reach out ahead of time asking about topics of interest.
The most common response I get is something like, “I want to learn about investing.”
The other common response is, “I want to invest in real estate.”
I totally get it. Investing in the stock market and owning real estate are sexy topics.
Without a doubt, these are both important topics to cover in a personal finance seminar. We spend a lot of time in my course and here in the blog talking about investing and owning real estate.
Of course, the best way to generate wealth is through consistent investments over a long time horizon.
So, my students are asking the right questions when they are concerned about investing and real estate.
The hard part is constantly generating enough money to fuel those investments.
That’s why investing and owning real estate are “Day 2 topics.” On Day 1, we have to build the foundation.
Think about it like this:
Before we can invest, we need excess money to invest.
To have excess money to invest, we need a budget that actually works.
For a budget that actually works, we need clear motivations.
Clear motivations means a strong money mindset.
Can you spot the issue of investing without a solid foundation?
When my students ask me a question about how to start investing, I tend to respond with a question of my own:
“How much savings does your budget generate each month?”
Yes, I know. It’s so annoying to answer a question with a question.
This particular question usually leads to a double dose of annoyance from my students.
My students are first annoyed that I ignored their question about investing. They didn’t come to me to talk about something boring, like budgeting.
They want to know about the exciting stuff, like earning huge returns in the stock market.
Next, after this initial annoyance fades away, another form of annoyance sets in.
My students get annoyed because they can’t actually answer the question.
They realize they have no idea how much money they’re saving each month because they don’t have a budget.
That’s a problem.
Not having a budget is a problem for anyone who wants to consistently invest.
To be a successful investor, you need to consistently fuel your investments. There will be ups and downs in the markets. That’s to be expected.
Your job is to stay in the game and keep feeding your accounts.
For example, most of us can be successful investors by simply investing in an index fund, like VTSAX.
Once we’ve selected that investment, our job is to constantly add money to your investment account.
That means having a budget that works.
If you skip this part of the process, sure, you may be savvy enough to open and initially fund the account. But, my prediction is you won’t be fueling that account regularly.
Having a budget for your personal finances is even more important when it comes to owning real estate.
Investing in real estate means running a business. Money comes in and money goes out. To be successful, you have to make sure that more money comes in than goes out.
This is obvious stuff, right?
The same logic applies to your personal budget: if you want to get ahead in life, more money needs to come in than goes out.
The problem is most people have a hard enough time managing their personal finances. How are they going to handle managing business finances?
That’s why I ask my students, “If you haven’t mastered this idea with your personal budget, are you sure you want to take on the stress and risk of an investment property?”
It’s usually around this point when my students start nodding in understanding.
Before focusing on stocks or real estate, make sure your personal finances are in order.
My goal here is not to dissuade you from investing in stocks or real estate.
We all need to invest if we want to generate wealth.
My goal is to help you avoid the mistakes that so many of us make in the early stages of our careers.
One of the biggest mistakes I see is people wanting to jump to the final steps in the process without starting from a strong foundation.
If you’ve been following along on the blog, you likely noticed the progression in topics we’ve covered. This is the same progression that we follow in my personal finance course.
You’ll see links to each one of these topics featured on the top of the Think and Talk Money homepage:
We initially covered each of those topics in order from top to bottom. First, we talked extensively about the mental side of money. Without having your money mindset in the right place, nothing else matters.
We then spent a lot of time talking about personal finance fundamentals, like budgeting, saving, and handling credit and debt responsibly.
Only after having our personal finance foundation in place did we talk about more fun concepts like investing and real estate.
There’s a reason we’ve covered these topics in this order.
If your money mindset is not in the right place, you won’t be able to stay on budget.
If you can’t stay on budget, you’ll likely fall into debt.
When you’re falling deeper and deeper into debt, it doesn’t make a lot of sense to prioritize investing.
Why bother with investing if any profits are just going to disappear?
Let’s focus on that last point for a minute.
What sense does it make to invest if you’ve never proven to yourself that you can use those investment gains responsibly?
I never want to see people take on the risks of investing just to have any profits disappear because they don’t have a strong personal finance foundation in place.
For example, imagine someone does the work to find and sustain a good rental property that generates $1,000 per month in cash flow.
It’s not easy to earn that much. It takes time and effort, not to mention the risk involved.
If that same person blows the $1,000 he earned on things he doesn’t care about, what was the point?
Why take on the risk and do the work if the money will all be gone by the end of the month?
Unfortunately, this is how many people go through life. They work hard, make good money, and then have nothing to show for it.
I don’t want that to be your fate. I want you to have a plan for your money before you earn it.
That means sticking to a budget that consistently moves you closer to living freely on your terms.
Most of us don’t know where our next dollar is going.
The reason most people never get ahead with their finances is because they don’t have a plan for where their next dollar is going.
Their income hits their checking account, they spend it on this or that, and pretty soon that money has disappeared. They haven’t used the money to advance any of their priorities.
It’s just gone.
To me, this is one of the most important money mistakes that we need to fix right away. We definitely need to fix it before we start fantasizing about big investment returns.
If not, you’ll just be making the same mistakes, just with more money to lose.
Having a plan for our money, before we earn it, is essential if we want to reach our goals. With a plan, we can eliminate the disappearing dollars with confidence that our money is being used to serve our purposes.
How do you create a plan for your money before you earn it?
You need to have a budget.
If you don’t currently have a budget that results in excess money at the end of each month, I encourage you to start there before thinking bout real estate.
When you have strong fundamentals in place, money becomes fun.
Being good with money doesn’t have to be stressful. Once you have the fundamentals in place, you’ll start to see how each dollar you earn gets you one step closer to financial freedom.
Before you think about investing in stocks or in real estate, make sure that your personal finances are in order.
Otherwise, the effort, stress, and risk of investing is not worth it. Any dollar you earn is likely to disappear as quickly as it comes in.
To prevent that from happening, establish good money habits before you buy real estate.
In the end, you’ll be so happy that you did.
For any investors out there, did you jump in before establishing strong personal money habits first?
Did any benefits you earned from investing simply disappear because you didn’t have a plan for those dollars ahead of time?
What advice do you have for beginners thinking about investing?
If you have credit card debt, your immediate financial goal should be to pay off that debt as quickly and efficiently as possible. To get you started, I’ll show you exactly how to make a budget to pay off debt.
On your journey to financial freedom, getting rid of credit debt is crucial.
It is nearly impossible to get ahead financially if you are paying 20% interest or more on credit card debt. That type of drag on your money is just too strong.
Think about it: the stock market has historically averaged a 10% annual rate of return.
Does it make any sense to prioritize investing in the stock market to earn 10% per year if, at the same time, you are paying 20% in interest on your credit card debt?
Each year you follow this pattern, you are losing more and more money.
So, the first thing you should do is come up with a plan to pay off your credit card debt. Once the debt is gone, use that money for investments.
Today, we’ll look at how to make a budget to pay off debt so you can begin fueling your investments.
If you can follow these three steps, you’ll have a budgeting framework in place that will serve you well, long after you’re out of debt.
Paying off debt is the hard part. If you can do it, you’ll soon realize that it is a lot more fun to see your money grow each month instead of only seeing your debt shrink.
Let’s dive in.
Making a budget to pay off debt is about having a plan ahead of time.
The art of budgeting is to know what you want to do with your money before it hits your checking account.
Otherwise, it’s too late. Those dollars will disappear.
How do you come up with a plan, or budget, to pay off debt?
I teach my students that to create a budget to pay off debt, you need to first study your own personal situation to figure out where your dollars are currently going.
Then, you can figure out a plan for how to use your next dollar before you earn it. This applies not just to bonuses or other unexpected dollars, it applies to every dollar you earn.
When you put the time in to study your own habits, you can then create a realistic budget. When you have a realistic budget, you will have confidence that your dollars are working for you.
Some dollars will be used to pay your ordinary life expenses, some dollars will be used for all the things in life you love, and some dollars will go to your financial goals, like paying off debt.
That’s all there is to it.
If you don’t currently maintain a budget, here are three steps to follow to get you started.
Step 1: Track your spending for at least 3 months.
I recommend everyone, regardless of where you are in life, start with this first step of tracking your spending for at least three months.
Without knowing where your money is currently going, you won’t be able to make adjustments so you can pay off debt faster.
In other words, before you can reduce your debt, you have to make sure your debt is not growing each month.
That means not spending more than you can afford to pay off each month.
That’s a problem if you’re hoping to make a budget to pay off debt.
To address that problem, you need to track every penny for at least three months. Then, you’ll know exactly how much you’re spending and can begin to think about areas of improvement.
So, before you go any further in the budgeting process, you need to commit yourself to tracking every penny for three months and only charging what you can afford to pay off.
Fair warning, you probably won’t enjoy this part of the budgeting process.
Tracking your spending is important even if it’s not enjoyable.
I won’t lie to you.
This step can be hard and you probably won’t like it. This is the step that makes people think budgeting is a nasty word.
I get it and don’t blame you for having that reaction.
Still, there’s no getting around this first step. You don’t have to budget forever, just long enough to learn your own behaviors towards money.
Please know that many of us struggle with this first step. You might not like what you learn by tracking your spending.
When I first started budgeting, I learned that I was $20,000.00 in debt and was spending way more than I earned.
That wasn’t fun, but I’m happy that I put in the effort to find my blindspots and make adjustments.
I often think to myself, “Where would I be today if I didn’t go through this process 15 years ago? How much further into debt would I have fallen?”
The good news is, tracking your spending is easier today than it’s ever been. I’ve used apps, spreadsheets, and even the notes function on my phone.
Regardless of how you track your spending, be honest with yourself. If you intentionally or mistakenly leave out certain expenditures, you won’t learn where your money is actually going.
A budget, which is just a plan, is only as good as the data it’s built off of. Be honest about your data.
Last note: Budgets are usually done monthly, so you’ll want to create a separate accounting for each month you tracked.
The reason we track three months of spending is so you’ll be able to identify any patterns or inconsistencies in your spending from month-to-month.
This helps ensure you’re making decisions based off the best data possible.
Step 2: Separate your spending into three three main categories.
Great work completing the first step! That wasn’t easy, but you did it.
Now that you have tracked your spending for three months, you can assign each expense into separate categories.
Most personal finance experts agree, though we have different names for each category, that you should divide your money into three main buckets.
I refer to these buckets as:
Now Money
Life Money
Later Money
1. Now Money
Now Money is what you need to pay for basic life expenses.
These expenses include housing, transportation, groceries, utilities (like internet and electricity), household goods (like toilet paper), and insurance.
These are expenses that you can’t avoid and should be relatively fixed each month.
If you’re making a budget to pay off debt, it’s going to be hard to cut from this category, unless you are willing to make major changes. That means moving to a less expensive home or giving up your car, which are not always feasible.
That said, if you are in the position to make these kinds of big changes resulting in serious savings, you can accelerate your path towards being debt-free.
2. Life Money
Life Money is what you are going to spend every month on things and experiences in life that you love.
This bucket includes dining out, concerts, vacations, subscriptions, gifts, and anything else that brings you joy.
We can’t be afraid to spend this money. This bucket is usually what makes life fun and exciting.
The key is to think and talk so you are spending this money consistently on things that matter to you.
If you are truly dedicated to paying off debt, this is the major category to focus on. If it costs $100 to go out to eat, and $10 to eat dinner at home, that’s $90 that could potentially go towards paying off debt.
When you repeat that decision over and over, you can aggressively attack your debt.
3. Later Money
Later Money is what you are saving, investing, or using to pay off debt.
This bucket includes long term goals, such as retirement plan contributions (like a 401k or Roth IRA), college savings for your kids (like a 529 plan), emergency savings and paying off student loan or credit card debt.
This bucket also includes any shorter term goals, like saving for a wedding or a downpayment for a house.
Most fun of all, this bucket includes any investments you make to more quickly grow your wealth, like investing in real estate or the stock market.
You’ve probably guessed it already. Later Money is the key category that fuels your ultimate life goals, like financial independence.
The more you fuel this category, the faster you can reach your goals.
When your goal is to pay off credit card debt, any fuel you generate in this bucket should go to paying off that debt.
With the exception of contributing enough to receive your company’s 401(k) match and creating a small emergency savings account, all excess money should go towards paying off your credit card debt.
Don’t worry about assigning a percentage to each category.
I have intentionally not recommended target amounts or percentages to allocate to each of your three categories.
The reason is because of what I’ve learned from my students over the years. I’ll lay out my full reasoning in a separate post.
The short version is that in my experience working with law students, assigning target percentages for each category is counterproductive.
When I used to teach my students to aim for certain percentages in each category, I could tell that they would get discouraged as soon as I put the numbers on the slideshow. I completely understand why.
Each of us is starting in a different place. If you are currently spending 80% of your monthly income on Now Money, it’s not helpful to have someone tell you to create a budget that automatically drops that level to 50%.
My students would tune me out as soon as I put those numbers on the board.
Now, I teach my students to think and talk about their current personal realities and aim for steady and lasting improvements.
I want my students to create a plan that will last, not an unrealistic plan that they give up on after a few months.
So, whatever amount you’re currently spending in each bucket, that’s what we’re going to work with as we move on to step 3.
One other thing before you move on to step 3: don’t get hung up stressing about what type of expense goes into each category.
Sometimes, it gets tricky. Do clothes you buy for work count as Now Money or Life Money?
Don’t stress. It doesn’t really matter. It’s not worth the mental energy thinking about it. Just stay consistent and move on.
If you still want a target, aim for 20% of your income added to your Later Money each month.
All that said, I know that some of us operate better if we have a specific target in mind. If that’s you, the conventional wisdom is to aim for 20% of your income added to your Later Money each month.
Obviously, the more you add to Later Money, the faster you will pay off your debt. So, if you can afford more than 20% toward credit card debt each month, do it.
If you’re curious, targeting 20% savings each month was popularized in Elizabeth Warren’s book, All Your Worth: The Ultimate Lifetime Money Plan, first published in 2005 (before she was Senator Warren, she was a law professor and author).
Senator Warren advocated for a 50-30-20 budget framework with 50% going to fixed costs (what I call “Now Money”), 30% going to wants (“Life Money”), and 20% going to financial goals (“Later Money”).
Most personal finance experts agree that the 50-30-20 framework is a solid plan for your budget.
In theory, I agree.
In reality, I’ve become convinced through working with my law students that the 50-30-20 framework does not cut it in today’s environment.
While I agree the 60-30-10 framework may be more realistic, my experience has taught me that assigning rigid percentages is just not a practical framework for most people at the beginning of budgeting process.
Step 3: Make adjustments so your spending better aligns with your true motivations and desires in life.
OK, so now that you have assigned your spending to each of the three categories, the next step is to think and talk about your current habits and whether you’re spending matches your true motivations and desires in life.
If you decide that your spending does not match your life values, then it’s time to make some adjustments.
When you’re in credit card debt, the goal of these adjustments is to create more money each month to pay off your debt.
What kind of adjustments can you target?
In essence, my budgeting philosophy is to aim for steady and lasting improvements based on your current reality and your ultimate motivations.
What does that mean?
This is where we circle back to the importance of having a clear understanding of what we want out of our money. Money is just a tool.
Ask yourself:
“Is your current spending aligned with how you want to use your money to fuel your goals and ambitions?”
If not, you can make incremental adjustments as you progress towards your ideal spending alignment.
The idea will be to continuously add more fuel to your Later Money bucket so you can eliminate your debt faster.
You can make small adjustments, which are usually easier and faster to put in place. These adjustments might include dining out a bit less, cutting out a concert, or cancelling a gym membership or subscription you don’t use.
You can also make big adjustments, like moving to a cheaper part of town or getting rid of you car.
Small or big, the key is that when you make these adjustments, you repurpose that money in a thoughtful and intentional way. When you’re in debt, that means repurposing those savings to paying off debt.
Once your debt is paid off, you can put those savings towards your other financial goals.
You’ve already done the hard part. You’ve already aligned your budget with your money motivations.
With each thoughtful decision, you’re progressing towards your best money life. Most importantly, you’re learning about yourself and developing lasting habits. You won’t get discouraged and give up on budgeting.
To help you better understand how to make a budget to pay off debt, here is exactly how I did it when I was in debt in my twenties.
Here’s an example of how to make a budget to pay off debt.
In today’s budgeting example, we’ll look at how I made a budget to pay off debt in my twenties.
The dollar amounts below are what my actual income and spending looked like back then, adjusted for today’s dollars and rounded for easier math.
For some context, I was 26-years-old, living by myself in Chicago (no dependents, no pets), and working as a “slasher.” Not a joke, that was my actual job title.
I worked for a judge with the Appellate Court of Illinois, and as the junior member of the team, my responsibilities included lawyer duties and secretarial duties. I was a judicial law clerk “slash” secretary. Hence, slasher.
Lawyers are funny, huh?
In today’s dollars, I earned an annual salary of $90,000.00. That means I earned $7,500.00 per month. We did not have bonuses at the courthouse, so the $90,000.00 salary was my full compensation.
The benefit of going through an example like this is not to compare your situation to mine. Your income might be much higher or much lower. Same with your expenses.
Instead of the numbers, focus on the thought process so you can start to think about adjustments that suit your current life to help you pay off debt.
Below, you’ll see charts showing that I completed each of our three steps to make a budget to pay off debt:
Step 1: I tracked my spending for 3 months and reflected the average monthly amount for each expenditure in the column labeled “Baseline Budget.”
Step 2: I created a separate chart for each of the three main categories: Now Money, Life Money, and Later Money.
Step 3: I made thoughtful adjustments to better align my spending with my true motivations in life. I illustrated my decisions in the third column labeled “Budget After Thinking.”
Now Money
Recall that Now Money is what you need to pay for basic life expenses.
These are expenses that you can’t avoid and should be relatively fixed each month. If you have expenses for kids, pets, and other fixed life expenses, be sure to include them in your Now Money category.
Now Money
Baseline Budget
Budget After Thinking
Apartment rent
$2,200
$2,200
Renter’s Insurance
$20
$20
Parking spot
$430
$0
Gas for car
$40
$40
Car Insurance
$50
$30
Car Maintenance
$150
$150
Utilities
$120
$120
Internet
$60
$30
Cell Phone
$55
$35
Groceries
$300
$240
Personal upkeep(wardrobe, haircuts, etc.)
$100
$75
Gym Membership
$360
$360
Budget Busters
$300
$300
Now Money Total
$4,185
$3,600
What I learned tracking Now Money.
Now Money is pretty easy to track. There is not a whole lot of variance from month to month.
You’ll notice immediately that I had one major expenditure that needed immediate adjustment. That parking spot for $430? Definitely did not need that.
I lived 2 miles from work in one of the best cities for public transportation in the country. It was frustrating at times to look for street parking, but I didn’t use my car enough to justify the cost of a parking spot.
The other adjustments resulted in more minor savings, but don’t ignore these. Each adjustment took relatively no effort to make, just a little bit of thought beforehand.
When I say relatively no effort, I mean three phone calls and three reductions for car insurance, internet, and cell phone. That’s $70 saved per month, or $840 saved per year, for about 30 minutes of effort.
Otherwise, I decided to show a bit more restraint when grocery shopping and found a cheaper place to get my haircut.
All told, I reduced my Now Money Budget After Thinking by $585 per month with a little bit of thought and hardly any effort.
That meant $7,020 per year I could reallocate to paying off debt.
Life Money
This bucket, Life Money, is what you spend every month on things and experiences in life that you love.
Life Money
Baseline Budget
Budget After Thinking
Social Life (dining out, concerts, ball games, etc.)
$800
$700
Purchases (books, fun clothes, gifts, etc.)
$200
$150
Travel
$500/mo ($6,000/yr)
$400
Cubs Season Tickets
$400/mo ($4,800/yr)
$400
Budget Busters
$200
$200
Life Money Total
$2,100
$1,850
What I learned tracking Life Money.
When you’re reviewing your Life Money expenses, don’t be overly aggressive in cutting here. These are the things and experiences that make your life enjoyable. Even modest adjustments can make a big difference in the long run.
For tips on adjusting your Life Money without sacrificing the things and experiences you love, check out my post here.
As we saw with Now Money, with some thought and very little effort, I reduced my Life Money Budget After Thinking by $250 per month.
That meant another $3,000 I could use to pay off debt.
Some bonus tips for tracking Life Money
Life Money is the most annoying category to accurately track. These expenses vary month-to-month. You may buy concert tickets or have a trip planned some months, but not every month.
So, how do we get an accurate picture of our Life Money?
This is why I recommend you track your spending for at least three months.
You’ll get a more accurate picture because you can average your Life Money spending over those 3 months and balance out any inconsistencies.
Of course, if you have the patience to track your spending for even longer, you’ll get an even more accurate picture.
Fortunately, it is easier to track our spending today with the availability of apps and online banking platforms that can automatically track your spending.
Keep it simple when tracking your Life Money.
