Tag: credit card debt

  • No Need to Obsess Over Credit Score

    No Need to Obsess Over Credit Score

    Your credit score is very important.

    And, you need to stop obsessing over it.

    Here’s why both those statements are true.

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

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

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

    But, obsessing over your credit score is counter productive.

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

    GPA…

    Weight…

    Social Media Followers…

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

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

    To lose weight, you need to practice healthy living.

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

    The same logic applies to credit scores.

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

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

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

    What is a credit score?

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

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

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

    Your credit report will typically include:

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

    Now, we’ll talk about credit scores.

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

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

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

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

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

    What is a good credit score?

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

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

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

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

    Don’t obsess over your credit score.

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

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

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

    What factors go into your credit score?

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

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

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

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

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

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

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

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

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

    Here’s all you need to know:

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

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

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

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

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

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

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

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

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

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

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

    What factors are not considered in your credit score?

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

    Credit scores also do not consider income or employment history.

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

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

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

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

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

    As FICO explains:

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

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

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

    How to check your credit score.

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

    Most major banks offer free credit scores to their customers.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    In other words, can you be trusted with money.

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

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

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

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

    Credit scores are especially important before big purchases.

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

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

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

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

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

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

    Have you ever needlessly obsessed over your credit score?

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

  • Why Credit Reports are So Important

    Why Credit Reports are So Important

    I first learned about credit when I was in law school. My teacher wasn’t a professor, though.

    My teacher was a surprisingly pleasant debt collector.

    I spoke to this debt collector after breaking my wrist snowboarding.

    For the second time in a year.

    Let me explain.

    About six months earlier, my friends and I took a road trip to go snowboarding in Wisconsin. I had never been to this location before and wanted to explore the entire ski area. After a few loops on the main run, I found my way to the terrain park.

    My plan was to scout out the terrain park and report back to my friends. I must have forgotten the plan as I approached a jump that I had no business approaching. That turned out to be a mistake.

    Heading towards the jump, I had too much speed and, for lack of a better word, panicked. My friend reported afterwards that as soon as I jumped, my body and snowboard turned parallel to the ground like I was lying in bed.

    After all these years, It almost seems peaceful to picture myself lazily flying through the air on a beautiful, blue sky, sunny day.

    Almost.

    To state the obvious, this was not a good position to be in since I needed my feet and snowboard to hit the ground first and land safely.

    I ended up landing on my backside with my hand and wrist hitting the ground first. The unpleasant result was a trip to the emergency room and a broken wrist.

    My reputation for having fragile wrists was secured.

    OK, back to the debt collector.

    A few weeks after returning to Chicago, I received a bill in the mail from the emergency room for approximately $200.

    I didn’t understand why I was receiving a bill since I had insurance and provided that information to the emergency room. I figured it must have been a mistake to send me a bill, and that my insurance company would pay for it.

    So, I crumbled up the bill and threw it in the trash.

    Healthcare and medicine. Medical and technology. Doctor working on digital tablet on hospital background illustrating how I first learned about the importance of credit history.

    Before you shake your head, remember that I was still in school and on my parents’ insurance. This was my first interaction with a medical provider where the bills came to me instead of them.

    I didn’t know at the time that even with insurance, I could potentially be responsible for some portion of the bill.

    For the next few months, I continued to receive bills from the emergency room. And, I continued to throw these bills straight in the trash.

    At some point, I received a new type of letter in the mail. This one caught my attention. It was from a collections agency.

    The letter said something to the effect of, “Call us immediately to dispute or pay this medical bill before we are forced to take action against you.”

    The scare tactic worked.

    I picked up the phone and had a surprisingly nice conversation with the debt collector. The debt collector explained how the collections process works and the potential impact failing to pay would have on my credit report.

    Credit report?

    Never heard of that before. Don’t think I have one.

    After hanging up the phone, I did some research and realized the debt collector wasn’t scamming me.

    I certainly did have a credit history, as reflected in my credit report, that I needed to be mindful of.

    I wrote a check to pay the bill the next day.

    This is how a broken wrist and a debt collector first taught me about credit reports.

    What is a credit report?

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

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

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

    Your credit report will typically include:

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

    Every time you open a loan, like a credit card, auto loan, or mortgage, it will appear on your credit report. Likewise, whenever you make a payment or miss a payment, that information will be reflected on your credit report.

    When someone has “good credit,” it means they have a reliable history of repayment. When someone has “bad credit,” it means they have not previously demonstrated a reliable history of repayment.

    Remember this key point: your credit report represents a complete picture of your interactions with credit over an extended period of time. Your credit report will include information about you going back years and years.

    This means that the information reflected on the report will follow you for the long term. Any negative information on your credit report will typically stay on your credit report for 7-10 years, depending on the credit reporting agency.

    What is a credit reporting agency?

    In the United States, there are three credit reporting agencies:

    • Equifax
    • Experian
    • TransUnion

    By law, you are entitled to receive a free copy of your credit report from each credit reporting agency every year.