I highly recommend you keep it simple when tracking your Life Money. Many of my students give up on budgeting because they make this category more complicated than it needs to be.
I really struggled with this at first because I was so concerned about doing it right.
What I learned was that it doesn’t matter. If you go to happy hour with friends, don’t agonize over whether that goes into your “Dining Out” category or your “Drinks” category?
It doesn’t matter. Make it easy on yourself. Have one category called “Social Life” and move on.
Don’t forget that the point of budgeting is to learn your current habits so that you can make thoughtful adjustments.
Don’t let yourself become so obsessed with the details that you get stressed and give up on budgeting.
Break down large, annual expenses on a monthly basis.
One last tip, when you have large expenses, like season tickets or a big vacation, it’s helpful to break down those expenses on a monthly basis.
That way, you can see how much those individual purchases are impacting your overall monthly goals.
I’m not suggesting you actually pay for that trip over 12 months (like on a credit card), or that you can only spend that much on travel in a certain month. Think of it this way: you likely will not take a trip every month of the year.
Using my Budget After Thinking figures, let’s say I did not take a trip in January, February or March. That would mean that for my planned April trip, I would have $1,600 available that I can use, assuming I didn’t let those dollars disappear.
Later Money
Later Money is what you are saving, investing, or using to pay off debt.
This is the fuel for your most important goals.
When you’re in debt, this is the bucket that matters the most.
Later Money
Baseline Budget
Budget After Thinking
Student Loans
$1,100
$1,100
Credit Card Debt
$150
$900
Savings
$0
$50
Pretax Retirement (401k)
$300*
$300*
Other Investments
$0
$0
Total Later Money
$1,250
$2,050
*This was pretax money to my employer’s retirement plan. For budgeting purposes, it’s easier not to count the amount here.
This is where all your efforts in tracking your spending and making thoughtful adjustments starts to pay off, IF you have a plan for your next dollar before you earn it.
My plan was to pay off debt as quickly as possible.
In my baseline budget, I was very good about paying my student loan debt in full every month. I knew enough not to mess with student loans.
The consequence was my credit card bills were the last to get paid each month. This usually meant only paying the required minimum since I had run out of money by this point. It also meant no money for savings or investments.
In my Budget After Thinking, because of the thoughtful choices I made with my Now Money and Life Money, I created $800 of excess cash.
With that cash, I had committed myself to paying off my credit card debt as quickly as possible.
I also wanted to start the habit of saving each month. So, I added $750 of fuel to my credit card bills and $50 of fuel to my savings.
I stayed true to my plan and put that money to work. Within a few years, I had paid off all of my debt.
Some bonus tips for tracking Later Money.
Make budgeting as easy as possible for yourself.
In my example, I excluded the $300 pretax retirement savings because I am creating a plan for the $7,500.00 that hit my checking account each month. These are the dollars in jeopardy of disappearing.
The entire point of your budget is to create a plan for your next dollar before you earn it. You already wisely chose to save your pretax dollars by enrolling in your employer’s retirement plan.
Those dollars are already accounted for and working for you. They are not disappearing dollars. You did your job!
Like in my example above, you can exclude the amount you’re saving for retirement in pretax dollars from your budget calculations.
Feel good knowing that you’re saving that money. It’s icing on the cake. No need to worry about it when budgeting.
Now you know how to make a budget to pay off debt.
Let’s look at the complete picture before and after I started the budgeting process:
Baseline Budget
Budget After Thinking
Now Money
$4,185
$3,600
Life Money
$2,100
$1,850
Later Money
$1,250
$2,050
Total
$7,535*
$7,500
*Income of $7,500
With some thought and relatively little effort, I was able to stop the disappearing dollars and start making progress towards my ultimate life goals.
In my baseline budget, I was spending more than I earned each month. That meant I had no money to pay my credit card bills, which kept getting bigger because I kept spending.
In my Budget After Thinking, I broke my habit of living above my means and generated $9,600 of fuel in one year to help pay off debt faster.
Taking these first steps may seem like minor steps on the way to financial independence, but they were the most important steps I ever took on my personal financial journey.
Like I did, you can follow these three steps if you are truly motivated to make a budget to pay off debt:
Step 1: Track your spending for at least 3 months.
Step 2: Separate your spending into 3 main categories.
Step 3: Make adjustments so your spending better aligns with your true motivations and desires in life.
As you start to implement these steps, you’ll start to have a clearer picture of how your money can work for you.
When you’re in debt, that means putting your money to work for you to eliminate that debt.
The benefit to creating a Budget After Thinking is that it works whether you are in debt or you are focused on fueling other financial goals.
If you can put in the hard work now to create your budget, you’ll be in good shape no matter what you’re trying to accomplish.
Have you ever made a budget to pay off debt?
What was the key to successfully paying off that debt?
Let’s say you are fresh out of law school working in big law.
At the current salary scale, that means you’re making $225,000 in salary, plus another $25,000 or so in bonuses. We’ll call it $250,000 in total compensation.
That’s a lot of money.
It’s so much money, in fact, that you convince yourself you can make some lifestyle changes.
For starters, you figure it’s time to leave the old law school roommates behind and move into a nicer, but smaller apartment by yourself.
Even though the tradeoff for living by yourself is paying more in rent, you justify it because your income is so high.
Besides paying more in rent, you can’t help but order in more meals now that you’re earning a high income. Plus, you’re working long hours, afterall. Who has time to cook?
Even though you survived on frozen chicken breasts in law school, that won’t cut it anymore now that you’re a practicing attorney.
Finally, you start taking Ubers to get around town. It’s only $15 per ride, and you make more than $20,000 per month.
Even though you took the bus or the “L” home in law school, you can afford a ride! Uber it is!
Does this sound familiar to you?
Maybe it sounds completely ridiculous?
Personally, this story is all too familiar.
When I graduated law school, I spent money based on my income instead of my wealth.
As soon as I started making money after law school, I started spending on things I really didn’t need.
About a year after I graduated, I moved into an apartment by myself. I started spending more freely. I took taxis (no Ubers back then) when I could easily have hopped on the bus or walked.
What made it worse in my case was that I was not even making big law money. At the time, I was a judicial law clerk making around $70,000 per year.
It was because I was careless with my money that I fell into credit card debt so quickly after beginning my career as an attorney.
On top of my poor spending choices, I had student loan debt. Because I had debt and hardly any assets to my name, my net worth was less than zero dollars.
That means I had negative wealth, even though I was earning a decent income.
This is all background for the main question behind today’s post:
Do you spend money based on your income or based on your wealth?
Let’s revisit our fresh big law attorney who’s earning $250,000 per year.
Earlier, I said “That’s a lot of money.”
And, it is.
But, what I should have said was, “That’s a lot of income.”
See, earning a lot of money is not the same as having a lot of money.
There’s a key difference.
Income is temporary. There’s no guarantee that your income will always be there. People lose their jobs all the time. People also switch careers, which can result in lower income.
Wealth is your financial foundation. When you have money, meaning you don’t spend it, you can build wealth.
Of course, when we talk about wealth, we are talking about all of your assets minus your liabilities. This is your net worth.
When your liabilities are greater than your assets, you have a negative net worth, like I did when I graduated law school. By the way, the same is true for most people when they graduate law school.
A high income is not a bad thing, but it can be a wasted thing.
A high income means you have a lot of money coming in.
That’s not a bad thing, but it can be a wasted thing.
What you do with that money is what determines your wealth and financial progress.
If you use your high income to acquire assets, you are winning the game. The same goes for paying off your liabilities.
If you use your high income to buy expensive things, you’ll be stuck in place. At the end of the year, you’ll likely be in no better shape than someone making a fraction of what you make.
That’s why I prefer to think about how much money I keep each year, instead of how much I make.
You may think that a new lawyer earning $250,000 per year should be splurging on life’s finer things.
Would your opinion change if you acknowledged that lawyer’s net worth is a negative number?
Think about it: most new lawyers leave law school with hundreds of thousands of dollars in debt. They also have little to no assets. That means they have a negative net worth.
Should someone with a negative net worth really be splurging on a fancy apartment?
If that person is looking to build a solid financial foundation, the answer is obviously, “No.”
This person should continue living like a law student and spending in accordance with his net worth, not his income.
I recommend you use your high income to acquire assets and eliminate liabilities.
Don’t get me wrong. I am not suggesting that earning a lot of money is a bad thing.
Having a high income is a major benefit.
In fact, I recommend that all of my law students take the high paying job right out of school, if they can get it.
A high income means you can pay off your debt faster. It means you can build up your emergency savings and fund your investment accounts sooner.
There can be no doubt that a high income can accelerate your progress to financial freedom.
You just need to use that income to acquire assets and eliminate liabilities.
As you take those steps, you’ll see your net worth climb, and you’ve earned the right to start spending more.
We all know that it’s bad to live beyond our means. The problem is we don’t evaluate our means properly.
You don’t have to be a personal finance expert to know that living beyond your means is a bad idea.
Most of us intuitively understand that we should live within our means. Actually doing so can prove to be more problematic.
Part of the explanation may be that we don’t think of our spending in terms of our net worth.
We may not appreciate that if we are spending extravagantly while our net worth is still low, or even negative, we are living beyond our means. It doesn’t matter what our income level is.
That’s why I recommend you spend based on your level of wealth (your net worth) instead of your income.
Of course, this lesson applies to all of us, not just recent graduates.
This is challenging for lawyers and professionals who feel compelled to keep up with the Joneses.
When you’re making $750,000 per year, you may think you need to buy the $100,000 luxury car. Or, you may not hesitate to spend $10,000 to upgrade your family’s plane tickets to first class.
But, can you really justify that level of spending when your net worth does not match up with your income?
What happens if that income goes away?
Instead, you should prioritize saving and investing until your net worth justifies that higher spending threshold.
Spending money based on your wealth does not spending from your wealth.
When I say spend money based on your wealth, I don’t mean that you should spend from your wealth.
In other words, this is not a post on spending down your wealth in retirement.
Rather, what I mean is that you should consider your net worth before deciding how much of your income you are comfortable spending.
For example, if you earn $250,000 per year from your job and have a negative or low net worth, you should continue living like a law student.
If you earn $250,000 per year and have a net worth of $1M, you would be justified in splurging from time-to-time.
If you earn $250,000 per year and have a net worth of $10M, you shouldn’t worry about spending extravagantly with all of that income.
Why not worry about spending so much?
The reality is that your investment earnings on $10M will far exceed your $250,000 income from work.
Even a 5% investment return on $10M would earn $500,000 per year, double what you earn from your job. You actually might start thinking about why you still have that job in the first place.
These numbers are just for illustration purposes. Still, the idea is that your spending decisions should factor in your net worth at least as much, if not more so, than your income.
Don’t ignore your wealth when it comes to spending.
Whenever you are evaluating your current financial position, especially your spending decisions, I recommend that you focus on your wealth at least as much as your income.
Income is temporary. It can go away at any moment.
If you are fortunate enough to earn a high income, use that high income to acquire assets and pay down liabilities. That means you’ll have to avoid spending extravagantly until your level of wealth can justify it.
Wealth is foundational. Yes, there will be drops in the markets and your net worth can decrease. That is to be expected.
However, if you focus on spending in line with your net worth, you’ll naturally adjust your spending if your net worth temporarily drops. When it rises again, you can justify spending more. The key is to be flexible.
If you can think in these terms, you will build a strong financial foundation that will give you choices down the road.
Kudos to you if you can answer that question quickly and relatively accurately.
Knowing your net worth indicates you are likely making intentional choices with your money. You likely are more concerned with how much money you keep, not how much you make.
It also likely means that you have a plan and are well on your way to financial independence.
Well done!
If you know your net worth, you might be wondering how you measure up to people your age.
That’s what we’re going to look at today.
First, let’s discuss why it’s important for all of us to track our net worth.
Why is it important to track your net worth?
By tracking your net worth, you can quickly see if you are making good money decisions or need to make adjustments.
I recommend everybody, no matter where you are in your financial journey, track your net worth.
By the way, tracking your net worth is not a major time commitment.
It takes me less than 30 minutes each month to track and discuss what I consider to be one of the most important metrics in personal finance.
That’s all the time it takes to know if I am progressing towards my most important financial goals.
If you don’t know your net worth, now is the time to start tracking it.
For a step-by-step guide to tracking your net worth, check out my post here:
Think of tracking your net worth in terms of keeping score during a basketball game.
If you don’t know the score of the game, you don’t know if your strategy is working. You don’t know if you need to make adjustments before time runs out.
The same applies to tracking your next worth. The point is to educate yourself on your current financial situation so you can make adjustments while there is still time.
How do I know if I need to make adjustments based on my net worth?
Speaking of making adjustments, it can sometimes be helpful to look at datasets to see how you measure up to the rest of the population.
So today, we’ll look at two potentially helpfully net worth metrics.
First, we’ll look at the average net worth of Americans by age.
Then, we’ll look at the average net worth by age of the Top 1%.
The goal is to give you some benchmarks so you can assess where you’re currently at. Then, you can decide if you want to make any adjustments.
In other words, the point is to educate yourself so you can make intentional choices for your own situation. The point is not to start comparing yourself to your neighbors.
Below is the average and median net worth of Americans by age based on research from Empower.
Keep in mind these studies are not perfect.
It’s not an easy task to track and study net worth across a wide population. Not everyone tracks her net worth, let alone makes it easy for outsiders to track it.
Use these figures as a rough guide to help your own decision-making. Just don’t get too caught up in the exact figures.
Net Worth by Age
Age
Average Net Worth
Median Net Worth
20s
$121,004
$6,609
30s
$307,343
$24,247
40s
$743,456
$75,719
50s
$1,330,746
$191,857
60s
$1,547,378
$290,447
70s
$1,444,413
$233,085
80s
$1,342,656
$233,436
90s
$1,212,583
$205,043
High school math refresher: The average is calculated by adding up all values in a dataset and dividing by the count. The median is the middle value of a dataset with an equal number of values above and below. Averages can be skewed by extreme values, so the median can give you a more accurate picture.
Here are some observations about the average net worth of American by age:
Net worth tends to increase with age. No surprise there, right? As our careers progress, we tend to earn more and invest more money.
Net worth tends to peak in our 60s. This also makes sense. When people reach retirement age, they start to draw down their portfolio. They’ve spent decades accumulating wealth and eventually it’s time to spend that savings.
Notice the effects of compound interest. From the 20s to the 30s, we see that the median net worth nearly quadruples. That’s a 400% increase! However, it equates to a median net worth increase of only $18,000.
Compare that to the change from the 50s to 60s. We see that the median net worth increases by only 50%, but the result is an increase in nearly $100,000.
The takeaway is that when you have more money invested, smaller gains result in higher earnings. You could say, “the rich get richer.”
What is the net worth by age of the top 1%?
Next, let’s take a look at the average net worth by age of the Top 1%, thanks to an analysis of Federal Reserve data by DQYDJ.
Remember, these are only rough figures. Use this data to help you strategize based on your current financial situation.
Net Worth by Age of the Top 1%
Age
Top 1% Net Worth
18-24
$653,224
25-29
$2,121,910
30-34
$2,636,882
35-39
$4,741,320
40-44
$7,835,420
45-49
$8,701,500
50-54
$13,231,940
55-59
$15,371,684
60-64
$17,869,960
65-69
$22,102,660
70-74
$18,761,580
75-79
$19,868,894
80+
$16,229,800
Are these dollar amounts lower or higher than you expected?
If these dollar amounts seem unattainable, remember that 99% of us will never hit these marks. Don’t get discouraged. You’re doing great work if you’re anywhere close to these numbers.
Did you notice that the trends in the Top 1% net worth data are very similar to the average net worth by age data we previously looked at?
We again see the net worth of the Top 1% peaking in the 60s.
We also see the same effects of compound interest.
This data reinforces the point that investing favors people who start early, even if the results do not materialize for decades. It takes time for compound interest to work its magic.
When you reach FIPE, you are free to pivot to a new challenge, if that’s what you want.
On the other hand, maybe you looked at this data and learned that you are not as far along on your financial journey as you had hoped.
Don’t panic.
The benefit is that you can now make adjustments.
What kind of adjustments can you make after learning your net worth?
When you track and study your net worth, you can make adjustments while you still have time on your side.
For example, you may decide that it’s finally time to boost your saving rate.
After all, your saving rate is the one thing you can actually control on your way to financial independence.
Or, you might take a fresh look at your Budget After Thinking to find ways to generate more fuel for your investments.
And, it might mean saving and investing that one-time windfall instead of spending it on stuff you don’t really care about.
Whatever decisions you make, knowing the average net worth by age can help point you in the right direction.
It takes me less than 30 minutes per month to track my net worth.
It takes me less than 30 minutes each month to track and study one of the most important numbers in personal finance.
Each month, I’m only looking for progress compared to what my net worth was previously.
If my net worth increases over time, it means I am heading in the right direction.
It means that I am continuing to fuel my Later Money goals. I am paying down debt. I’m letting my investments do their thing.
If my net worth is not increasing, it means I need to figure out why and consider making adjustments.
Sometimes my net worth decreases because the markets are heading down. If that’s the case, I don’t do anything. At this stage in my life, I can afford to wait while markets tick back up.
If the issue is that my debt is increasing, or I didn’t fuel my investments that month, I know I need to make adjustments.
By studying my net worth each month, I can catch these setbacks before they become a continuous problem.
Do you track your net worth?
Are you happy with how you measure up?
If not, are you prepared to make the necessary adjustments?
On your journey to financial freedom, there is only so much you can control.
The reality is, like most things in life, much of our financial journey is out of our hands.
If your gut reaction is that I’m wrong about that, that’s OK. I get it. I used to be in denial, too.
Really smart people, like Think and Talk Money readers, don’t want to acknowledge that they aren’t in complete control of their financial lives.
To illustrate my point, here are just a few things that you can’t control on your way to financial freedom:
You can’t control the returns you’re going to get in the stock market. It’s reasonable to project 10% average annual returns based on historical performance. Also, we use 10% merely as a projection for planning purposes. But, there’s no guarantee anybody will earn 10% per year.
You can’t control whether a real estate investment appreciates. We all certainly hope our properties increase in value over time. We do our best to target areas where appreciation is likely. But, once again, there’s no guarantee.
You can’t control if your employer is going to give you a raise. Of course, you can work hard. Also, you can outperform all the metrics. You can go above and beyond to deliver massive value to your company. However, when it’s time for your annual salary review, it’s not up to you how much all that is worth.
So, am I wrong about any of that?
Gee, thanks for the doom and gloom, Matt.
I know, I know. Not what you want to hear.
Don’t be discouraged. All is not lost.
There is one crucial element that you can control on your way to financial freedom.
Today, we’ll focus on the one crucial element that you actually can control on your way to financial freedom.
Your saving rate is simply the amount of money you save each month divided by the amount of money you make.
Saving rate = Money Saved / Money Earned
Just like staying on budget with two simple numbers, you can monitor your progress with this simple formula.
I find it helpful to measure your saving rate based on your monthly income and savings. This way it matches up with your Budget After Thinking.
I also find it most useful to express your saving rate as a percentage. To see your saving rate percentage, all you need to do is multiply your saving rate by 100.
Moving forward, when I refer to saving rate, I will be talking about your saving rate percentage. It’s more informative to see what percentage of your money you are saving, rather than an amount with no context.
What I mean is this: if someone asked me if saving $10,000 per year was a good target, I wouldn’t be able to comment with more context.
If that person was making $75,000 per year, I would say that seems OK. That’s a saving rate of more than 13%.
On the other hand, if someone told me they were making $750,000 per year, and only saving $10,000, I would recommend that person revisit their Budget After Thinking.
Whatever your current saving rate is, the goal is to seek personal improvement. Just like with tracking your net worth, the purpose is to see if you are making personal progress over time.
When it comes down to it, there are really only two ways to improve your saving rate.
You can spend less, and save more, of the money you’re currently making.
You can make more money and save most of that money, all while keeping your expenses the same.
Combining those two ideas is even better. Like we just said, make more money, spend about the same.
Use the excess money you make to fuel your Later Money goals.
If you can do that, your saving rate and your net worth will steadily climb. You’ll experience that your Later Money goals are closer to becoming reality than you think.
Why it’s important to focus what you can control, like your saving rate.
My point here is show you how dramatically one decision can accelerate your progress towards your goals.
Each additional amount saved is one step closer to financial freedom.
Sometimes, we all need to ask ourselves:
“Is spending more money right now on things I don’t really care about going to make me happier?”
“Do I even want to go out to more restaurants? Or fancier restaurants?”
“Do I despise my home/my car/my wardrobe so much that I must replace it immediately?”
Only you can answer these questions.
Maybe you’ll realize that your life is pretty good right now as it is.
You might just decide that you don’t need the extra money at this moment.
Here’s an example showing the importance of your saving rate.
Scott Trench, author of one of my favorite money wellness books, Set for Life, is a big advocate of improving your saving rate.
In a recent episode of his BiggerPockets Money podcast, Trench emphasized just how important your saving rate is using a simple example.
Let’s use that example to explore how improving your saving rate can accelerate your journey to financial freedom.
Assume that you earn $100,000 per year (after taxes for simplicity).
You are a pretty good saver and save 20% of your income, or $20,000. For most people, targeting a saving rate of 20% is pretty solid.
Of course, if you save 20% of your income, that means you spend 80% of your income, or $80,000 per year:
Take Home Pay: $100,000
Annual Spending: $80,000
Annual Savings: $20,000
Based on the above, we can project how long you will have to work to fund one year of your life.
Because you spend $80,000 per year and you save $20,000 per year, you would have to work four years to save enough money to fund one year of your lifestyle:
$20,000 saved x 4 years = $80,000 saved (1 year of spending)
In other words, you would need to work four years to buy one year of financial freedom.
Not bad, huh?
But, look what happens when you improve your saving rate.
What happens if you double your saving rate from 20% to 40%?
Now, let’s see what happens if you double your saving rate to 40%. That means you are saving $40,000 per year and only spending $60,000 per year.
The result is that you now only need 1.5 years of work to fund one year of financial freedom:
$40,000 saved x 1.5 years = $60,000 saved (1 year of spending)
Notice that two things are happening at the same time when you increase your saving rate.
First, you are saving more money each year. That’s a good thing.
Second, you are spending less money each year. That’s another good thing.
The result is that when you spend less money, you need to accumulate less money to fund your lifestyle.
It’s a double whammy. In a good way.
Should we complete our example by taking it one step further?
Let’s say you have a 50% saving rate. That means you save $50,000 per year and spend $50,000 per year.
How long do you have to work to buy one year of financial freedom?
Only one year.
$50,000 saved x 1 year = $50,000 saved (1 year of spending).
Now, that’s cool.
It’s motivating to think of your saving rate in terms of years to financial freedom.
So, what’s the takeaway here?
It can be extremely motivating to think of your saving rate in terms of how long you have to work until financial freedom.
Each incremental amount that you save means you’re boosting your savings at the same time you’re reducing your spending.
When you pull both of those levers at the same time, you accelerate your progress towards financial freedom.
This thought process is especially helpful for people who feel that math is not their thing. It doesn’t get much simpler than viewing savings in terms of buying financial freedom.
The cool part is that once you hit a 50% saving rate, you can essentially buy a year of financial freedom for every year that year work.
Keep in mind that that this simple illustration ignores any investment returns you may get from your savings.
Don’t worry, those investment returns will generally reduce the length of time you need to work even more. Check out Mr. Money Mustache’s post for more on that point.
Setting aside investment returns, the purpose here is to drive home the point that the more you save, the faster you’ll reach financial freedom.
That’s why it’s so important to focus on your saving rate. You can’t control everything, but you can certainly work on your saving and spending.
Have you ever calculated your saving rate in terms of how quickly you can achieve financial freedom?
“I’m worried about today. I’ll deal with tomorrow later.”
“If I cut out vacations and saving for retirement, I can make it work.”
Have you ever heard money excuses like this before?
I recently had a couple of great talks that got me thinking about comments like this. These talks led me to think about common money mindsets we sometimes have when we’re worried about paying for things today.
For many of us, the natural inclination when money is tight is to ignore the future and focus on today.
The pattern goes something like this:
Go to work, pay the bills, keep food on the table.
Wake up and do it all over again tomorrow.
Dream about life-enriching experiences and retirement later.
The problem with this money mindset: how are you ever going to break the cycle?
How are you ever going to progress towards financial independence so your life is not stuck on auto-pilot?
My challenge to you?
When money is tight, think long and hard about the future. Think about what comes next.
Use a challenging period in your life as motivation to do things differently.
It helps to picture yourself 10 years from now. Imagine you don’t do anything differently.
Same Job. Same bills. The cycle continues.
Do you like what you see?
If you do, no need to read any further. Keep doing what you’re doing.
If you don’t like what you see, let me share another perspective with you.
Let’s use the future as motivation to make the hard decisions today.
That way, you can spend your money (and time) on the things and experiences that bring you happiness in life.
Some dollars will be used to pay your ordinary life expenses, some dollars will be used for all the things in life you love, and some dollars will go to your financial goals.
That’s all there is to it.
When it comes to budgeting, I divide my money into three primary categories:
Now Money
Life Money
Later Money
Now Money
Now Money is what you need to pay for basic life expenses.
These are expenses that you can’t avoid and should be relatively fixed each month. If you have expenses for kids, pets, and other fixed life expenses, be sure to include them in your Now Money category.
Life Money is what you are going to spend every month on things and experiences in life that you love.
This bucket includes dining out, concerts, vacations, subscriptions, gifts, and anything else that brings you joy.
We can’t be afraid to spend this money. This bucket is usually what makes life fun and exciting. The key is to think and talk so you are spending this money consistently on things that matter to you.
Later Money
Later Money is what you are saving, investing, or using to pay off debt.
This bucket includes long term goals, such as retirement plan contributions (like a 401k or Roth IRA), college savings for your kids (like a 529 plan), emergency savings and paying off student loan or credit card debt.
This bucket also includes any shorter term goals, like saving for a wedding or a downpayment for a house.
Most fun of all, this bucket includes any investments you make to more quickly grow your wealth, like investing in real estate or the stock market.
Later Money is the key category that fuels your ultimate life goals, like financial independence. The more you fuel this category, the faster you can reach your goals.
Your budget is really just about finding fuel for the best things in life.
This is where we circle back to the importance of having a clear understanding of what we want out of our money.
“Is your current spending aligned with how you want to use your money to fuel your goals and ambitions?”
If not, you can make incremental adjustments as you progress towards your ideal spending alignment.
The idea is to continuously add more fuel to our Life Money and Later Money. Why?
These are the buckets that represent the things we love the most (Life Money) and our most important life goals (Later Money).
When money is tight, resist the urge to cut these expenses from your budget. These are the expenditures that oftentimes give meaning to life and allow us to build a future on our terms.
Instead, focus on the Now Money bucket as much as possible.
You can make small adjustments, which are usually easier and faster to put in place. These adjustments might include dining out a bit less, cutting out a concert, or cancelling a gym membership or subscription you don’t use.
You can also make big adjustments, like moving to a cheaper part of town or getting rid of you car.
Small or big, the key is that when you make these adjustments, you repurpose that money in a thoughtful and intentional way. You’re now starting to align your budget with your money motivations.
These adjustments will give you options in the future.
With each thoughtful decision, you’re progressing towards your best money life. Most importantly, you’re learning about yourself and developing lasting habits. You won’t get discouraged and give up on budgeting.
Creating a Budget After Thinking is really all about one question:
What do you really want out of life?
When you prioritize Life Money (experiences) and Later Money (financial freedom), each dollar you spend or invest brings you one step closer to that ideal life.
If you are totally consumed with Now Money, you’ll struggle to build the life that you really want.
By that point in my life, I had paid off my student loan debt and was about to get married.
My soon-to-be wife and I had good money coming in, but I never truly thought about what I wanted in life. Sure, I had thought about things like having a family and being able to take vacations.
But, I never carved out time to purposefully think hard about what I actually wanted. I had never asked myself what truly motivates me.
I never allowed myself to dream about financial freedom.
The truth is, I don’t think I had ever visualized a life that wasn’t dominated by a full-time job.
Up to that point, my whole life had revolved around getting an education and then getting a job. I never pictured a world where I might not need a full-time job to provide for myself and eventually my family.
I had read about the concept of being financially free, but it always seemed like a possibility for other people, not me.
Writing this years later, I feel sad for that version of myself for having such limiting beliefs.
Whenever someone tells me she doesn’t make enough money to dream about the future, I think about those same limiting beliefs I used to have.
That’s the cycle I’m hoping to help people break.
When money is tight, think about the future.
When it comes to spending choices, resist the urge to cut the things from your budget that make life what it is. That might mean money spent today on memorable experiences, like vacations.
Or, it might mean money saved and invested to provide yourself more options down the road.
The key is to break the thoughtless spending cycle that can make your life feel like it’s stuck in place.
Create a Budget After Thinking that prioritizes what you truly value.
Money might still be tight, but you’ll know you’re spending on things that matter.
You’ll know that you’ll have options in the future.
No matter how far along you are on your personal finance journey, you will always need to make choices on how to spend your money.
I recently wrote about how I felt annoyed when I wanted to buy a new bike and new golf clubs.
You have to make decisions like this whether you make a lot of money or very little money.
The more money you make, the harder these choices can be. When I was in my 20s, traveling and a social life were my biggest spending challenges.
Now that I’m in my 40s, it’s making good spending choices for not only me, but my wife and three kids.
The other day, I confessed that I was annoyed because my goal to pay off debt was keeping me from buying a new bike or new golf clubs.
What I’ve realized since then is that I also felt guilty about spending money on myself when I could better spend that money on my kids.
I felt guilty because my five-year-old wants to learn how to ride a bike. I should buy her a bike and teach her to ride before I splurge on a new bike for myself, right?
With powerful feelings like annoyance and guilt, how can we make good spending decisions even as we make more money?
Don’t ignore key personal finance fundamentals even as you start to make more money.
What I’ve learned as my career and family obligations evolve is that it’s easy to forget the little things I used to focus on when money was tight.
This recent experience reminded me that I need to step back and focus on personal finance basics.
I’m not alone in needing a reminder from time to time about personal finance fundamentals, like budgeting. I talk to plenty of people who tell me that they kept a budget in their 20s but not so much in their 30s and 40s.
They share with me that even though they’re making more money, it seems like they have less and less money to spend.
I totally get it because I was the same way. I tracked every penny I made in my 20s until I learned how to stay on budget with two simple numbers. Recently, I haven’t been as diligent.
My recent dilemma with the new bike and golf clubs reminded me to go back to the fundamentals.
The benefit is that by remembering the basics, I can help myself by taking the anxiety and guilt out of these types of spending choices.
These budgeting strategies helped me realize that I can choose to spend money on what I want and shouldn’t feel guilty or annoyed.
The key is understanding how a certain purchase fits into the rest of my overall spending.
On this occasion, 3 of my top 10 budgeting tips stood out and helped me with what to do about the new bike and golf clubs.
Let’s take a look.
6. It’s OK if you occasionally exceed your spending.
What should you do if you overspend one month? Don’t get discouraged and give up. Before all your hard work goes to waste, take the next month to course correct.
If you overspent by $300 in August, make it a priority to underspend by $300 in September.
Is this easier said than done?
Well, sure. It’s always easier to say you’re going to do something. The hard part is following through. It will take discipline to get back on track. What will drive that discipline?
Once again, it’s your ultimate life motivations that we’ve talked so much about (and will always continue to talk about). Without that clear vision of your ideal life in front of you, no budget will ever last.
Don’t panic. Course correct. Stay on track.
Even though I didn’t buy the new bike or golf clubs, if I chose to do so, I could course correct the next month.
Going over budget for just one month is fixable. The key is to not blow my budget multiple months in a row.
If I did that, I would end up digging a hole so deep that it would be a major challenge to get back to good spending levels.
8. Buy it if you want it, but not right away.
Just because I didn’t buy the bike or golf clubs yet doesn’t mean I can’t buy them in the future when the time is right.
I always think of my mom when I see something that I want to buy but know I shouldn’t buy it right away.
About 10 years ago, my mom bought me a jacket for a birthday present. It was the exact jacket I wanted. How did she know, I asked her. “You mentioned it when we were downtown four months ago.” Four months ago!
I shouldn’t have been surprised. My mom has one of those steel trap memories.
If you only met her for five minutes and then saw her again two years later, don’t be surprised when she asks about your consulting gig, your trip to New Orleans, and that blue dress that she really liked.
I learned from my mom’s gift strategy and modified it to help myself resist the temptation to make impromptu purchases. I don’t have her memory, but I do have a phone with a notes function.
When I see something that I might want to buy, I do my best to resist the temptation of buying it immediately and make a note in my phone. After a couple weeks, if I still want that thing, I buy it.
More times than not, I no longer want whatever it was that tempted me in the moment.
If I still want the bike or golf clubs a few weeks from now, I can still buy them. By waiting, I also might benefit from end-of-the-season sales and can shop around for the best offers.
10. Plan ahead for budget busters.
Budget busters are any inconsistent expenditures, good or bad, that can derail your planning.
Good budget busters might include trips, weddings, and holiday/birthday gift shopping.
We can also add a new bike and golf clubs to the good budget busters category. These certainly count as irregular expenses but can wreck our budgets if we don’t properly plan for them.
Bad budget busters include unexpected car repairs, home repairs, or medical expenses.
Note, budget busters are inconsistent; they are not unexpected. These expenditures are 100% predictable every year, we just don’t always know when they will surface.
Planning ahead for budget busters is crucial to staying on track.
To do so, open up a savings account, preferably at a different bank than your checking account. This helps isolate those funds so those dollars don’t disappear.
As part of our really lost boy’s Budget After Thinking, you’ll recall that we had a separate line item for budget busters in both our Now Money (bad budget busters) and Life Money (good budget busters).
I encourage you to do the same. Each month that you don’t spend your budget buster money, transfer it to your savings account so it’s there when you need it.
One more bonus tip for dealing with budget busters.
We talked above about how to course correct when you exceed your budget in one month. On the flip side, what should you do when you’ve had a great month and underspent?
I recommend you transfer the amount you underspent to your budget busters savings account. Don’t let that hard-earned money sit in your checking account.
Those dollars will disappear. By transferring them to savings, those dollars will be at your disposal when needed.
Instead of buying the bike or golf clubs now, I can transfer some funds in my savings account and wait to go shopping until I have enough saved up.
Don’t ignore your budget even if you’re far along on your personal finance journey.
My experience with the new bike and golf clubs served as a great reminder to revisit personal finance fundamentals, like budgeting.
If you haven’t thought about your spending choices in a while, now is a good time to do it.
The 10 budgeting strategies mentioned above have worked for me in the past and continue to work for me today.
If you review those top 10 strategies, I hope you see that making good spending choices does not have to make us feel annoyed or guilty.
It just takes a little mental energy, exerted ahead of time.
When making good spending choices becomes part of your everyday life, you can eliminate the guilt and anxiety that comes with tough choices, like buying a new bike or golf clubs.
Have you been in a similar situation where you wanted to buy something but were worried about how it fit into your overall budget?
Do you dream about owning rental properties so you can generate semi-passive income while spending more time with your family?
I want to hear about those dreams. What would you do with that time?
Travel?
Exercise?
Read?
It’s so motivating for me to learn what you would do with that kind of freedom.
At the same time, it’s my job to remind you to not ignore key personal finance fundamentals while you’re dreaming about the future.
When it comes to buying rental properties, this is especially true.
Let me explain.
If you’ve been keeping up with the blog, we’ve now learned how to run the numbers on potential real estate deals.
In fact, I showed you that the analysis is not actually that hard. Your job is simply to account for the fixed costs and make informed predictions for the speculative costs.
Then, we did the math together on an actual property in my target zone. By using a real example in Chicago, my goal was to further convince you that running the numbers should be easy.
Finally, we talked about how to evaluate a rental property when the initial math looks bad. The truth is most rental properties are not going to immediately look like great investments. It’s our job as investors to negotiate and look for potential.
By this point, you may be thinking that buying a rental property sounds great, except for one big problem:
How are you supposed to come up with the money for a downpayment?
Great question.
It’s such a great question that it requires us to take a step back.
Before evaluating rental properties, you need to evaluate your personal finances.
It’s no secret that in order to buy a rental property, you first need available money for the downpayment.
Unless you plan on taking on partners or getting the money from family, coming up with a sufficient downpayment is a major challenge.
Yes, there are loan options available that require a smaller downpayment. We’ll soon talk about some of those options. I’ve used loans like this in the past.
Still, a “smaller downpayment” does not mean “no downpayment.”
So, how can you come up with a downpayment?
For a downpayment, you need to have available money.
Each one of these categories builds upon the previous categories.
It all starts with money mindset.
A strong money mindset is the foundation of the personal finance journey. Maintaining a strong money mindset requires constant and intentional thought.
It may seem overly simplistic, but money mindset is what separates people who reach financial freedom from those who struggle to get ahead in life.
Don’t believe me?
Budgeting is really not that hard. We all understand the basic concept: spend less money than you earn. Still, most of us can’t do it.
The same applies to debt and credit. We all know to avoid debt. We know to use credit responsibly. So, why don’t we do it?
Investing can seem complicated at first. Is it really that hard? Entire books and websites have been created to show you how to create massive wealth through simple index funds.
What about buying rental properties? We did the math together. Analyzing deals is not that hard. The impediment for most people is coming up with the money for a downpayment.
You may be in a similar boat right now. You want to buy a rental property but you’re discouraged because you don’t have the downpayment saved up.
It’s not just about how much money you make.
Buying rental properties is not just about how much money you make. Plenty of lawyers and professionals make a lot of money and struggle to come up with any excess money to invest.
Sadly, the struggles don’t just relate to coming up with money for investments.
Being a lawyer is a hard way to make a living. When you work as a lawyer, the hours are intense and stress levels are consistently high.
In 2023, the Washington Post analyzed data from the U.S. Bureau of Labor to determine what the most stressful jobs are. The study confirmed that lawyers are the most stressed.
Of course, lawyers are not alone in struggling in this regard due to long, stressful hours.
The same study showed that people working in the finance and insurance industries were right up there with lawyers as being highly stressed.
Well, what can we do about it?
How can we address these struggles?
Where can we find money for a downpayment?
I have some thoughts.
How motivated are you to truly get ahead in life?
Are you truly motivated to get ahead in life?
Have you worked on your money mindset and found the motivation to actually create a budget that generates savings?
If you’ve successfully created a budget and still need to generate more fuel, have you thought about a side hustle?
When I mention side hustle, is your initial reaction that you’re too busy or important?
Some lawyers and professionals reading this won’t even allow themselves to consider a side hustle. They automatically think, “I’m way too skilled or busy to even think about another job.”
In my personal finance class, we spend a lot of time challenging that notion.
Very few people- and I mean very few- are too important or too busy to take on a side hustle.
For most of us, it’s an excuse.
You may think you’re one of those “too important” people.
I would challenge you to assess whether you’re confusing “too important” with “too stressed” or “too tired” or “too cool.”
Is continuing to worry about money really better than spending a few hours a week earning extra money doing something you love?
Setting that conversation aside, the ideal side hustle is something you enjoy doing that can earn you extra money at the same time.
Some examples of side hustles my students have come up with in class include:
Bartending. Entice your friends to come to your bar by offering cheap drinks. You get to hang out with them and get paid at the same time.
Fitness instructor. Instead of paying $48 for the spin class you love, become the instructor and get paid to lead the class.
Dog Walker. If you love dogs and don’t currently have one of your own, what better way to fill that void in your life while making money. The same applies to babysitting.
Home Baker. Make homemade treats with your kids and sell them to parents who don’t have the time.
How about this idea for aspiring real estate investors: part-time property manager?
My wife and I recently needed some help with apartment showings. We reached out to one of our favorite young people in the world to see if she’d be interested.
A chance to make some money on the side and learn a new skill?
She jumped on board without hesitation.
We’ve known her for years and were not the least bit surprised. She’s exactly the type of person who will no doubt be successful in whatever she chooses to do.
Too many lawyers and professionals come to me and primarily want to talk about investing or buying real estate.
They want to skip the foundation and jump right to the more exciting stuff.
Most of the time, these are people who have never kept a budget. Or, they have massive student loan debt with no real plan to pay it off. Maybe they have a good W-2 job but no other sources of income.
When I start exploring their situations with them, it’s clear they haven’t thought much about the personal finance building blocks.
When they mention how hard it is to save for a downpayment, they haven’t considered looking for a new job that pays more or starting a side hustle.
Before jumping right to owning rental properties, these are the personal finance obstacles that need to be addressed.
If this sounds like the situation you are in, your ongoing mission is to generate more cash to fuel investments.
The fun part is once you’ve discovered your motivations and established strong habits, you will consistently have money available so you can invest month after month for the rest of your life.
My wife and I would not own five properties today if we didn’t first learn personal money wellness.
My wife and I would not own five properties (11 rental units) today if we had not first learned money wellness fundamentals.
I don’t just mean we wouldn’t have had money available to invest, although that is certainly true.
I also mean we wouldn’t have the skills and knowledge to successfully run our real estate business.
If you’ve ever wanted to be a business owner or investor, working on personal finance skills now is critical.
Robert Kiyosaki put it best in Rich Dad Poor Dad, “It’s not how much money you make. It’s how much money you keep.”
If you knew someone that made $1,000,000 per year, and at the end of the year, had only invested $20,000, what would your reaction be?
What if you knew someone who made $100,000 per year and invested $20,000? Did your reaction change?
How often do you think about your money mindset?