    To do so, simply visit annualcreditreport.com.

    If you haven’t obtained your credit report recently, I highly encourage you to do so.

    Regularly checking your credit report is the best way to make sure that nobody has fraudulently opened any accounts using your social security number. It’s also the best way to monitor all the loans you are currently responsible for.

    Believe it or not, it’s not uncommon for people to forget about loans they have previously opened.

    Did you ever go to a Cubs game in college and sign up for a credit card just to receive a free XXL white t-shirt with a blue W on it?

    No?

    Uhh… me neither.

    How about signing up for a new credit card while making a purchase at your favorite store to save a whopping 10% that day?

    You may never end up using these credit cards and completely forget that you opened them. They’ll still appear on your credit report, and you are still responsible for those credit cards.

    Is a credit report different from a credit score?

    Yes, credit reports and credit scores are different.

    We’ll soon discuss credit scores in detail. For now, understand that a credit score is a number calculated based on your credit history that represents your present day creditworthiness.

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

    Unlike a credit score, your credit report does not change quickly. Like we mentioned earlier, any negative information on your credit report will typically stay on your credit report for 7-10 years.

    Why does my credit report matter?

    We typically rely on our ability to borrow money to make our biggest purchases in life. When you take out a mortgage or finance a car purchase, you are relying on your ability to borrow money to make that purchase.

    In these scenarios, lenders will “pull your credit” or do a “credit check” before agreeing to give you a loan.

    If you have a history of responsibly borrowing money and paying it back on time, a lender is more likely to lend you money.

    On the other hand, if you have a history of falling behind on payments, a lender may choose to not lend you money.

    Or, a lender may agree to give you a loan and charge you a higher interest rate to compensate for the increased risk. This could end up costing you lots of money.

    Poor credit history can lead to lost opportunities.

    Besides just financial consequences, a poor credit history can also lead to lost opportunities.

    As an example, it’s common practice for landlords to check an applicant’s credit history before renting them an apartment. Most major rental property search websites, like Zillow and Apartments.com, offer credit checks as part of the standard application process. My wife and I require a minimum credit score for all potential tenants.

    It makes sense why a landlord would pull an applicant’s credit. When you rent an apartment, you are signing a contract (a lease) to pay a predetermined about in exchange for a place to live.

    Landlords rely on those rent payments to pay for the property’s mortgage and upkeep. These rent payments can also directly impact the landlord’s livelihood.

    It should be no surprise that landlords are hesitant to rent apartments to people who have a poor track record of paying for things.

    Just as a landlord is sizing up your ability to pay the rent each month, other lenders, like a car dealership or mortgage lender, are sizing up the likelihood you can repay its loan.

    Don’t ignore your credit history.

    Have you checked your credit report this year?

    My wife and I check our reports at least once per year to make sure there are no red flags.

    Fortunately, I realized my mistake with the debt collector before that red flag ended up on my credit report.

    If I hadn’t, I would have seen that negative mark on my credit report for 7-10 years. This would have severely impacted my ability to qualify for mortgages and grow my real estate portfolio.

    I’m glad I learned that lesson about credit reports.

    I’m also glad that I haven’t been back to a terrain park since law school.

  • Good Credit with Unicorn Cake

    Good Credit with Unicorn Cake

    Something can be good and bad at the same time.

    I’ll give you an example. This weekend, we hosted a birthday party for my five-year-old daughter. She wanted a rainbow unicorn theme.

    When asked what she wanted for a present, she would unhelpfully respond, “No clue.”

    OK, great.

    Fortunately, the local toy store was stocked with rainbow unicorn items: puzzles, books, stuffed animals, craft kits, etc. The kids at school must be on the same page with their interest in rainbow unicorns this year.

    The rainbow unicorn party went well. We started with pizza, decorated cupcakes, and had a unicorn egg hunt.

    The highlight of the party?

    The birthday cake.

    We ordered a rainbow unicorn cake from one of the most popular bakeries in Chicago, Sweet Mandy B’s. The next time you’re in Chicago, do yourself a favor and pop in for a cupcake or cookie.

    After singing “Happy Birthday,” I started cutting pieces of cake for the kids. A few jumbo pieces of cake later, one of our guests came to my rescue and showed me how to cut smaller, kid-appropriate pieces.

    It’s a good thing she did because with the way I was cutting the cake, we were going to run out before all the adults got a piece. And that would have been a bad thing.

    See, this cake was incredible. I’m not always a cake guy (unless it’s ice cream cake), but this one was special.

    Vanilla confetti cake with buttercream frosting. It had the perfect balance of cake and filling. Sweet, but not too sweet. Soft and also firm.

    It wasn’t just me. I never saw a cake disappear so fast. Usually, we end up with so much cake leftover that I’m sneaking bites every time I open the fridge for the next week. Not this time. Sadly.