Do you tend to think more about the “fun stuff” (investing, real estate) than the fundamentals (money mindset, budgeting, debt, etc.)?
Let us know about your money mindset in the comments below.
When my students ask me a question about how to start investing in real estate, I tend to respond with a question of my own:
“How much savings does your personal budget generate each month?”
Yes, I know. It’s so annoying to answer a question with a question.
This particular question usually leads to a double dose of annoyance from my students.
My students are first annoyed that I ignored their question about real estate. They didn’t come to me to talk about something boring, like budgeting. They want to know about the exciting stuff, like becoming a real estate investor.
What I’ve noticed is that after this initial annoyance fades away, another form of annoyance sets in. My students get annoyed because they can’t actually answer the question.
They realize they have no idea how much money they’re saving each month because they don’t have a personal budget.
Investing in real estate means running a business. Money comes in and money goes out. To be successful, you have to make sure that more money comes in than goes out. The same logic applies to your personal budget: if you want to get ahead in life, more money needs to come in than goes out. #thinkandtalkmoney#realestateinvesting#realestateinvestor#personalfinance
Not having a personal budget is a problem for anyone who wants to be a successful real estate investor.
Investing in real estate means running a business. Money comes in and money goes out. To be successful, you have to make sure that more money comes in than goes out.
This is obvious stuff, right?
The same logic applies to your personal budget: if you want to get ahead in life, more money needs to come in than goes out.
The problem is most people have a hard enough time managing their personal finances. How are they going to handle managing business finances?
That’s why I ask my students, “If you haven’t mastered this idea with your personal budget, are you sure you want to take on the stress and risk of an investment property?”
It would be much easier to simply invest in an index fund, like VTSAX. At least in that case, you don’t have to manage a business budget. You just have to do your best to constantly add money to your investment account.
It’s usually around this point when my students start nodding in understanding.
Before investing in real estate, make sure your personal finances are in order.
My goal here is not to dissuade you from investing in real estate. I am a big proponent of rental property investing.
I’ve said it before: I think every professional or lawyer can benefit from owning rental properties.
My only goal is to help you avoid the mistakes that crush so many beginner real estate investors. One of the biggest mistakes I see is people taking on a major financial commitment (and time commitment) without starting from a strong foundation.
If you’ve been following along on the blog, you likely noticed the progression in topics we’ve covered.
You’ll see links to each one of these topics featured on the top of the Think and Talk Money homepage:
We initially covered each of those topics in order from top to bottom. First, we talked extensively about the mental side of money. Without having your money mindset in the right place, nothing else matters.
We then spent a lot of time talking about personal finance fundamentals, like budgeting, saving, and handling credit and debt responsibly.
Only after having our personal finance foundation in place did we talk about more fun concepts like investing and real estate.
There’s a reason we’ve covered these topics in this order.
If your money mindset is not in the right place, you won’t be able to stay on budget.
If you can’t stay on budget, you’ll likely fall into debt.
When you’re falling deeper and deeper into debt, it doesn’t make a lot of sense to prioritize investing.
Why bother with real estate if any profits are just going to disappear?
Let’s focus on that last point for a minute.
What sense does it make to invest if you’ve never proven to yourself that you can use those investment gains responsibly?
I never want to see people take on the challenge of investing in real estate just to have any profits disappear because they don’t have a strong personal finance foundation in place.
Imagine someone does the work to find and sustain a good rental property that generates $1,000 per month in cash flow.
It’s not easy to earn that much. It takes time and effort, not to mention the risk involved.
If that same person blows the $1,000 he earned on things he doesn’t care about, what was the point?
Why take on the risk and do the work if the money will all be gone by the end of the month?
Unfortunately, this is how many people go through life. They work hard, make good money, and then have nothing to show for it.
I don’t want that to be your fate. I want you to have a plan for your money before you earn it.
That means sticking to a budget that consistently moves you closer to living freely on your terms.
Most of us don’t know where our next dollar is going.
The reason most people never get ahead with their finances is because they don’t have a plan for where their next dollar is going.
Their income hits their checking account, they spend it on this or that, and pretty soon that money has disappeared. They haven’t used the money to advance any of their priorities. It’s just gone.
To me, this is one of the most important money mistakes that we need to fix right away. We definitely need to fix it before we take a chance on investing in real estate.
If not, you’ll just be making the same mistakes, just with more money to lose.
Having a plan for our money, before we earn it, is essential if we want to reach our goals. With a plan, we can eliminate the disappearing dollars with confidence that our money is being used to serve our purposes.
How do you create a plan for your money before you earn it?
You need to have a budget.
If you don’t currently have a budget that results in excess money at the end of each month, I encourage you to start there before thinking bout real estate.
The key to budgeting is to eliminate disappearing dollars by creating a plan for Now Money, Life Money, and Later Money.
Your Later Money is what you’ll eventually use to accelerate your journey to financial freedom by investing in stocks or buying real estate.
1. Now Money
Now Money is what you need to pay for basic life expenses.
These expenses include housing, transportation, groceries, utilities (like internet and electricity), household goods (like toilet paper), and insurance.
These are expenses that you can’t avoid and should be relatively fixed each month.
2. Life Money
Life Money is what you are going to spend every month on things and experiences in life that you love.
This bucket includes dining out, concerts, vacations, subscriptions, gifts, and anything else that brings you joy.
We can’t be afraid to spend this money. This bucket is usually what makes life fun and exciting. The key is to think and talk so you are spending this money consistently on things that matter to you.
3. Later Money
Later Money is what you are saving, investing, or using to pay off debt.
This bucket includes long term goals, such as retirement plan contributions (like a 401k or Roth IRA), college savings for your kids (like a 529 plan), emergency savings and paying off student loan or credit card debt.
This bucket also includes any shorter term goals, like saving for a wedding or a downpayment for a house.
Most fun of all, this bucket includes any investments you make to more quickly grow your wealth, like investing in real estate or the stock market.
Later Money is the key category that fuels your ultimate life goals, like financial independence. The more you fuel this category, the faster you can reach your goals.
When you have strong fundamentals in place, money becomes fun.
Being good with money doesn’t have to be stressful. Once you have the fundamentals in place, you’ll start to see how each dollar you earn gets you one step closer to financial freedom.
Before you think about investing in real estate, make sure that your personal finances are in order.
Owning rental properties means running a business. When the money comes in, you want to make sure it doesn’t go right out.
Otherwise, the effort, stress, and risk of owning real estate is not worth it. Any dollar you earn is likely to disappear as quickly as it comes in.
To prevent that from happening, establish good money habits before you buy real estate.
In the end, you’ll be so happy that you did.
For any real estate investors out there, did you jump in before establishing strong personal money habits first?
What advice would you have for beginners thinking about investing in real estate?
If you would have asked me this a couple years ago, the answer would have been “100% yes.”
I’ve long been a big fan of using credit cards to earn rewards points and to help track my spending. As long as you pay your credit card bills on-time and in-full every month, credit card rewards can be quite valuable.
The best vacations I’ve ever had were paid for using points instead of cash.
My wife and I have taken some amazing vacations that we would have never gone on if we had to pay in cash.
We used points to fly first class to Florence for our honeymoon. We’ve used points to stay at luxury hotels in Paris, Barcelona, and Santorini that normally charge more than a thousand dollars a night.
When my wife and I were still dating, we went to New York for a wedding. We got out there two nights early, and I used points to book us a room at the Waldorf Astoria. This was back in my real life, really lost boy days when I didn’t have any spare cash for something like this.
My wife and I had a great time at the Waldorf before heading out to Long Island for the wedding.
I may have forgotten to tell my wife that in Long Island, we’d be sharing a room with two (turned out to be three) of my buddies. I didn’t have any points left for this hotel. Oops.
She was a good sport. Not even the surprise ice storm from the groom in the middle of the night bothered her. She was a keeper.
I could go on and on. The point is there was a long period of time where all of our vacations were paid for using points instead of cash.
Using points also helped me stay on budget and build my net worth.
That meant our net worth grew in the background while we were out having these amazing experiences.
I also have long been a fan of using credit cards to help me stay on budget. With credit cards, I can quickly track my spending online during the month to see if I’m on pace for a good month.
If I notice that I’ve overspent, I can slow down my spending to get back on track.
Between the rewards points and the ability to track my spending, I still am a big fan of using credit cards for most everyday purchases.
When used responsibly, meaning paying your credit card bill in full and on-time every month, credit cards can be part of a healthy financial life.
That said, nowadays, I’ve started using cash more frequently.
I’ve started using cash more often these days.
I still use credit cards more than cash, but I’m starting to use cash more often than I used to.
There are a couple main reasons for this.
I use cash for the convenience for smaller transactions.
I now use cash regularly for smaller or quicker transactions, like going to the farmer’s market, grabbing ice cream for the kids, or paying for taxis.
Yes, I still take taxis. I work as a mesothelioma attorney in downtown Chicago near the courthouse. Taxis are plentiful and a lot of times quicker and cheaper than ride share companies.
And, there are ATM’s on just about every corner near my office in Chicago, so it’s not inconvenient to keep cash on hand.
For these types of transactions, I value the convenience of paying with cash more than the small amount of credit card points I would earn.
I also like to pay cash to help out these types of small businesses because they seem to generally prefer being paid in cash. I leave whatever change I’m owed as a tip.
Also, I’m no longer worried about precisely tracking my cash spending in my Budget After Thinking.
Instead, I simply account for a few hundred dollars of spending using cash each month. I generally know what types of things I’m spending cash on, so I don’t worry about tracking each expenditure specifically.
Besides convenience, there’s another reason I use cash more frequently now.
Besides convenience, I’ve started to use cash regularly for another reason.
It’s not that the rewards have changed very much. Or, that I no longer like tracking my spending.
It’s for a different, and somewhat disappointing, reason:
More and more service providers, retailers, and restaurants are charging fees to use credit cards. These fees can be as high as 4% of the purchase price.
These additional fees are sometimes referred to as “surcharges” or “processing fees.”
Be warned, sometimes these fees are cloaked as “discounts for cash payments.” Don’t be fooled. This is just a sneaky way to say you will be penalized for using a credit card.
Why do businesses charge processing fees?
For a little bit of context, credit card companies make money by charging businesses a “merchant fee” or “interchange free” whenever customers pay with a credit card.
Most businesses pay these merchant fees. That’s because there are plenty of incentives for businesses to accept credit cards.
For one, many customers prefer to pay with credit cards, like me. Businesses typically don’t want to lose out on these customers who prefer to pay with credit cards.
For another, businesses are well aware of the fact that people tend to spend more money when using credit cards instead of cash. Obviously, it’s good for business when people spend more.
There are certainly other incentives, as well. The point is that businesses have long paid these merchant fees in exchange for benefits provided by credit card companies.
In recent years, more and more businesses have decided to pass these fees onto customers.
Businesses, especially smaller businesses, commonly point to the past few years of surging inflation for why they need to pass these processing fees onto customers.
Have you also noticed these fees popping up seemingly everywhere these days?
As a consumer, whether we like it or not, these processing fees seem to be sticking around.
So, what can we do about it?
We can choose to use cash instead of credit, or we can choose to not spend our money at that business.
Let’s look at an example to help you make that decision for yourself.
Who really cares about a small processing fee anyways?
A processing fee of 4% may or may not sound like a lot to you.
Let’s look at an example to put some real numbers on it.
Let’s assume you’re going to buy a new TV that costs $1,000.00 (all taxes included) from a reputable store. A 4% processing fee on the purchase of a $1,000.00 TV means adding $40 to the price of that TV.
That TV now costs you $1,040.00 with the processing fee.
That’s a $40 penalty simply for using a credit card instead of cash. That’s a penalty that the next customer paying in cash doesn’t have to pay for the exact same TV.
Keep in mind this is a $40 penalty charged on just this one purchase. Consider all the other purchases you make with a credit card and what those total penalties could add up to.
We’re assuming you’re shopping at a reputable store, so you shouldn’t have to worry about purchase protection.
So, that really leaves only one potential benefit to using a credit card for this purchase.
What about the points you can earn?
Let’s play that out so you can decide for yourself.
Aren’t points worth more than whatever the processing fee is?
Let’s continue our same example of purchasing the TV for $1,000.
Including the 4% fee, the TV costs $1,040.00.
Let’s assume you buy this TV using the Chase Freedom Unlimited, which is the actual card I would use if I were making this purchase.
The Chase Freedom Unlimited offers 1.5 points per dollar spent. That means this TV purchase of $1,040.00 would earn you 1,560 points (1040 x 1.5 =1,560).
Next, let’s look at my favorite website for valuing rewards points, The Points Guy. Currently, The Points Guy values each Chase Ultimate Reward point at 2.05 cents.
So, 1,560 points, valued at 2.05 cents per point, is worth $31.98 ((1,560 x 2.05)/100=31.98).
Now, we can decide if paying the 4% service fee to earn points is worth it.
In this example, by choosing to use your credit card with the $40 processing fee, you’ll earn $31.98 worth of points.
In other words, even accounting for the points you’ll earn, this transaction still costs you an extra $8.02.
Does that sound like a good deal to you?
Personally, I would rather keep the $40 in my bank account instead of earning $31.98 worth of points.
To me, this is not even a close call.
It doesn’t make a lot of sense to trade in a higher amount of cash for a lesser amount of points. Not only are you technically losing money, cash is more flexible than credit card points. You can use cash everywhere.
I don’t think it’s a stretch to say you’d be hard pressed to find anyone who would take $31.98 worth of points instead of $40 in cash.
What if the processing fee was lower?
Even if the processing fee was lower, say 3%, my decision wouldn’t change.
At a 3% fee, the TV would cost $1,030 and you would earn 1,545 points valued at $31.67.
In this scenario, it’s true that the points are worth $1.67 more than the processing fee.
I’d still rather have the cash. I value the flexibility that $30 in cash provides me more than a comparable value in points.
Admittedly, it’s a closer call when the processing fee is 3%. I won’t argue with you if you’d rather go strictly by the math and have the points in this scenario.
Money is emotional, after all, like we saw when choosing to pay down debt using the Debt Snowball method.
I went through this exact process when paying my property taxes recently.
Recently, I went through this exact thought process when paying my property taxes. I had the option to use a credit card and pay a 2.1% convenience fee.
I chose to pay cash, even though the points I would have earned were worth $170 more than the convenience fee.
The math indicated I should have taken the points. Still, I didn’t like the idea of paying another 2.1% on top of my already sky-high property taxes.
Even though I lost out on valuable points, money decisions are emotional. It felt better to not pay the extra 2.1% and to keep that cash in the bank.
Setting aside the math and the value of credit card points, there’s another reason I have started using cash more frequently these days because of processing fees.
These processing fees really bother me on principle.
You may disagree, but I don’t think it’s right for businesses to pass this fee onto customers when businesses do benefit by accepting credit cards.
I especially don’t think it’s fair when businesses spring this fee on a customer when he is standing at the register about to pay.
Maybe it’s just me, but these fees annoy me so much that I won’t go back to a business that passes these fees onto customers.
If it’s a business that I simply can’t live without, and there are very few businesses that reach this level, I’ll pay cash instead of using credit.
I’m not insensitive to the fact that certain businesses are struggling with inflation. If a business is having a hard time staying profitable without charging a 4% fee, I would prefer that it raises its prices by 4% instead of surprising me at the cash register with this extra fee.
At least then, I can make an informed decision ahead of time about whether I want to eat at that restaurant or purchase that item before it’s time to pay.
I know this is a polarizing debate. There are business owners who I’m sure would vehemently disagree with my thoughts on the matter. That’s OK.
Businesses are of course free to choose how to run their businesses. As a consumer, I am free to choose to avoid certain businesses.
Have you noticed this processing fees more often lately?
Where do you come out on paying a processing fee to use a credit card?
Credit cards make it very easy to track these two numbers.
Here’s exactly how I use credit cards to track my spending.
When I get my monthly statement for each credit card, the first thing I do I add the amount and due date to my Notes app.
I’ve been doing this for years now, which means I have a clear understanding of my family’s usual spending habits.
I can then quickly assess whether it was a good spending month. For example, if I normally spend $4,000 per month on my card, and this month I spent $5,000, I’ll know very quickly that something is off.
Sometimes, it’s obvious why I overspent. Maybe it was something like buying airplane tickets for a family vacation. If that’s the case, I don’t need to study my credit card statement too closely because I already know why my spending was more than usual.
Other times, it’s not so obvious. When I don’t immediately understand why my spending was higher than normal, I take a closer look at my statement.
This same process also helps me track that month’s savings transfers to make sure I maintain a strong savings rate.
Why I also track the payment due date in Notes.
The reason I write the payment due date is to make sure I never miss a payment. This is the most important rule of responsible credit card use.
If you miss even one payment on a single credit card, that missed payment will appear on your credit report. Your credit score will also drop.
As a landlord, I play close attention to any potential tenant’s credit history and score. I am not willing to risk entering in a financial relationship with someone who has a history of missed payments.
We recently received an application from someone who has missed 8 of her last 25 payments on her auto loan. That was a major red flag.
I automate some, but not all, of my monthly payments.
Even though my wife and I only use two credit cards for our personal spending, we have business credit cards for our real estate properties.
We also have mortgages and HELOCs that need to get paid at various times each month. I use the Notes function to remind me when these payments are due.
For each credit account, I have automatic payments set up to pay the minimum required amount each month. I then pay the full balance each month manually.
That’s because we have various sources of income that come in sporadically throughout the month. It’s simpler for me to pay certain bills manually instead of automatically.
When you have multiple income streams, you have Parachute Money. Currently, our Parachute Money includes:
Using the Notes function helps me make the required payments each month after these income streams hit my checking account.
What other benefits do credit cards offer?
Credit cards offer a variety of other benefits to entice customers. Besides tracking your spending, two of my favorite perks are purchase protection and credit score monitoring.
Purchase Protection and Fraudulent Charges
Purchase protection is so important in today’s world. The last thing any of us needs is for our personal finances to get wrecked by scam purchases or fraudulent charges.
Let’s say you buy something with Zelle, debit card, or cash. There are very little, if any, protections to get your money back if that transaction needs to be cancelled.
Credit cards, on the other hand, typically offer the best purchase protection available. If you’ve been scammed or deceived in any way, your best bet at fixing that issue is to work with your credit card company.
Also, credit card companies are generally very proactive and helpful in addressing fraudulent charges. If you do encounter any fraudulent charges, your credit card company will work with you to fix the problem.
While credit card companies are pretty good these days at spotting fraudulent charges, I like to double check my online account to protect myself. To make sure I have not been targeted, I take about 30 seconds to look at my credit card transactions each week.
Credit Score Monitoring
Most credit card companies today offer free credit score monitoring through one of the major credit agencies, like Experian. You can see your credit score right in your online account.
Your credit score will automatically update, usually once per month. You can see how your score changes from month to month and what factors currently influence your score.
How can I see all the benefits my credit card offers?
Because there are so many credit card options on the market, the best thing to do is look up the card you have or are thinking about applying for.
I prefer to visit websites like thepointsguy.com for thorough breakdowns and even valuations on each card’s offerings. This makes it easy to compare credit cards from different banks.
You can also visit the credit card company’s website directly to learn the full extent of the benefits offered by each card.
In today’s post, we’ll discuss 10 credit card tips for lawyers and professionals so you can benefit from the perks of credit cards without suffering from the penalties.
I’ll also share what two credit cards I carry in my wallet for all of my everyday spending.
I’m a big fan of earning credit card points on everyday spending and turning those points into once-in-a-lifetime vacations.
My wife and I have traveled all over the world together using credit card points. Using points, we’ve stayed at some incredible hotels like the Mandarin Oriental in Lake Como and the Park Hyatt in Sydney.
The key is to recognize that credit cards are a privilege, like any other form of credit. If you abuse the privilege, you’ll face severe personal finance consequences.
With that underlying principle in mind, here are ten credit card tips for lawyers and professionals:
10 Credit Card Tips for Lawyers and Professionals
Only charge what you can afford to pay off.
Avoid overspending because you’re using credit instead of cash.
Do not treat your credit card like an emergency savings account.
Understand how credit card interest works.
Never miss a credit card payment.
Know the fees associated with your account.
Learn how much points are actually worth.
Use points for travel instead of cash back.
Be strategic about what, and how many, credit cards you have.
Don’t spend money just to earn points.
1. Only charge what you can afford to pay off.
While it may seem obvious to only charge what you can afford to pay off, many of us have trouble following this primary rule of responsible credit card use.
Let’s look at some scary stats about credit card use to solidify this point:
48% of credit card holders carry a debt balance, an increase of 9% since 2021.
53% of people have been in credit card debt for more than a year.
From 2023 to 2024, credit card balances on average increased 3.5% to $6,730.
Credit card balances increased by $45 billion from the previous quarter and reached $1.21 trillion at the end of December 2024.
2. Avoid overspending because you’re using credit instead of cash.
Making a purchase with a credit card instead of cash makes it seem like we’re not spending real money.
We have all fallen victim to this tendency to overspend because of how easy it is to swipe a credit card.
Whether it’s the daily Starbucks habit, running up a bar tab, or buying another new toy for your kid, it’s a lot less painful in that moment to use a credit card instead of cash.
If you’re honest with yourself and know that you tend to overspend when using a credit card, try leaving your credit card at home. Bring some cash with you instead.
The simple act of needing to pay with cash instead of credit is oftentimes enough to stop you from spending on that thing you don’t really want anyways.
3. Do not treat your credit card like an emergency savings account.
This may be the single most problematic area we’ll discuss in my credit card tips for lawyers and professionals.
33% of Americans report they have more credit card debt than emergency savings.
None of us are immune from these types of unexpected expenses.
Be sure to establish an emergency savings account so you don’t end up relying on your credit card when the unexpected happens.
These unexpected expenses can be substantial and result in monthly credit card balances that accrue large amounts of interest.
4. Understand how credit card interest works.
If you’re going to use credit cards as part of your everyday life, you should understand the basics on how interest is charged.
This may be the most overlooked of my credit card tips for lawyers and professionals.
Credit card interest is typically expressed as an annual percentage rate, or APR.
If you carry a balance on your card, the credit card company charges interest by multiplying your average daily balance by your daily interest rate. You will be charged this interest until your balance is paid off in full.
Credit card interest rates are typically variable, meaning they can change over time.
In the abstract, it can be difficult to fully appreciate how penalizing credit card interest is on our finances.
Let’s look at an example to better understand the consequences of carrying a balance.
Let’s say you just moved to a new apartment and purchased a $1,400 TV using a credit card. You don’t have enough money saved up for the full purchase, so you decide to pay off $100 each month. Your credit card charges 23% interest.
At that interest rate, it will take you 17 months to pay for that TV. You will end up paying a total of $1,645, which includes $245 in interest.
The $245 in interest equals 15% of the original price of the TV. That means you paid 15% more than the TV actually cost.
If that doesn’t catch your attention, don’t forget this is just the interest on one purchase after moving to a new apartment.
What if you want to buy a new sofa to go with your TV? How about a coffee table and a rug? Floor lamp? End table?
You can see how a 15% penalty on each of these purchases can start to add up quickly.
5. Never miss a credit card payment.
Write this rule down in stone: never miss a credit card payment.
If you don’t remember any of the other credit card tips for lawyers and professionals, remember this one.
It may seem unfair, but even a single missed payment can severely impact your credit history and credit score.
Because the consequences of a missed payment are so severe, it’s a good idea to set up your account for automatic payments.
You have options when setting up automatic payments. Ideally, you can pay your full balance automatically each month.
If that won’t work for your situation, you can set up automatic payments for the minimum required amount to stay in compliance with your account terms.
By paying at least the minimum amount required on-time each month, you will not be penalized with a missed payment.
What is the minimum required payment?
Credit card companies typically only require customers to make a minimum payment towards their balance each month. The minimum payment is generally 2% to 4% of your balance, or a predetermined minimum fee of around $35.
It may sound enticing to only pay the minimum. However, you will be charged interest on that remaining balance. That interest compounds and will be a major drag on your finances.
Let’s look at another example to see what happens when you only make the minimum required payment.
Let’s say you have a credit card balance of $2,000. Your minimum required payment will likely be between $40 and $80 to stay in compliance with your account terms.
In this example, assume the minimum required payment is $40. If you make the minimum payment of $40 out of your total balance of $2,000, that means your remaining balance is $1,960.
On the next billing cycle, you will be charged interest on that remaining balance of $1,960. At 23% interest, you will be charged $37.39, which gets added to your total balance.
So, on the next billing cycle, your total balance will be $1,997.39.
Let that sink in.
Even though you paid $40 last month, your balance only decreased by $2.61. Ouch!
Note: this example is for illustration purposes only and may not be precisely how your credit card company calculates interest.
By the way, credit card companies want you to only pay the minimum each month. That’s how they make so much money.
How much money do credit card companies make in interest and fees?
Beyond interest, credit card companies profit by charging fees, such as late fees and balance transfer fees.
For these credit card tips for lawyers and professionals, I want to focus on the annual fees tied to rewards credit cards. These fees can cost hundreds of dollars annually and cancel out the value of any points you earn.
For example, if you have a credit card that charges an annual fee of $500, and you only earn $400 worth of points each year, that’s a losing proposition.
You’d likely be better off using a credit card that does not charge an annual fee, even if that means losing out on some points.
For that reason, it’s important to do your homework before applying for a new card.
So, how can you determine if you’re getting enough value out of your card to justify the annual fee?
That leads us to our next tip.
7. Learn how much points are actually worth.
This is not an easy thing to do. Luckily, there are some great websites that are dedicated to credit card rewards that have done these calculations for you.
I like The Points Guy for determining the value of credit card points. While it’s not an exact science, The Points Guy calculates the value of each credit card company’s points and miles every month.
To give you an idea, The Points Guy currently values Chase Ultimate Rewards points at 2.05 cents/point and American Express Membership Rewards at 2 cents/point.
With that information, you can then determine if a certain credit card is worth having in your wallet.
For example, let’s say a particular Chase card you have charges an annual fee of $500 per year. When you look at your total spending from the previous year, you see that you earned 20,000 points using that Chase card.
Using The Points Guy valuation of 2.05 cents/point, that means you earned $410 worth of points. That’s $90 less than what you paid as an annual fee to have the card. That’s obviously not a good tradeoff.
Yes, credit cards come with other benefits that may add value to you. These benefits are oftentimes related to travel. If you travel frequently, these benefits may be worth it. If you don’t travel often, these benefits may not offer much value to you.
Keep in mind there are plenty of credit cards available that do not charge an annual fee and still offer points.
The takeaway is that you should regularly evaluate your spending habits and credit card reward programs to ensure you are still getting value from that card.
8. Use points for travel instead of cash back.
Many credit cards offer various options to redeem points. The easiest redemption option is to convert your points into cash that then gets applied to your balance.
While cash back is the easiest redemption option, it is typically the least valuable. You’ll get far more value by redeeming your points for travel rewards.
Credit card companies like Chase and American Express have partnerships with airlines, hotels and other travel providers. You can transfer your credit card points to these travel programs to maximize the value of those points.
If you’re reading a blog on credit card tips for lawyers and professionals, I’m guessing travel is a part of your life. Whether for leisure, business, or necessity, there should be plenty of opportunities to use your points for travel.
To figure out the best redemption options, it takes a little bit of effort. There are endless options and entire websites dedicated to point redemption strategies.
Before you get overwhelmed, I’d suggest first talking to your friends and family to see if any of them have already investigated the best redemption option for your personal situation.
Did you know that talking about money, and credit card points, is not taboo?
9. Be strategic about what, and how many, credit cards you have.
There was a time in my life when I had ten different credit cards because I wanted to maximize the points I earned on every purchase.
I had airline branded cards, hotel branded cards, and general travel rewards cards. I had credit cards with Chase, American Express, and CitiBank.
My wallet was thicker than a Harry Potter book.
I did earn a lot of points. But, it was so stressful.
Keeping track of what card to use for every single purchase was complicated. Making sure I paid off each card every month was even harder. In the end, it wasn’t worth it.
In these credit card tips for lawyers and professionals, I recommend you keep things simple.
We still earn plenty of points and our finances are much simpler.
One other suggestion: if you’re in a relationship and share finances, I suggest you align your credit card strategies. Most major credit card companies allow you to combine points with a household member.
You can more quickly accumulate points by focusing on a single rewards program, instead of spreading out those points among various programs.
As crazy as it sounds, you may be tempted to spend money you otherwise wouldn’t because you want to earn more points.
It’s possible to become so obsessed with collecting points that you forget about the strong personal finance habits you’ve worked so hard to establish.
It can be easier to justify careless spending when we trick ourselves into thinking that spending will eventually lead to a vacation. For example, if you have a credit card that offers bonus points at restaurants, you may be tempted to spend more money when you eat out.
Or, you may be tempted to pick up the tab for your friends even though that spending doesn’t align with your budget.
The temptation to earn points can overwhelm your plans to stay on budget. This logic applies to any type of spending, not just dining out and bar tabs.
Use your credit cards to spend within your Budget After Thinking, not as an excuse to justify blowing your budget.
To recap, here are my ten credit card tips for lawyers and professionals:
10 Credit Card Tips for Lawyers and Professionals
Only charge what you can afford to pay off.
Avoid overspending because you’re using credit instead of cash.
Do not treat your credit card like an emergency savings account.
Understand how credit card interest works.
Never miss a credit card payment.
Know the fees associated with your account.
Learn how much points are actually worth.
Use points for travel instead of cash back.
Be strategic about what, and how many, credit cards you have.
Don’t spend money just to earn points.
Let us know your best credit card tips for lawyers and professionals in the comments below!
We need to replace a 20 year-old wood fence at our home that’s one strong storm away from falling over. In these past few weeks, I’ve learned more about fences that I care to admit.
On the bright side, shopping for a fence has led me to think about and practice many of the personal finance habits we talk about in the blog.
Let me walk you through my thought process to help you whenever you have a big expenditure in front of you.
In the world of privacy fences, there seem to be three primary choices available: wood, vinyl, and composite. I won’t bore you with all the details. The key points to consider for our conversation are:
Wood is the cheapest, but requires the most upkeep and will eventually need to be replaced.
Vinyl (plastic) comes with a lifetime warranty, requires little-to-no upkeep, but is 30-40% more expensive than wood.
Composite is the most durable, looks incredible, requires no upkeep whatsoever, has soundproofing ability, is made from recycled materials, comes with a 25-year warranty, but is nearly 3x more expensive than wood.
We’ve ruled out wood after doing our research and determining that we’ve got too much going on to worry about annual fence upkeep.
So, that leaves vinyl and composite. From our research, both would be good options. However, there’s really no doubt that composite is the best overall option, if you can stomach the cost.
Talk to your people about expensive purchases.
This is a big financial decision, so of course, I’ve been talking to my people for weeks about what they would do.
I’ve gotten three common responses that go something like this:
“You’re planning to live in this home for the long run, make the investment in the best fence possible and never worry about it again.”
“How much do you really care about a fence? I’ve never even noticed my fence. Think of what other projects you could spend that money on.”
“Dude, leave me alone. I don’t want to talk about your fence.”
As you can see, talking to your people does not mean that you’re off the hook for making the decision yourself. You will likely get a wide spectrum of advice.
However, you’ll gain invaluable perspective to consider so you can make the best decision for your personal situation.
Expensive purchases test your personal finance habits.
Whenever you have a big purchase ahead of you, many of the strong personal finance habits you’ve been working to establish will be tested. You’ll be asking yourself questions like:
My wife and I have considered all these questions as we’ve talked through the options.
As of this moment, we’re leaning towards the composite fence so we never have to think about fencing again.
To help defray the cost, we’re considering a financing option that offers 0% interest for 18 months.
Important side note: if you ever choose to go with an attractive financing option, always read the fine print first.
The lender is hoping you fail to pay off the purchase within the 0% interest period so you’re forced to pay insanely high interest on the remaining balance. The financing option we’re looking at jumps from 0% interest to 26% interest if we fail to pay off the loan in 18 months. That’s a serious penalty.
Financing aside, we’ve also concluded that other projects will have to wait for a while so we don’t crush our money goals for the year.
We’ll make our final decision this weekend.
What would you do?
Leave a comment below to help my wife and I decide.
Sharing Think and Talk Money with Others.
Over the past couple days, I’ve heard from several readers who have shared Think and Talk Money with people they care about.
One reader told me that he shared the blog with his 25 year-old son. The reader was very appreciative because he’s experienced how important personal finance is.
He knows his son will only benefit in the long run if he implements strong money habits at the beginning of his career.
Another reader shared the blog with a friend who is now tracking her spending for three months. This is the first time she has ever tracked her spending to learn where her money is going each month.
She is using her phone and a simple spreadsheet to track her expenses. She reports that even though it’s only been a month, she’s learning things about her money choices she never knew before.
I love reader stories like this because they reflect one of our core philosophies at Think and Talk Money:
It doesn’t matter if you’re talking about paying for a fence or starting a budget. We all could use help when it comes to making good, consistent money decisions.
Your friends are likely going through the same money challenges.
Since writing about my challenges with credit card debt at the beginning of my career, I’ve had some great talks with friends I knew back then.
Multiple friends have shared with me that they were dealing with the same credit card debt issues at the same time that I was.
None of us ever knew it at the time. We were hanging out with each other every weekend, spending money we didn’t have. The joke of it all is that we were likely encouraging each other’s poor habits.
Learning that I was in the same position as my friends all these years later does make me feel at least a little bit better about the mistakes I made back then. But, that’s not the important takeaway.
The big takeaway for me is that if my friends and I were dealing with the same money challenges back then, we’re probably dealing with similar money challenges today.
It might not be credit card debt from our social lives, but it might be something like saving for college or paying for a home. Maybe it’s what we should do when the stock market slumps.
Just like we mentioned above, my friends and I will only benefit from having these kinds of money talks.
Instead of just talking about mistakes we made in the past, we can talk about how to get it right as we move forward.
Let’s turn this simple question into a hypothetical scenario.
It’s time to learn one final (for now) important personal finance tracking metric, known as “saving rate.”
Congratulations on your raise!
Let’s say you’ve been at your job for a few years. Your current salary is $100,000.
It’s salary review time, and you set up a meeting with your boss. You want to make sure she remembers all your major contributions from the past year.
Prior to the meeting, you send her a letter setting forth your top accomplishments. It’s a hard letter to write. It doesn’t feel like a normal thing to have to brag about yourself.
You remember seeing a quote somewhere, “If you don’t advocate for yourself, nobody else will.” You push on and send your boss the letter.
On the day of your meeting, you’re nervous walking into your boss’ office. Why did I ask for this? She’s going to be so annoyed.
Before you even sit down, she puts your mind at ease. Your boss has a welcoming smile on her face.
She immediately thanks you for your thoughtful letter. She appreciates the reminder of all your accomplishments throughout the year.
Your boss tells you that you’ve always been a valuable member of the team. She thanks you again for reminding here of some of the specific projects you worked on that year.
It’s not a long conversation. Before you go, she asks what else the company can do to enhance your work experience. You walk out of her office feeling like a valuable member of the team.
You’re happy that you initiated the meeting, even though you didn’t enjoy the process.
A couple of weeks later, you receive an email that your salary is increasing by $20,000.
You couldn’t be happier. You earned it.
Wait, a raise?
Work continues as normal the rest of the week. By the time your next paycheck hits your bank account, you sort of forgot that you’re now making more money.
After taxes and retirement contributions, your biweekly (every 2 weeks) paycheck is now for roughly $538 more. That comes out to $1,166 more money per month, which of course, is a very good thing.
But, you need to figure out what you’re going to do with that money.
Ideally, you’ll have a plan in place before you receive the money. Whether it’s a raise, a bonus, or you switch jobs and earn a higher salary, the thought process remains the same.
Thinking about what to do with this new money is what I’m getting at when I ask, “What would you do right now with $20,000?”
No, it’s not coming in one lump sump payment.
Fine, you have to pay taxes on the $20,000 so it’s more like $14,000 in new money.
The point of the question doesn’t change. What are you going to do with this money?
3 options for what to do when you earn more money.
You now have more income coming in each month. Let’s talk through some of the options on what you can choose to do with that excess money.
Option 2: You tell yourself, “Man, I’m flush!” You start looking for a nicer apartment. And, you upgrade your plane ticket on your upcoming trip. You stop taking the train to work and instead opt for Ubers. Congratulations, you’ve become the real life, really lost boy.
I also find it most useful to express your saving rate as a percentage. To see your saving rate percentage, all you need to do is multiply your saving rate by 100.
Moving forward, when I refer to saving rate, I will be talking about your saving rate percentage. It’s more informative to see what percentage of your money you are saving, rather than an amount with no context.
What I mean is this: if someone asked me if saving $10,000 per year was a good target, I wouldn’t be able to comment with more context.
If that person was making $75,000 per year, I would say that seems pretty good. That’s a saving rate of more than 13%.
If someone told me they were making $750,000 per year, and only saving $10,000, I would recommend that person revisit their Budget After Thinking. That’s a saving rate of only 1.3%.
Follow these tips for calculating your saving rate.
Just like we talked about when creating your budget, don’t overcomplicate this process. Here are some suggestions to help you easily calculate your saving rate:
When you calculate your saving rate, be sure to use your take-home pay for “Money Earned.” This means the amount of money that hits your bank account after taxes and retirement contributions.
This next part gets a little bit tricky to explain, but it’s important.
If you get paid biweekly (every other week), that means you will receive 26 paychecks every year (52 weeks / 2 = 26). If you are paid twice per month, like on the 1st and 15th of every month, you only receive 24 paychecks.
OK, so what?
To determine your monthly take-home pay so you can calculate your saving rate, you need to know the amount you earn for the whole year.
To figure out how much you earn in a full year, multiply the amount you receive in one paycheck by 26 (or 24). That’s your annual take home pay.
Then, to calculate how much you earn per month, divide your annual take home pay by 12. This is the amount you’re going to use for “Money Earned.”
For “Money Saved,” include all of the money you are putting towards your Later Money goals each month (except your retirement contributions through work).
I know it’s called “saving rate,” but for this purpose, include all your Later Money in the saving rate equation.
Of course, we know that “saving” is different from “investing.” Saving is also different than paying down debt or any other personal financial goal you’ve set.
It doesn’t matter. When calculating your saving rate, your goal is to see what percentage of your take-home pay is fueling our Later Money goals.
When it comes down to it, there are really only two ways to improve your saving rate.
You can spend less, and save more, of the money you’re currently making.
You can make more money and save most of that money, all while keeping your expenses the same.
Combining those two ideas is even better. Like we just said, make more money, spend about the same.
Use the excess money you make to fuel your Later Money goals.
If you can do that, your saving rate and your net worth will steadily climb. You’ll experience that your Later Money goals are closer to becoming reality than you think.
Let’s do the saving rate math together.
Now that we know what our saving rate is and why it’s such a useful metric, let’s revisit our $20,000 raise to do some math together.
Going back to our hypothetical, you were making $100,000 before your raise. Let’s assume that your take home pay was $70,000 per year after taxes and retirement plan contributions.
Let’s also assume you were putting $1,000 per month towards your Later Money goals.
Using our saving rate percentage formulas above, we see that:
Money Earned = $5,833 per month ($70,000 / 12)
Money Saved = $1,000 per month
Saving Rate = $1,000 / $5,833 = .17
Saving Rate Percentage = 17%
17% of your take home pay to fuel your Later Money goals is great!
Now, let’s see what happens if you add your entire raise to fuel your Later Money goals.
Earlier, we assumed that after taxes and retirement contributions, your take home pay increased by roughly $1,166 per month. With your raise, your annual take home pay has now climbed to $84,000, or $7,000 per month.
Look what happens to your saving rate percentage when you add the full $1,166 to Money Saved (instead of spending it)
Money Earned = $7,000 per month ($84,000 / 12)
Money Saved = $2,166 per month
Saving Rate = .31
Saving Rate Percentage = 31%
You more than doubled your monthly savings contributions and improved your saving rate to 31%!
Think about how much more quickly you can reach your goals by planning out this one decision.
In this week’s Q&A, we talk about how the timing was right to launch Think and Talk Money, why you should consider a side hustle, and what comes next for the website.
As always, please email your questions or leave a comment below or on socials.
You have a lot on your plate. Lawyer, teacher, landlord, young kids… why launch Think and Talk Money now?
I had been thinking about writing a book or starting a website for a couple years. Over the holidays, my dad gave me the final push I needed.
We were casually chatting while the kids played in the other room. Out of nowhere, he said, “Matt, you should do it.”
Do what?
“You should write a book.”
Oh, no biggie.
I didn’t expect him to say that. He went on to explain how you get to a certain age and you look back on life and wonder where it all went. You think about all the things that you wanted to do but never got around to doing.
No regrets, blogging then book.
He knew I had been thinking about writing a book for a while and didn’t want me to regret not doing it.
I thought about it and realized he was right. I would never forgive myself if I didn’t take this chance.
Now that I’ve thrown this out there, I have to do it, right?
There’s never a perfect time in life. If I didn’t start Think and Talk Money now, I might never have gotten around to it. Something always comes up. It’s too easy to make excuses.
It’s true we have a lot going on. Fortunately, I had a system already in place that gives me time to write thanks to Hal Elrod’s The Morning Miracle.
I hesitate to say a certain book “changed my life.” This might be one of them.
For almost 10 years now, I’ve been waking up at 5:30 a.m. to read, journal, and relax. It’s so beneficial to have that time for myself, especially now with kids, before the day gets away from me.
Since launching Think and Talk Money, I use my mornings to blog instead of reading. I like teaching and writing about personal finance, so my mornings are still enjoyable.
We’ll spend some time in a future post talking about all the advantages of having a side hustle.
The obvious advantage is you can make more money. The important thing is what you do with that money to make the side hustle worth it. A side hustle is another time commitment, after all. If you’re going to take on the responsibility, make sure it counts.
Before you consider a side hustle, have a plan in place for why you want additional money. Are you looking to pay down debt faster? Save for a wedding? Invest in your first rental property?
One of my favorite experiences teaching personal finance to law students involved a side hustle. A couple of years ago, a student approached me during a break and told me about his credit card debt. It had been weighing heavily on him.
After our discussion about side hustles, he committed himself to driving for DoorDash and using the income to pay off his credit card balance.
Six months later he sought me out to share that the plan worked. His side hustle allowed him to pay off his credit card in less than six months. All while working a full-time job and attending law school par-time. I couldn’t have been happier.
To help you think through why you might want a side hustle, check out these three posts:
BTW, you’re not too busy or important for a side hustle.
Some people reading this will automatically think, “I’m way too busy to even think about another job.”
In my personal finance class for law students, we spend a lot of time challenging that notion. Very few people- and I mean very few- are too important or too busy to take on a side hustle.
You may think you’re one of those “too important” people. I would challenge you to assess whether you’re confusing “too important” with “too stressed.”
Setting that conundrum aside, the ideal side hustle is something you enjoy doing that can earn you extra money at the same time. Some examples my students have come up with in class include:
Bartending. Entice your friends to come to your bar by offering cheap drinks. You get to hang out with them and get paid at the same time.
Fitness instructor. Instead of paying $48 for the spin class you love, become the instructor and get paid to lead the class.
Dog Walker. If you love dogs and don’t currently have one of your own, what better way to fill that void in your life while making money. The same applies to babysitting.
Home Baker. Make homemade treats with your kids and sell them to parents who don’t have the time.
I’m reminded of another conversation my dad and I had when I was in high school.
Growing up, my siblings and I were busy kids. Sports, clubs, performances, classes, you name it. I made a remark to my dad about it at one point.
He responded that being busy wasn’t a bad thing because you don’t have time to fool around. When you have no choice other than to stay focused, you actually perform better in all facets of life.
You’re not thrown off by distractions because you’re locked in on accomplishing your goals.
After launching Think and Talk Money, I feel a heightened sense of focus. It’s benefitting me in all of my pursuits. I take care of business as best I can, while prioritizing my family and my health.
I can see your eye rolls through your screen.
This guys is nuts. He’s a workaholic.He has no life.
Have you ever used a HELOC to invest in real estate?
Yes, I’ve used HELOCs, which stands for Home Equity Lines of Credit, to scale my real estate portfolio.
This question leads to so many concepts we need to discuss, from debt and credit to investing. We’ll come back to HELOCs more fully in a separate post.
The bottom line is using HELOCs to scale your investment portfolio is a more advanced strategy that I would not recommend for everyone. I probably wouldn’t recommend it for most people, even experienced real estate investors.
I say that for good reason. When you hear HELOC, think debt. For many of us, debt is problematic and leads to negative emotions.
If you satisfy all of the above, a HELOC may be useful to scale your real estate portfolio. If you’re thinking about using a HELOC in the near future and want to talk it out, please feel free to reach out.
What’s it like being a blogger?
It’s only been five weeks, but I’m happy I took the chance to launch Think and Talk Money.
It’s been fun.
And, it’s been hard.
First, the fun stuff. I’ve enjoyed writing and talking about personal finance concepts that are important to me. I’ve especially enjoyed all the interactions with our readers.
One unexpected element I’ve appreciated is the sense of accomplishment that comes with publishing every post. This is very different from my experience as a lawyer where we typically work on a case for years before its conclusion.
I’ve also had fun writing in a new style. I haven’t ever blogged before. I haven’t done any writing other than legal writing since college. If you’ve ever had the pleasure of reading a legal brief or court opinion, first off, I’m sorry. Second, you understand how different legal writing is from blog writing.
Even though the writing styles are different, there is certainly some overlap in the fundamentals. My aim in both styles of writing is to be clear, concise, and informative. I hope to be somewhat interesting, as well.
As a blogger, I’m still finding my voice, as they say.
It can be challenging to make core personal finance concepts- like budgeting and saving money- educational, simple, and entertaining. If I’m doing my job, then my personal finance content should also be relatable and understandable.
Please let me know you have any feedback on what’s working (or not working for you)!
So, what’s hard about blogging?
Now, for the hard stuff.
My wife and I launched Think and Talk Money with zero knowledge, skills, or experience in starting a website.
Can you tell? Be nice.
We have no tech background whatsoever. Two months ago, I had no idea what SEO, caching, or plugins were.
If you’ve ever started a website, you know exactly what I mean. Creating the content is only the first step. So much more goes into it behind the scenes. We’re still only scratching the surface.
To sum it up, the tech stuff has been challenging and time consuming. We’ve learned so much already but have so much more to learn.
Thank you to everyone who has reached out with tips and suggestions!
What’s the end game for Think and Talk Money?
I completely understand why this is an important question to think about. The truth is we’re just getting started and haven’t thought about Think and Talk Money in terms of an end game.
I’ve always liked to teach and write, and this lets me do more of both. For now, our mission is to introduce the most important concepts of personal finance through the blog.
We post three times per week on Mondays, Wednesdays, and Fridays.
Some of the posts cover core personal finance topics in depth. Other posts are more targeted and address specific strategies or lessons.
There’s an intentional order to the way we’ve been introducing concepts. The order is important and mirrors the curriculum in my personal finance class for new lawyers.
Most of us humans are pretty good at avoiding things we don’t like. The things I’ve done to avoid mayonnaise…
Budgeting falls into this category of avoidance. Even though most of us can appreciate that budgeting is a crucial step in money wellness, we still avoid it.
Some of us give it a shot, and usually quit before we notice meaningful improvements. Just as problematic, some of us obsess over our budgets in an unhealthy and unsustainable way. This was me for a while. My obsession was mint.com.
I didn’t have a healthy relationship with budgeting apps.
If you used mint.com like I did before it ended, do you also have nightmares about those red tracking bars? Mint.com users know exactly what I mean. Overspend $11 on groceries? Red bar. One too many lunches downtown? Red bar! A last minute Saturday morning yoga class? RED! BAR!
It still pains me to think about how many hours of my life I wasted trying to recategorize expenditures so those red bars would turn green. If I just move this box of cereal from Groceries to Social Life, that Groceries bar will turn green. Oh wait, now Social Life is red. OK, move those movie tickets to Car Repairs.
When my wife was still courting me, I introduced her to mint.com. You might be thinking, “Matt, why on earth would you introduce her to something that drove you crazy!?” Valid question.
She was a good sport and gave it a shot for a little while. Thankfully, she was smart enough to realize tracking every penny wasn’t for her. The whole thing gave her more anxiety about money. Think about that. The idea was to create a plan for her next dollar so she didn’t have to worry about money. All I did was make it worse by introducing her to a budgeting app.
There’s an alternative to tracking every penny for the rest of your life.
That experience paved the way for my preferred budgeting method that my wife and I still use today. We discussed this method briefly in our recent Q&A post.
Please keep in mind this method is for people who have already created a Budget After Thinking and are honestly dedicated to creating fuel for their Later Money. Only when you get to that point will you no longer need to track every penny. At that point, your money motivations will be so strong that you’ll stay on track without needing to track every expenditure.
If you’re not there yet, don’t worry. You will be soon. Follow my top ten budgeting strategies until good habits become second nature. Then, move on to this simple plan.
My preferred tracking method is a version of zero-based budgeting.
Zero-based budgeting was first introduced in the 1970s by Peter Pyhrr. (I don’t love the name, either.) The main idea is that every dollar has a job, something we already talked about in our conversation about eliminating disappearing dollars.
In my version of zero-based budgeting, you don’t need to track every penny. You don’t need budgeting apps or complicated spreadsheets.
You’ll only need to focus on two numbers each month to know whether you are on track or falling behind. I’ll show you those two numbers below.
Before you get too excited, I need to reiterate this key point: if you want to succeed with zero-based budgeting, you still need to first create a Budget After Thinking. Otherwise, you won’t be able to figure out the key two numbers that you need to focus on.
This step is for those people who have already tracked their spending for at least three months, made thoughtful adjustments so their spending is in line with their values, and now know exactly how much fuel they can generate for their Later Money every month.
OK, so how does this all work?
I mentioned there are only two key numbers you’ll need to focus on each month:
Your checking account cushion.
Your Later Money transfer amount.
Let’s explore each number.
1. Your checking account cushion is your safety net.
A checking account cushion is the amount of money in your checking account that you don’t plan to spend. The purpose of the cushion is to give you a little breathing room so you can pay your bills, even if you overspend in one month.
Without the cushion, if you have a tough spending month, you either need to skip paying certain bills or skip making your Later Money transfer. Neither option is acceptable. The first option leads you into debt. The second option halts progress on your most important life goals.
The checking account cushion gives you protection.
How much of a checking account cushion do you need?
How much of a cushion do you need? It depends on whether you have consistent income (regular paychecks), or are paid inconsistently (commissions, freelance, contract, etc.)
If you are paid with consistent paychecks, I recommend your checking account cushion equal the amount you’ve planned to spend in your Now Money category from your Budget After Thinking (don’t worry, example below). This amount should give you a comfortable safety net without leaving too much money in your checking account that could be better used elsewhere.
If your pay is inconsistent, you’ll need a larger cushion to cover the larger gaps between pay days. I recommend you have double the amount of your Now Money. Note, you may have to tweak this amount based on your unique situation.
In our really lost boy example, he received paychecks biweekly. A good checking account cushion was $3,600 (equal to his Now Money).
This means that there should be $3,600 in his checking account to start each month. At the end of the month, after paying all of his bills and making his Later Money transfers, he should still have $3,600 left in his checking account. That’s his checking account cushion.
It’s OK if your checking account cushion temporarily dips below the amount you started the month with. This could happen during the time of the month when you pay certain bills, like your rent or mortgage. Don’t worry. The amount in your account will climb back up once you receive your next paycheck.
A final point: don’t spend this cushion. Fight the temptation to use your checking account cushion to pay off bills or debt. Without that safety net, zero-based budgeting does not work.
2. Your Later Money transfer is the main reason you’re budgeting in the first place.
This number reflects the whole purpose of budgeting in the first place: to create fuel for your ultimate goals in life. If you don’t know what your goals are, revisit our conversation on why you should want to be good with money. It all starts with what you truly want from your life and how you can use your money to get it.
When you’ve created your Budget After Thinking, you’ll know exactly what this amount is. In our really lost boy example, the total Later Money transfers added up to $2,050. In future posts, we will discuss where to transfer and what to do with this Later Money. No matter what, the goal is to put this money to work for you to progress towards your goals.
By focusing on just these two numbers, (1) your checking account cushion and (2) your Later Money transfer amount, you don’t have to track every penny. You’ll know if you are hitting your goals or falling behind just by looking at these numbers.
Now that we know the two key numbers to focus on, let’s see how this all works.
How to ensure you are on track with your money goals with just two numbers.
Sticking with our really lost boy, he predetermined that his checking account cushion is $3,600 and his Later Money transfer amount is $2,050.
At the start of the month, that means he had $3,600 in his checking account. Throughout the month, his checking account balance increased when he got paid (our really lost boy earned $7,500 per month). His checking account balance decreased whenever he paid for things like rent ($2,200) and any other bills.
The checking account cushion ensured that he had enough to cover all of his expenditures throughout the month. For example, if his rent was due on Wednesday, and he wasn’t getting paid until Friday, his checking account cushion ensured that he had enough in his account to pay the rent on time. His cushion might fall temporarily below $3,600, but his next paycheck would soon replenish his account.
As the month went on, various bills came due. Utilities may be due on the 7th of the month. Credit card bills on the 15th. These payments can all be automated so he didn’t have to actively worry about them. Again, his checking account cushion guaranteed he had enough in his checking account to pay them.
Towards the end of the month, in a perfect world, our really lost boy would have exactly $5,650 left after paying all of his bills. He could then transfer the predetermined $2,050 of Later Money to his various Later Money accounts. He’s then left with a checking account cushion of $3,600 and is ready to begin the next month.
This is not a “set it and forget it” budgeting method.
This is not a “set it and forget it” budgeting method. Think and Talk Money is all about exerting a little bit of mental energy on your money every week. This budgeting method is a good illustration of what that means. You don’t need to track every penny, but you still need to pay attention to your money choices.
To help you with that, I suggest that you glance at your banking or credit cards apps once a week to monitor your spending. If you use credit cards or electronic payments for most expenditures, it is quick and simple.
The reason it’s a good idea to glance at your banking apps is to make sure you are relatively close to your spending targets. If you notice that you’re overspending in the first half of the month, you can make the appropriate adjustments before the month ends.
This small amount of effort throughout the month is worth it. Every time you make that Later Money transfer at the end of the month, you’ll feel exactly what I mean.
Don’t strive for perfection.
I said above “in a perfect world” to highlight that we’re not striving for perfection. That’s an impossible standard. One month, our really lost boy might have only had $3,300 left after making his Later Money transfer. That’s fine. It’s a temporary blip that he could easily fix, if he’s honestly dedicated to his life goals. He had a couple of options.
His first option was to course correct the next month by spending $300 less. That could mean temporary adjustments in his Now Money or Life Money, such as skipping a couple dinners out, doing yoga at home, and buying chicken instead of steak at the grocery store.
His second option was to replenish his checking account cushion from his specific budget busters savings account. What is that, you ask? It’s a separate savings account to cover you if you have one of these higher-spending months so you can keep your money plan progressing.
In some months, you will actually underspend.
Where do you get the funds for such an account? Believe it or not, in some months, your spending will come in under budget. Let’s say our really lost boy had one of these good spending months in January. Maybe he did Dry January and ate all his meals at home for health reasons to compensate for all the holiday celebrations.
In this example, the result was he spent $500 less in January than he had budgeted for. Instead of leaving that $500 in his checking account (bringing his cushion up to $4,100) where it turns into disappearing dollars, he transferred it to his budget busters savings account.
Then, when he had a high spending month, he could make a transfer back into his checking account to keep his cushion at $3,600. All while continuing to make his Later Money transfers every month.
If you constantly run out of money before making your Later Money transfers, this method is not for you, yet.
Always remember the goal of your Budget After Thinking is to generate fuel for your life goals. If you’re not making these Later Money transfers, you’ve defeated the purpose of having a budget in the first place.
Don’t feel embarrassed or sad if that happens to you. Take it as a sign that you need to explore your Now Money and Life Money spending to see what adjustments you can make. Once you’ve found those adjustments, you can come right back to my version of zero-based budgeting.
If you want this plan to work, where you only need to focus on two numbers instead of tracking every penny, you need to be honest with yourself that you’re ready for this.
Decide for yourself what budgeting method works best for you.
If you’ve been successful tracking your spending in a spreadsheet or a budgeting app, and enjoy the process, you should continue to do so. If it ain’t broke, don’t fix it, right?
On the other hand, if you’ve created a Budget After Thinking and consistently hit your Later Money goals, you’re probably ready to stop tracking every penny, if you’d like.
To recap, my version of zero-based budgeting is for those people who want to continue to fuel their Later Money goals without the anxiety of the spreadsheet. Instead, focus on those two numbers: (1) your checking account cushion and (2) your Later Money transfers. This is what I’ve been doing for years and it has worked.
If your cushion falls short one month, that’s OK. We are not striving for perfection. Make up for it the next month or use your budget buster savings account to replenish your checking account. And, keep making your Later Money transfers.
Has anyone else experienced mint.com anxiety? Are you currently using a budgeting app? How do you like it? Has any tried zero-based budgeting?
Think and Talk Money’s motto is “Money Wellness Together.” The more we all talk, the more we all benefit. The best way to keep the conversation going? Ask questions!
I’ve learned through teaching in law schools for the past 15 years that most of us prefer seminars with questions and answers to long lectures. Thanks for all the great questions so far! I’m hoping we can do a Q&A post like this just about every week.
Please keep the questions coming in the comments on any post, by responding to our newsletter, or on Instagram.
In our first Q&A post, we’ll cover my favorite personal finance books, whether you should keep your condo as a rental unit, and the most important question of all: what is Italian beef?
1. Do you have a favorite personal finance book that you would recommend?
What a great question. I always recommend starting with books that focus on money mindset. Like we always talk about, the first step is getting our money mindset in the right place. I would start with:
1. Rich Dad Poor Dad by Robert Kiyosaki. There’s a reason this is the best selling personal finance book of all time. If you read Rich Dad Poor Dad, your entire money mindset will be changed. Kiyosaki brilliantly shares the stories he learned growing up from his Rich Dad (really his best friend’s dad, very successful real estate investor/business owner) and his Poor Dad (his actual dad, highly educated/traditional career path). Using these two role models in his life, he makes a very compelling and easy to follow case that most of us go about life and money all wrong.
Read Rich Dad Poor Dad. It will light a fire under you like no other book I’ve read.
2. Think and Grow Rich by Napoleon Hill. Another longtime classic that will shift your money mindset. I first read this book in college when I learned my friend’s dad offered him $50 if he read this book. $50 to read a book? I’m in.
Originally published in 1937 and recently updated, Think and Grow Rich, will convince you that we can all be successful. Hill studied innovators like Henry Ford and Thomas Edison. In the updated version, you’ll learn about modern figures like Bill Gates and Mary Kay Ash. To translate the title into my own words: Wake up! Use your brain! You can be successful in any walk of life if you just stop sleepwalking through life like everyone else and do something!
Read Think and Grow Rich. You will be motivated to do that thing you’ve been saying you would do, but haven’t yet.
3. The Richest Man in Babylon by George S. Clason. A third classic originally published nearly 100 years ago. Clason wrote a simple collection of fables set in the ancient city of Babylon to illustrate the power of fundamental money habits: earn, save, invest, protect. Through his stories, you’ll see how you can get ahead in life by practicing strong financial wellness habits.
4. Your Money or Your Life by Vicki Robin and Joe Dominguez. Vicki Robin and Joe Dominguez are often credited for laying the groundwork for the Financially Independent Retire Early (FIRE) movement. They have a lot to say about the relationship between money, work, and time.
Most of us are doing it all wrong. We chase money at the cost of our precious time. By making good choices about how to earn money- and as importantly what to do with that money- you can get the most out of your money and your life.
5. Die with Zero by Bill Perkins. Perkins makes a strong case that many of us are saving too much for retirement. We work too many hours and save more money than we’ll ever need. Instead, we could be using that money during the best years of our lives to create lifelong memories.
Perkins also questions the conventional wisdom of waiting until we die to pass money onto our kids. He suggests helping our kids earlier in life when the money will be more meaningful.
Read Die With Zero. You won’t wait any longer to book that vacation you’ve been putting off for no good reason.
If you have read these books already, but it was some time ago, read them again. I didn’t fully appreciate all the lessons until I was years into my career and knew what it felt like to work for money.
2. $500 Challenge? I could never do that!
In Part 3 of our series on budgeting, I gave you 10 of my favorite tips to help stay on budget. One of the tips involved a game my wife and I play called the “$500 Challenge.”
If $500 is a nonstarter for you, increase the amount of the game. Whether you play with $750 or $1,000 or more, the point of the game remains the same. If $500 is too much for you, pick a smaller number that works. The amount doesn’t matter. The point is to set a number for yourself that will get you back on track after overspending in the previous month. January is a great time to play the game.
3. When I’m creating my budget categories, does my health club membership count as Now Money or Life Money?
In a 50-30-20 framework, you must choose what category to put your health club membership in. Same with every other borderline expenditure. What if you think working out should be Now Money, but it pushes you over 50%? OK, just move it to Life Money. Wait, now I’m over 30% in my Life Money. Why is this so hard?
Take it from me and my students who have attempted 50-30-20 budgeting, making these choices gets to be very frustrating. What is the point in agonizing over decisions like this?
So, what should you do with your health club membership?
It doesn’t matter! You saw in our really lost boy’s budget that I counted it as Now Money. Today, I’d actually probably count it as Life Money. How’s that for an answer!?
Instead of agonizing, pick a category and leave it there. The whole purpose of our budget is to generate fuel for our Later Money. Whether that fuel comes from adjustments to Now Money or Life Money is irrelevant.
In our Budget After Thinking, we’re not limiting ourselves by rigid frameworks and agonizing over spending categories. We’ve got better things to focus on, like creating more fuel for our dreams.
4. Do I need to actively budget forever?
Nope! I’m going to do a post soon on what I recommend for people that have done the budgeting thing for a while and have a pretty good idea what their spending is. If you’re at that point, and are relatively responsible, you won’t need to track your spending anymore.
Let’s look at a quick example. Say you learned that your Budget After Thinking includes $1,000 of Later Money. That means each month, your top priority is to put that $1,000 of fuel towards your financial goals.
In this plan, you’ll need a “cushion” in your checking account to make it work. In this example, let’s use $5,000 as our cushion. At the end of the month, after you’ve made your Later Money transfers out of your checking account, and you’ve paid all your bills and credit cards, you should have $5,000 left.
If you have less than $5,000 left, compensate the next month by spending less so you get back to $5,000 at the end of month 2. If you’ve way overspent, that’s an indication you are not ready to stop budgeting.
No matter what, don’t short your Later Money. Do the $500 challenge if you need to. If you have more than $5,000 left, transfer the surplus to your savings account so you can use the excess to cover budget busters or top off your checking account if you overspent a little the previous month.
This budgeting process is similar to zero-based budgeting, a concept that’s been around for a long time. I find this method takes almost all of the anxiety out of budgeting. The key is you just have to be disciplined enough that if you have less than $5,000 left at the end of month 1, you course correct in month 2 so you’re back on track.
5. I am thinking about either selling my condo or keeping it as a rental unit. What should I do?
I’m a real estate investor, so my mind always goes first to keeping the condo as a longterm rental unit. Based on the question, it seems this reader is interested in real estate investing, too. If that’s true and your financial situation permits, I would consider keeping the condo as a rental unit.
It could be a great way to see if you like being a landlord without putting time and resources into acquiring a different property. Best case scenario, you hold the condo for many years and it turns out to be a great investment. Worst case scenario, you sell it in a year or two if being a landlord isn’t your thing.
Of course, there are so many factors that go into real estate investing. You need to do your homework first on whether your condo is a plausible rental unit. Leave a comment below or reach out on Instagram if you need some help deciding if your condo might be a good rental unit.
6. What is Italian Beef?
This person, I cannot help.
Fortunately, there’s a current Emmy winning show out there about Chicago and Italian beef!
Thanks for all the questions! Please keep them coming in the comments on any post, by responding to our newsletter, or on Instagram.
In Part 1 of our series on budgeting, we learned how to eliminate disappearing dollars by creating a plan for Now Money, Life Money, and Later Money.
In Part 2, we used a real life example to work through the budgeting process together. We learned that even seemingly minor adjustments can add major fuel to your Later Money bucket.
Here in Part 3, we’ll take a deep dive into my top 10 strategies for making thoughtful adjustments so we can consistently win the budget game.
1. See the ball go through the hoop.
When I was playing basketball growing up, I learned the concept of “seeing the ball go through the hoop.” When I was struggling to make a shot, my coach encouraged me to drive to the basket and make an easy shot.
Once I saw that I could make an easy shot, I had my confidence back.
By seeing the ball go through the hoop, I subconsciously reminded myself that I could do it. There was nothing wrong with me. I was ready for more challenging shots.
Anyone who has been around young kids has witnessed this same phenomenon. My son is learning to swim. When he proudly drifted (with a life vest on) two feet from me on his own, he proudly exclaimed, “I’m swimming! I’m swimming!”
It didn’t matter that neither his arms nor his legs were moving.
Once he saw that he could enjoy the pool without holding onto dad for dear life, he wanted nothing to do with me. He knew for himself that he could do it.
This concept works in a lot of different money situations, especially when making thoughtful adjustments to your budget. In our really lost boy example, we made small adjustments to our grocery budget, phone and internet bills, and social life spending.
These adjustments were easy to implement and added major fuel to our Later Money. Just as importantly, there was an additional psychological benefit in proving to ourselves that we could make improvements.
Start small. See the ball go through the hoop.
2. Don’t cancel your social life.
The point of starting small is to identify beneficial adjustments that are relatively painless. Focus on the “relatively painless” part. Canceling your social life will not be relatively painless.
Your social life consists of ongoing experiences that bring you happiness. We always should strive for more of those experiences, not less. So, don’t cancel your social life.
Looking again to our really lost boy, you probably noticed that I made small adjustments to my Life Money. However, even those small adjustments did not result in less time with my friends.
This is a key point: I didn’t spend any less time with my friends than I did before. Instead, I thought and talked about alternatives so I could still see them without spending a lot of money.
In recent years, my students have thought and talked about some great examples of this concept in action. For example, say your friends are going out to dinner on Friday night. You know it’s going to be more expensive than what your Life Money permits.
Instead of going to the dinner (and wrecking your budget), or not going to the dinner (and being sad at home), what alternatives can you think of?
One student suggested you can meet your friends beforehand for happy hour. Another student suggested you take a pass on dinner and invite your friends over to your place later that weekend for coffee and bagels.
If you don’t want to spend your Life Money to go see Taylor Swift in concert, invite your friends over to watch the documentary on Netflix.
The common theme is that you still get to spend time with your friends, while keeping more money in your pocket.
3. Talk to your friends about Life Money.
Surprise, surprise! More talking! I recommend you talk to your friends about the thoughtful adjustments you’re implementing with your Life Money. Like in most life situations, communication is key.
Once your friends know that you are working on thoughtful choices in your Budget After Thinking, they will happily support you. They’ll know that you aren’t blowing them off.
In the rare instance that they don’t support you in striving for your dreams? You may need to question if these are the right friends for you.
The art of budgeting is not about cutting, especially when it comes to things you love. Budgeting is about thinking and talking to find solutions or alternatives.
You can keep doing the things that bring you happiness at the same time you’re making progress on your life goals. It just takes a little bit of mental effort.
4. Keep on traveling.
Making small adjustments works in all areas of your budget, not just your social life. Let’s look at travel, a major expense, but also one of the best sources of life experiences for a lot of people.
For our really lost boy, cutting out travel completely was a nonstarter. My sister lived in Los Angeles, one brother lived in Washington D.C., and the other brother studied abroad in Spain. Plus, my best friends from college lived in New York and Virginia. My grandma was in South Carolina.
If I wanted to see my people, traveling was part of the deal.
Traveling was also a huge expense, and paying for all that travel brought me a lot of stress. I needed to think and talk about a solution so I could travel for less money. You know where this is going, don’t you?
I researched the best credit cards for travel points and how to best use those points for free flights and hotels.
I learned the most affordable days of the week to fly and the best times of the year to visit certain places. Yes, this took mental effort. But, this was more preferable mental effort than worrying about money.
Even if you don’t want to take these steps, you can still make thoughtful decisions about cutting back on even one or two trips a year, which I also did. I spent less money, but the added benefit was that I appreciated each trip even more.
I had more time to look forward to that trip and more time to remember it before another trip distracted me.
Do not use credit cards just to earn points.
This is not a recommendation. It’s a requirement. Stay tuned for a future post on responsibly using credit cards to earn free vacations.
For now, the only rule that matters is to not overly spend on your credit cards just to earn points. That is a recipe for disaster.
Using credit cards to travel only works to your advantage if you can pay your bills, in full and on time, each month.
“Triple points!!!”
Years ago, my friend and I were out to dinner with our wives at a nice neighborhood spot in Chicago. When the check came, I pulled out my credit card. He pulled out a debit card. I nearly fell out of my chair.
It’s not that using a debit card is a bad choice. It’s a great choice for a lot of people. In this instance, however, I was shocked because I knew this guy very well.
We had travelled all over Europe together. We had just spent most of dinner talking about trips we had taken and trips we wanted to take. This friend is also one of the smartest guys I know, a statement that I will forever deny and insist that I was hacked, if he ever reads this.
I was shocked he wasn’t using a credit card to earn points so he could travel for free.
I couldn’t help myself and had to ask my friend about the debit card. (What do you want from me, I like to talk about money.) Turns out he just never really thought about using a credit card.
He wasn’t actively avoiding credit cards, he just didn’t know there were advantages to go along with the potential negatives (if you don’t pay your bills).
My friend was an instant convert. He was thrilled (maybe an understatement) to learn about how he could travel for free with credit card points. He began responsibly using credit cards and never looked back.
To this day, he won’t leave me alone any time he earns “TRIPLE POINTS!!!” or books a free vacation for his family. I love it.
5. Spark and cut.
Another one of my favorite tricks was inspired by Marie Kondo, famous for helping people de-clutter their houses by asking a simple question, “Does this item spark joy?” If it does, keep it. If it doesn’t, get rid of it. So simple, and so powerful.
Marie Kondo is an inspiration. In my opinion, there is no clearer display of brilliance than taking a complex matter (like organizing your house) and distilling into a simple, understandable idea.
We can apply the same strategy to any area of our spending. Does this subscription bring me joy? If yes, keep it. If not, cut it.
Does this health club membership bring me joy? This expensive clothing store? What about attending concerts? Sporting events?
If these things don’t honestly bring you joy, cut them from your life and your budget. Italian beef or unagi? Either one is fine, if you’ve determined for yourself that it brings you joy.
When you spark and cut, you’ll create more money to fuel your Later Money goals. Just as important, you’ll likely find that you don’t miss those things or activities.
You’ll value your newfound time and freedom to pursue those remaining parts of your life with more dedication.
6. It’s OK if you occasionally exceed your spending.
What should you do if you overspend one month? Don’t get discouraged and give up. Before all your hard work goes to waste, take the next month to course correct.
If you overspent by $300 in your Life Money in December, make it a priority to underspend by $300 in January.
Is this easier said than done? Well, sure. It’s always easier to say you’re going to do something. The hard part is following through. It will take discipline to get back on track. What will drive that discipline?
Once again, it’s your ultimate life motivations that we’ve talked so much about (and will always continue to talk about). Without that clear vision of your ideal life in front of you, no budget will ever last.
Don’t panic. Course correct. Stay on track.
7. Make a game out of it, like the $500 Challenge.
When I veer off track and have a bad spending month, I try to not get down on myself. I’m human. It happens. So, lemons to lemonade. I make a game out of it called “The $500 Challenge.”
My wife and I started playing The $500 Challenge years ago. The game was simple. Each of us had to limit our Life Money for the month to just $500. Whoever spent the least that month, won the game.
I’ve never won the game. My wife is… competitive. I cope by lying to myself that she wins because I enjoy paying on date nights.
We’ve played this game several times to course correct after a high spending month. January is the perfect time of year for this game since the holidays in December often result in overspending.
The $500 Challenge has many benefits. When we succeeded, we’d be right back on track for our goals. Even if we couldn’t quite stay under $500 (never an issue for my wife), this game still reminded us to to prioritize the experiences and things in life that truly mattered to us.
Get creative with nights out.
My favorite part of the game was it forced us to get creative with our nights out. One of my favorite date nights was a product of the $500 challenge.
We had just moved to our new neighborhood. It was a Friday night. People were out and the city was bumping, per usual in summertime Chicago. We set out for a walk to explore with only one rule: we had $20 to spend or less on dinner for two.
We weren’t going to waste that money on an Uber, so we just started walking. A couple miles later, having learned all about our new surroundings, we ended up at a casual restaurant we had never been to.
We ordered a plate of nachos to share off the happy hour menu. We even had enough money left for one of us to wash it down with a cold beer. The nachos were great and the vibe was perfect. The check, with tip? 19 bucks.
We walked home, which helped digest our dinner, and went to bed feeling light in the belly and heavy in the wallet.
8. Buy it if you want it, but not right away.
About 10 years ago, my mom bought me a jacket for a birthday present. It was the exact jacket I wanted. How did she know, I asked her. “You mentioned it when we were downtown four months ago.” Four months ago!
I shouldn’t have been surprised. My mom has one of those steel trap memories. If you only met her for five minutes and then saw her again two years later, don’t be surprised when she asks about your consulting gig, your trip to New Orleans, and that blue dress that she really liked.
I learned from my mom’s gift strategy and modified it to help myself resist the temptation to make impromptu purchases. I don’t have her memory, but I do have a phone with a notes function.
When I see something that I might want to buy, I do my best to resist the temptation of buying it immediately and make a note in my phone. After a couple weeks, if I still want that thing, I buy it.
More times than not, I no longer want whatever it was that tempted me in the moment.
9. You don’t have to go big or go home.
We’ve been focusing on smaller adjustments, but of course, bigger adjustments can have a bigger impact on your overall budget.
Making bigger adjustments means examining your biggest expenditures, which for most people is housing and transportation.
If your life situation allows for big changes in these areas, you should by all means consider them. After all, reducing your housing costs by $500 by switching to a less expensive apartment opens up a lot of dollars to deploy as fuel elsewhere. That one decision can make a big impact.
The challenge that I have personally experienced with big adjustments and continue to observe in my students today? Making big adjustments is not realistic for everyone.
Let’s talk about switching up your housing situation. By going big in this scenario, you are giving up your home.
This may be a realistic and intelligent decision for someone in their 20s, with no dependents, and living somewhere with ample housing units available.
On the other hand, moving to a new home may not be realistic for someone with children in school and strong roots in a particular community.
To advise that family to pack up their home and move away could be counterproductive. While they’ll save money, they’re giving up a part of their lives that may be very important to their overall happiness. That tradeoff might not be worth it.
The same rationale applies to transportation costs. Like our really lost boy, if you live in a city with public transportation, you probably don’t need a car (or an expensive parking spot).
If you have kids and regularly drive them to dance class, swimming, soccer, gymnastics, piano, music class, ski lessons, and grandma’s house (yes, this is my life right now), giving up your car is not realistic.
How can I adjust my rising housing costs without giving up my home?
It’s because of these complicated tradeoffs that I encourage everyone to start with small adjustments while you’re thinking about bigger adjustments.
As you think and talk about the bigger adjustments, you may unlock other solutions that don’t require you to move.
For example, if you’re renting an apartment, you could negotiate with your landlord about locking in a longer term lease at a fixed rent. That way, you keep your largest Now Money expense consistent and avoid paying more each year as your lease renews.
I employed this strategy with great success when I rented an apartment in Chicago, generating a lot of fuel for my Later Money by staying in the same apartment for seven years.
This strategy works for families, too. A buddy recently moved to a new state with his wife and two kids. Instead of buying a house right away, he signed a four-year lease on the perfect home for his family. He has a wonderful place to live and his costs are fixed for the near future.
What can I do if I’m a homeowner?
If you’re a homeowner, what can you do to reduce your expenses without giving up your home? You may not want to re-finance your mortgage in today’s environment, but could you address other rising home ownership costs?
As an example, I recently re-caulked and re-grouted my shower. I had never done that before, but I watched a lot of YouTube videos like this one. The project took me a while, in small bursts, but doing so saved me close to $1,000.00.
I also felt satisfaction for learning something new and getting a job done despite my many frustrations along the way.
In the long run, is $1,000 saved going to pay off my mortgage? Of course not. This is just one example to illustrate that we can all use our mental energy to think about solutions, without giving up our homes.
This thought process can be repeated endless times, and does not only apply to DIY projects. From your couch, you can work on lowering costs related to home insurance, maintenance, and utilities by making phone calls or sending emails.
When you’ve trained yourself to exert mental energy to solve your rising home ownership costs, those savings will add up. You can lower your expenditures without giving up your house.
10. Plan ahead for budget busters.
Budget busters are any inconsistent expenditures, good or bad, that can derail your planning.
Good budget busters might include trips, weddings, and holiday/birthday gift shopping. Bad budget busters include unexpected car repairs, home repairs, or medical expenses.
Note, budget busters are inconsistent; they are not unexpected. These expenditures are 100% predictable every year, we just don’t always know when they will surface.
Planning ahead for budget busters is crucial to staying on track.
To do so, open up a savings account, preferably at a different bank than your checking account. This helps isolate those funds so those dollars don’t disappear.
As part of our really lost boy’s Budget After Thinking, you’ll recall that we had a separate line item for budget busters in both our Now Money (bad budget busters) and Life Money (good budget busters).
I encourage you to do the same. Each month that you don’t spend your budget buster money, transfer it to your savings account so it’s there when you need it.
One more bonus tip for dealing with budget busters. We talked above about how to course correct when you exceed your budget in one month. On the flip side, what should you do when you’ve had a great month and underspent?
I recommend you transfer the amount you underspent to your budget busters savings account. Don’t let that hard-earned money sit in your checking account.
Those dollars will disappear. By transferring them to savings, those dollars will be at your disposal when needed.
We’ve covered a lot of ground here to help generate fuel for your Later Money. To recap:
My Top 10 Budgeting Tips for Lawyers and Professionals
See the ball go through the hoop.
Don’t cancel your social life.
Talk to your friends about your life money.
Keep on traveling.
Spark and cut.
It’s OK if you occasionally exceed your spending.
Make a game out of it, like the $500 challenge.
Buy it if you want it, but not right away.
You don’t have to go big or go home.
Plan ahead for budget busters.
These are the strategies that have worked for me in the past and continue to work for me today.
I hope you’ve see than budgeting does not have to be hard and nasty. It just takes a little mental energy, exerted ahead of time.
Whether these specific tips work for your personal situation isn’t the point. I promised you before that I won’t tell you what to do with your money.
Review my tips and focus on the thought process to identify solutions that might work for you.
Have you used any of these strategies? What about other strategies that worked for you?
Drop a comment below or on the socials to keep the conversation going.
In Part 1 of our series on budgeting, we learned that the art of budgeting is having a plan for your next dollar before you earn it. That way, you avoid having disappearing dollars. It’s not a good feeling to work hard all month and then realize you have nothing to show for it.
We also learned the three steps to get started with a realistic budget based off your current personal situation:
Step 1: Track your spending for at least 3 months.
Step 2: Separate your spending into 3 main categories.
Step 3: Make adjustments so your spending better aligns with your true motivations and desires in life.
Here, in Part 2 of our series on budgeting, we’ll use a real life example to work through the budgeting process together. Through this example, you’ll see how even seemingly minor adjustments can make a big impact to your budget.
In Part 3, we’ll take a deep dive into my top 10 strategies for making thoughtful adjustments to our budgets so we can add more fuel to our financial and life goals.
Before we get ahead of ourselves, let’s meet a real life, really lost, boy.
Learning from a real life, really lost, boy.
In today’s budgeting example, we’ll look at real numbers from a real life, really lost, boy: 26-year-old Me. Remember when I told you I started a money journal in 2010? The dollar amounts below are what my actual income and spending looked like back then, adjusted for today’s dollars and rounded for easier math.
For some context, I was 26-years-old, living by myself in Chicago (no dependents, no pets), and working as a slasher. Not a joke, that was my actual job title. I worked for a judge with the Appellate Court of Illinois, and as the junior member of the team, my responsibilities included lawyer duties and secretarial duties. I was a judicial law clerk “slash” secretary. Hence, slasher. Lawyers are funny, huh?
In today’s dollars, I earned an annual salary of $90,000.00. That means I earned $7,500.00 per month. We did not have bonuses at the courthouse, so the $90,000.00 salary was my full compensation.
How to benefit from this budgeting example.
The benefit of going through an example like this is not to compare your situation to mine. Your income might be much higher or much lower. Same with your expenses. Instead of the numbers, focus on the thought process so you can start to think about adjustments that suit your current life.
Below, you’ll see charts showing that I completed each of our three budgeting steps:
Step 1: I tracked my spending for 3 months and reflected the average monthly amount for each expenditure in the column labeled “Baseline Budget.”
Step 2: I created a separate chart for each of the three main categories: Now Money, Life Money, and Later Money.
Step 3: I made thoughtful adjustments to better align my spending with my true motivations in life. I illustrated my decisions in the third column labeled “Budget After Thinking.”
Now Money
Now Money is what you need to pay for basic life expenses. These are expenses that you can’t avoid and should be relatively fixed each month. If you have expenses for kids, pets, and other fixed life expenses, be sure to include them in your Now Money category.
Now Money
Baseline Budget
Budget After Thinking
Apartment rent
$2,200
$2,200
Renter’s Insurance
$20
$20
Parking spot
$430
$0
Gas for car
$40
$40
Car Insurance
$50
$30
Car Maintenance
$150
$150
Utilities
$120
$120
Internet
$60
$30
Cell Phone
$55
$35
Groceries
$300
$240
Personal upkeep(wardrobe, haircuts, etc.)
$100
$75
Gym Membership
$360
$360
Budget Busters
$300
$300
Now Money Total
$4,185
$3,600
What I learned tracking Now Money.
Now Money is pretty easy to track. There is not a whole lot of variance from month to month.
You’ll notice immediately that I had one major expenditure that needed immediate adjustment. That parking spot for $430? Definitely did not need that. I lived 2 miles from work in one of the best cities for public transportation in the country. It was frustrating at times to look for street parking, but I didn’t use my car enough to justify the cost of a parking spot.
The other adjustments resulted in more minor savings, but don’t ignore these. Each adjustment took relatively no effort to make, just a little bit of thought beforehand. When I say relatively no effort, I mean three phone calls and three reductions for car insurance, internet, and cell phone. That’s $70 saved per month, or $840 saved per year, for about 30 minutes of effort.
Otherwise, I decided to show a bit more restraint when grocery shopping and found a cheaper place to get my haircut.
All told, I reduced my Now Money Budget After Thinking by $585 per month with a little bit of thought and hardly any effort. That’s $7,020 per year of fuel for my Later Money.
Life Money
Life Money is what you spend every month on things and experiences in life that you love.
Life Money
Baseline Budget
Budget After Thinking
Social Life (dining out, concerts, ball games, etc.)
$800
$700
Purchases (books, fun clothes, gifts, etc.)
$200
$150
Travel
$500/mo ($6,000/yr)
$400
Cubs Season Tickets
$400/mo ($4,800/yr)
$400
Budget Busters
$200
$200
Life Money Total
$2,100
$1,850
What I learned tracking Life Money.
When you’re reviewing your Life Money expenses, don’t be overly aggressive in cutting here. These are the things and experiences that make your life enjoyable. Even modest adjustments can make a big difference in the long run.
In Part 3 of our series on budgeting, I’ll show you my favorite strategies for adjusting your Life Money without sacrificing the things and experiences you love.
As we saw with Now Money, with some thought and very little effort, I reduced my Life Money Budget After Thinking by $250 per month. That’s another $3,000 of fuel for my Later Money.
Some bonus tips for tracking Life Money
Life Money is the most annoying category to accurately track. These expenses vary month-to-month. You may buy concert tickets or have a trip planned some months, but not every month. So, how do we get an accurate picture of our Life Money?
This is why I recommend you track your spending for at least three months. You’ll get a more accurate picture because you can average your Life Money spending over those 3 months and balance out any inconsistencies. Of course, if you have the patience to track your spending for even longer, you’ll get an even more accurate picture.
Fortunately, it is easier to track our spending today with the availability of apps and online banking platforms that can automatically track your spending. We’ll review some of these tracking options in a future post.
Keep it simple when tracking your Life Money.
I highly recommend you keep it simple when tracking your Life Money. Many of my students give up on budgeting because they make this category more complicated than it needs to be. I really struggled with this at first because I was so concerned about doing it right.
What I learned was that it doesn’t matter. If you go to happy hour with friends, don’t agonize over whether that goes into your “Dining Out” category or your “Drinks” category? It doesn’t matter. Make it easy on yourself. Have one category called “Social Life” and move on.
Don’t forget that the point of budgeting is to learn your current habits so that you can make thoughtful adjustments. Don’t let yourself become so obsessed with the details that you get stressed and give up on budgeting.
Break down large, annual expenses on a monthly basis.
One last tip, when you have large expenses, like season tickets or a big vacation, it’s helpful to break down those expenses on a monthly basis. That way, you can see how much those individual purchases are impacting your overall monthly goals.
I’m not suggesting you actually pay for that trip over 12 months (like on a credit card), or that you can only spend that much on travel in a certain month. Think of it this way: you likely will not take a trip every month of the year.
Using my Budget After Thinking figures, let’s say I did not take a trip in January, February or March. That would mean that for my planned April trip, I now have $1,600 available that I can use, assuming you didn’t let those dollars disappear. In Part 3, we’ll talk about what to do with the money you didn’t spend in the first three months to make sure they don’t disappear when April rolls around.
Later Money
Later Money is what you are saving, investing, or using to pay off debt. This is the fuel for your most important goals.
Later Money
Baseline Budget
Budget After Thinking
Student Loans
$1,100
$1,100
Credit Card Debt
$150
$900
Savings
$0
$50
Pretax Retirement (401k)
$300*
$300*
Other Investments
$0
$0
Total Later Money
$1,250
$2,050
*This was pretax money to my employer’s retirement plan. For budgeting purposes, it’s easier not to count the amount here.
What I learned tracking Later Money.
This is where all your efforts in tracking your spending and making thoughtful adjustments starts to pay off, IF you have a plan for your next dollar before you earn it.
In my baseline budget, I was very good about paying my student loan debt in full every month. I knew enough not to mess with student loans. The consequence was my credit card bills were the last to get paid each month. This usually meant only paying the required minimum since I had run out of money by this point. It also meant no money for savings or investments.
In my Later Money Budget After Thinking, because of the thoughtful choices I made with my Now Money and Life Money, I created $800 of fuel.
With that fuel, I had committed myself to paying off my credit card debt as quickly as possible. I also wanted to start the habit of saving each month. So, I added $750 of fuel to my credit card bills and $50 of fuel to my savings. I stayed true to my plan and put that money to work. Otherwise, what was the point of budgeting?
Some bonus tips for tracking Later Money.
When I run through this exercise with my students, I usually get a question along the lines of, “I’m aiming to save 20% of my income each month. Should I count the pretax money I’m saving for retirement towards that 20%?”
It’s a sneaky question. Think about it: the rest of your budget relates to your take-home paycheck, meaning your after-tax money that hits your checking account. Your retirement savings are typically withdrawn from your paycheck before taxes and before you ever see the money.
How to account for your pretax retirement savings can be another one of those tricky areas when you start budgeting. In my example, you may have noticed that I contributed $300 of pretax money through my employer’s retirement plan, but I did not count that money in my budget calculations.
Should you count that money if you’re aiming to save a certain percentage each month? Setting aside that this question demonstrates how a standardized framework, like 50-30-20, can be very confusing…
Yes! Give yourself credit where credit is due! Contributing to your retirement plan is a good choice. If you are aiming to save 5% or 10% or 20% each month in Later Money, count your pretax money towards that goal.
Make budgeting as easy as possible for yourself.
That said, I want to encourage you to make budgeting as easy as possible for yourself so you stick with it. In my example, I excluded the $300 pretax retirement savings because I am creating a plan for the $7,500.00 that hit my checking account each month. These are the dollars in jeopardy of disappearing.
The entire point of your budget is to create a plan for your next dollar before you earn it. You already wisely chose to save your pretax dollars by enrolling in your employer’s retirement plan. Those dollars are already accounted for and working for you. They are not disappearing dollars. You did your job!
Like in my example above, you can exclude the amount you’re saving for retirement in pretax dollars from your budget calculations. Feel good knowing that you’re saving that money. It’s icing on the cake. No need to worry about it when budgeting.
The real life, really lost, boy was starting to figure it out.
Let’s look at the complete picture before and after I started the budgeting process:
Baseline Budget
Budget After Thinking
Now Money
$4,185
$3,600
Life Money
$2,100
$1,850
Later Money
$1,250
$2,050
Total
$7,535*
$7,500
Income of $7,500
With some thought and relatively little effort, I was able to stop the disappearing dollars and start making progress towards my ultimate life goals.
In my baseline budget, I was spending more than I earned each month. That meant I had no money to pay my credit card bills, which kept getting bigger because I kept spending. In my Budget After Thinking, I broke my habit of living above my means and generated $9,600 of fuel in one year for my Later Money goals.
Taking these first steps may seem like minor steps on the way to financial independence, but they were the most important steps I ever took on my personal financial journey.
The real life, really lost, boy was starting to figure it out. The spark was lit. There was no turning back.
Imagine it’s a $20,000.00 bonus that was unexpectedly deposited into your checking account.
No strings attached. It’s your money to do anything with.
Answering this question should be fun.
It’s a free $20,000.00!
But, my guess is that if you thought seriously about it, you didn’t have much fun at all.
Many of us likely struggled with what to do. We want to do the right thing, but we don’t know what that right thing is.
Should we pay down debt?
Should we invest?
Take a vacation?
Do nothing?
Do you have a plan for where your next dollar is going?
The reason we struggle with decisions like this is because most of us don’t have a plan for where our next dollar is going. What ends up happening is we do nothing.
Our money hits our checking account, we spend it on this or that, and pretty soon that money has disappeared. We haven’t used the money to advance any of our priorities. It’s just gone.
To me, this is one of the most important money mistakes that we need to fix right away. Having a plan for our money, before we earn it, is essential if we want to reach our goals.
With a plan, we can eliminate the disappearing dollars with confidence that our money is being used to serve our purposes.
And, that leads us to budgeting.
Budgeting is having a plan for your next dollar before you earn it.
Here, in Part 1 of our series on budgeting, we’re going to learn that the art of budgeting is having a plan for your next dollar before you earn it. That way, you avoid having disappearing dollars.
We’ll learn how to create our baseline budget based off of our current personal situation. Wherever you currently are in life, you can then make adjustments to your spending based on what you truly want.
In Part 2 of our series on budgeting, we’ll use a real life example to work through the budgeting process together. Through this example, you’ll see how even seemingly minor adjustments can make a big impact to your budget.
In Part 3, we’ll take a deep dive into my top 10 strategies for making thoughtful adjustments to our budgets so we can add more fuel to our financial and life goals.
In the end, I’ll show you how to use the information you’ve learned about yourself to create a lasting money plan that does not require you to track every penny.
I teach my students that to create a budget, you need to first study your own personal situation to figure out where your dollars are currently going.
Then, you can figure out a plan for how to use your next dollar before you earn it. This applies not just to bonuses or other unexpected dollars, it applies to every dollar you earn.
When you put the time in to study your own habits, you can then create a realistic budget. When you have a realistic budget, you will have confidence that your dollars are working for you.
Some dollars will be used to pay your ordinary life expenses, some dollars will be used for all the things in life you love, and some dollars will go to your financial goals.
That’s all there is to it.
Let’s take a look at three steps to take when first creating a budget.
Step 1: Track your spending for at least 3 months.
I recommend everyone, regardless of where you are in life, start with this first step of tracking your spending for at least three months.
Without knowing where your money is currently going, you won’t be able to think about adjustments.
I won’t lie to you. This step can be hard and you probably won’t like it. This is the step that makes people think budgeting is a nasty word. I get it and don’t blame you for having that reaction.
Still, there’s no getting around this first step. Remember, you don’t have to budget forever, just long enough to learn your own behaviors towards money.
Please know that many of us struggle with this first step. You might not like what you learn by tracking your spending.
When I first started budgeting, I learned that I was $20,000.00 in debt and was spending way more than I earned.
That wasn’t fun, but I’m happy that I put in the effort to find my blindspots and make adjustments.
I often think to myself, “Where would I be today if I didn’t go through this process 15 years ago? How much further into debt would I have fallen?”
Talk to your people as you go through the budgeting process.
One last thing, budgeting is one of those areas where it can really help to talk with our people along the way for support and encouragement.
You don’t have to budget in secret. We’re all in this together. Put the mental energy into this step, so you can stop wasting mental energy worrying about money and start getting energized thinking about money.
In Part 2 of our budgeting series, we’ll talk about the different ways you can track your spending. I’ve used apps, spreadsheets, and even the notes function on my phone.
The good news is, tracking your spending is easier today than it’s ever been.
Regardless of how you track your spending, be honest with yourself. If you intentionally or mistakenly leave out certain expenditures, you won’t learn where your money is actually going.
A budget, which is just a plan, is only as good as the data it’s built off of. Be honest about your data.
One quick note: Budgets are usually done monthly, so you’ll want to create a separate accounting for each month you tracked.
The reason we track three months of spending is so you’ll be able to identify any patterns or inconsistencies in your spending from month-to-month.
This helps ensure you’re making decisions based off the best data possible.
Step 2: Separate your spending into three three main categories.
Great work completing the first step! That wasn’t easy, but you did it.
Now that you have tracked your spending for three months, you can assign each expense into separate categories.
Most personal finance experts agree, though we have different names for each category, that you should divide your money into three main buckets.
I refer to these buckets as:
Now Money
Life Money
Later Money
1. Now Money
Now Money is what you need to pay for basic life expenses.
These expenses include housing, transportation, groceries, utilities (like internet and electricity), household goods (like toilet paper), and insurance.
These are expenses that you can’t avoid and should be relatively fixed each month.
2. Life Money
Life Money is what you are going to spend every month on things and experiences in life that you love.
This bucket includes dining out, concerts, vacations, subscriptions, gifts, and anything else that brings you joy.
We can’t be afraid to spend this money. This bucket is usually what makes life fun and exciting.
The key is to think and talk so you are spending this money consistently on things that matter to you.
3. Later Money
Later Money is what you are saving, investing, or using to pay off debt.
This bucket includes long term goals, such as retirement plan contributions (like a 401k or Roth IRA), college savings for your kids (like a 529 plan), emergency savings and paying off student loan or credit card debt.
This bucket also includes any shorter term goals, like saving for a wedding or a downpayment for a house.
Most fun of all, this bucket includes any investments you make to more quickly grow your wealth, like investing in real estate or the stock market.
You’ve probably guessed it already. Later Money is the key category that fuels your ultimate life goals, like financial independence.
The more you fuel this category, the faster you can reach your goals.
Don’t worry about assigning a percentage to each category.
I have intentionally not recommended target amounts or percentages to allocate to each of your three categories.
The reason is because of what I’ve learned from my students over the years. I’ll lay out my full reasoning in a separate post.
The short version is that in my experience working with law students, assigning target percentages for each category is counterproductive.
When I used to teach my students to aim for certain percentages in each category, I could tell that they would get discouraged as soon as I put the numbers on the slideshow. I completely understand why.
Each of us is starting in a different place. If you are currently spending 80% of your monthly income on Now Money, it’s not helpful to have someone tell you to create a budget that automatically drops that level to 50%.
My students would tune me out as soon as I put those numbers on the board.
Now, I teach my students to think and talk about their current personal realities and aim for steady and lasting improvements.
I want my students to create a plan that will last, not an unrealistic plan that they give up on after a few months.
So, whatever amount you’re currently spending in each bucket, that’s what we’re going to work with as we move on to step 3.
One other thing before you move on to step 3: don’t get hung up stressing about what type of expense goes into each category.
Sometimes, it gets tricky. Do clothes you buy for work count as Now Money or Life Money?
Don’t stress. It doesn’t really matter. It’s not worth the mental energy thinking about it. Just stay consistent and move on.
If you still want a target, aim for 20% of your income added to your Later Money each month.
All that said, I know that some of us operate better if we have a specific target in mind. If that’s you, the conventional wisdom is to aim for 20% of your income added to your Later Money each month.
Targeting 20% savings each month was popularized in Elizabeth Warren’s book, All Your Worth: The Ultimate Lifetime Money Plan, first published in 2005 (before she was Senator Warren, she was a law professor and author).
Senator Warren advocated for a 50-30-20 budget framework with 50% going to fixed costs (what I call “Now Money”), 30% going to wants (“Life Money”), and 20% going to financial goals (“Later Money”).
Most personal finance experts agree that the 50-30-20 framework is a solid plan for your budget.
In theory, I agree.
In reality, I’ve become convinced through working with my law students that the 50-30-20 framework does not cut it in today’s environment. Like me, some experts have also recognized a 60-30-10 framework may be more appropriate today.
While I agree the 60-30-10 framework is more realistic, my experience has taught me that assigning rigid percentages is just not a practical framework for most people at the beginning of budgeting process.
Step 3: Make adjustments so your spending better aligns with your true motivations and desires in life.
OK, so now that you have assigned your spending to each of the three categories, the next step is to think and talk about your current habits and whether you’re spending matches your true motivations and desires in life.
If you decide that your spending does not match your life values, then it’s time to make some adjustments. What kind of adjustments?
In essence, my budgeting philosophy is to aim for steady and lasting improvements based on your current reality and your ultimate motivations. What does that mean?
Your budget is really just about finding fuel for the best things in life.
This is where we circle back to the importance of having a clear understanding of what we want out of our money. Money is a tool. Ask yourself:
“Is your current spending aligned with how you want to use your money to fuel your goals and ambitions?”
If not, you can make incremental adjustments as you progress towards your ideal spending alignment.
The idea will be to continuously add more fuel to our Life Money and Later Money, the buckets that represent the things we love the most (Life Money) and our most important life goals (Later Money).
You can make small adjustments, which are usually easier and faster to put in place. These adjustments might include dining out a bit less, cutting out a concert, or cancelling a gym membership or subscription you don’t use.
You can also make big adjustments, like moving to a cheaper part of town or getting rid of you car.
Small or big, the key is that when you make these adjustments, you repurpose that money in a thoughtful and intentional way. You’re now starting to align your budget with your money motivations.
With each thoughtful decision, you’re progressing towards your best money life. Most importantly, you’re learning about yourself and developing lasting habits. You won’t get discouraged and give up on budgeting.
As we wrap up Part 1 in our budgeting series, keep the three initial steps in mind.
Step 1: Track your spending for at least 3 months.
Step 2: Separate your spending into 3 main categories.
Step 3: Make adjustments so your spending better aligns with your true motivations and desires in life.
As you start to implement these steps, you’ll start to have a clearer picture of how your money can work for you.
And, the next time you’re asked what you would do with $20,000.00, you’ll know the answer ahead of time because you have a plan in place.
Answering the $20,000.00 question will be fun. No more anxiety-inducing, disappearing dollars.
I hope you’ve started thinking about why you want to be good with money. This will be personal for all of us and may change with time. The more you think and talk about why you want to be good with money, the clearer your motivations will become.
Three powerful reasons why I want to be good with money:
Money can give you choices.
Money can give you personal power.
Money can give you time.
1. Money can give you choices.
This may seem obvious, but when you have money, you have choices. You can choose where to live. You can choose who you work for, or can work for yourself. You can choose how you eat, exercise, relax, and travel.
This holds true whether you make $50,000 or $250,000. Of course, your options may be different. The point is that when you’ve made good money choices, you’ll at least have options.
2. Money can give you personal power.
This is another way to say that money gives you control of your life situation. If you are in a bad relationship, a bad job, or just need a change, money gives you the personal power to do something about it.
3. Money can give you time.
When you have enough money to be truly financially independent, you have earned the freedom to do whatever you want with your time. You can spend your working hours at a job that is meaningful to you. You can spend more time with people who are meaningful to you.
It’s been said many times, “time is our most precious resource.” When you have money, you can buy your time back.
From the time we’re in diapers, we start learning by observing people older than us. As my family prepares to leave the house, my son has recently started chanting “Let’s roll! Let’s roll! Let’s roll!” Yup, that one’s on me.
The same idea applies when it comes to life and money. I’ve mentioned before how much I’ve learned about life from listening to my clients suffering with mesothelioma. I’ve learned even more by listening to my family, friends, and mentors.
When you listen to enough people with more years behind them than you, certain themes continue to surface, like the importance of family. You’ll hear about creating experiences and memories, usually involving vacations or time with friends.
One thing I’ve never heard? Someone saying “I wish I spent less money on doing the things I loved.”
You don’t have to agree with everything you hear, but the act of listening will start turning the wheels in your own mind. And when your wheels start turning, you can’t be afraid to spend money on the things that make you happy.
Why do we need to actively think about the things that make us happy?
A sneak peak of how I look at budgeting.
I said we weren’t going to discuss budgeting yet, and we won’t. “Budgeting” is kind of a nasty word. Nobody likes to say it out loud, let alone aggressively do it each month. This is why we spend so much time in the beginning talking about our money mindset.
A budget is worthless if you are not motivated to stick to it. Sure, you may stick to your budget plan for a month or two, but you’ll fall back into old habits if you haven’t prioritized what matters most to you.
We’ll save the particulars for another day. A sneak peak at how I teach my students:
Like it or not, everyone needs a budget… for a little while. Once we’ve identified what we spend money on and made some thoughtful choices, most of us don’t need a rigid budget.
If you’ve thought and talked enough about your true motivations, you won’t need a budget either. Each month, you will take care of your obligations, grow your net worth, and use the rest of your money to buy things you love and to create experiences.
Talking money should be emotional.
If you’re being honest with yourself, talking money should be emotional. Remember, most of us exert mental energy pretending we’re not worried about money. My challenge to you is to exert that same energy into figuring out why we behave in certain ways when it comes to money.
The reason it matters is because we’re soon going to be talking in detail about budgeting, which is just the process of making thoughtful choices about how we spend our money. If we don’t know why we choose to spend in certain ways, we won’t be able to make lasting adjustments to our budget.
Let’s look at an example to start prepping ourselves for the budgeting process. This is a good time to revisit one of the main principles when talking money with your people: no judgments allowed. We’re not looking to shame ourselves or each other. We are aiming for understanding so we can make thoughtful decisions.
Say you’ve looked at your monthly spending and realize that you’re spending a lot of money dining out. The key to creating a budget you will actually stick to is actively thinking about why you spend so much money dining out. You might learn that dining out is an essential part of your best life. You might learn it’s really not.
Ask yourself these questions:
Is there an emotional reason you dine out frequently, like it makes you feel successful? Or, you like spending time with friends? Do you get joy out of trying new dishes?
Maybe it’s something else entirely and unrelated to your emotions. Maybe you don’t have time to cook at home because of your work schedule? Maybe it’s just laziness?
It might have nothing to do with how often you eat out, but where you choose to eat and what you choose to order. Do you order a bottle of wine with dinner? Could you have drinks at home beforehand instead?
When you honestly think about and answer these questions for yourself, you can start to make thoughtful decisions on whether that spending matches your priorities. If it doesn’t, then it’s an area for adjustment.
And, that’s really all that budgeting is. Not so nasty, right?