    By the end of the party, we had barely a single piece left (which was devoured within 24 hours).

    Half eaten cake on a plate symbolizing too much of a good thing like using too much credit can lead to debt which would be a bad thing

    There is a bright side to finishing the cake, though.

    If I had an unlimited supply of this cake, I’m not sure I could stop myself from eating it. The temptation would be too strong to sneak back to the fridge all day long, fork in hand. One little bite at a time.

    It’ll be fine.

    What does birthday cake have to do with personal finance?

    You know where this is going.

    Eating a wonderful cake at a birthday party is a good thing.

    Eating cake every day for the next week, no matter how good it is, would be a bad thing.

    You see? Something can be good and bad at the same time.

    And that leads us to our next major topic in the blog: the responsible use of credit.

    What is credit?

    Credit refers to an agreement to borrow money with the obligation to repay that money later, usually with interest. In this context, think of “credit” as another way of saying “debt.” When you use credit, you’re taking on debt.

    Credit also refers to a person’s trustworthiness or history of repayment. When someone has “good credit,” it means they have a reliable history of repayment.

    It’s important to always remember that credit and debt go hand-in-hand. That’s why before we discuss how credit can help us, we learned scary stats about debt. We discussed three big reasons why we’re in debt. And, in a preview to our conversation on credit, we learned the difference between Good Debt and Bad Debt.

    We typically rely on credit for big purchases.

    We typically rely on our ability to borrow money, or our credit, to make our biggest purchases in life. When you take out a mortgage or finance a car purchase, you are relying on your ability to borrow money to make that purchase. That ability to borrow money is known as credit.

    If you have a history of responsibly borrowing money and paying it back on time, a lender is more likely to lend you money.

    On the other hand, if you have a history of falling behind on payments, a lender may choose to not lend you money. Or, a lender may charge you higher interest rates to compensate for their increased risk.

    This could end up costing you lots of money.

    Poor credit will cost you more than just money.

    Besides just financial consequences, a poor credit history can also lead to lost opportunities.

    As an example, it’s common practice for landlords to check an applicant’s credit history before renting them an apartment. It should be no surprise that landlords are hesitant to rent apartments to people who have a poor track record of paying for things.

    These reasons, and other reasons we’ll soon discuss, illustrate why it’s so important to responsibly use credit.

    In our initial series on credit, we’ll discuss:

    • The basics of credit reports and credit scores and why they each matter.
    • How the responsible use of credit cards can fit into our personal finances.
    • What you need to know to maximize the benefits of credit card reward programs.
    • How to use other forms of credit, like a Home Equity Line of Credit (HELOC), to accelerate your progress towards financial freedom.

    By understanding what credit is and how your credit history is tracked, you’ll gain the confidence to use credit responsibly as part of a healthy financial life.

    I am in favor of the responsible use of credit.

    As I previewed in our discussion on Good Debt, I’m in favor of people responsibly using credit as part of a healthy financial life.

    That applies to our every day choices, like using credit cards to track our spending. It also applies to other forms of credit, like Home Equity Lines of Credit (HELOCs), to acquire assets. We’ll discuss these and other benefits of responsibly using credit in our upcoming posts.

    The important caveat, however, is that like the Sweet Mandy B’s birthday cake, we have to know when a good thing can become a bad thing.

    If we abuse the privilege of credit, the consequences can be severe. I abused the privilege of credit cards at the beginning of my career, and it took years to dig out of the hole.

    By understanding how credit works and how your credit is tracked, I hope you can avoid falling into a similar mess.

    I want you to happily enjoy the cake without the potential negative consequences.

  • How to Pay Off Debt on a Budget

    How to Pay Off Debt on a Budget

    In this post, we’ll learn how to pay off debt on a budget. In our initial series on debt, we first looked at some scary stats about how common debt is in society.

    We learned that 8 out of 10 people have some form of debt. We also learned that nearly half of credit card users carry a balance. Finally, we saw that consumer debt is a worldwide problem.

    By recognizing that debt is something that impacts nearly all of us, I hope that you stop feeling alone if your’e in debt. There’s no reason to be ashamed. You are not a bad person.

    If people were more willing to talk about money, you may not have had those feelings in the first place. You may have already learned how to pay off debt on a budget.

    Understanding how you got into debt is the first step in working your way out. That’s why we next looked at three big reasons why people are in debt.

    Of course, there are other explanations, but in my opinion, these three explanations sum it up:

    1. We can be careless with our money.
    2. We don’t plan ahead for emergencies.
    3. We try to keep up with the Kardashians.

    With these common causes in mind, we can now start focusing on how to pay off debt on a budget.

    These strategies can work whether you are trying to eliminate Good Debt or Bad Debt.

    In my experience, both Good Debt and Bad Debt can feel heavy. While Good Debt can help you achieve financial freedom, the debt will still hang over your head until it’s paid off.

    Before we get to my top 10 strategies to eliminate debt, let’s get one thing straightened out:

    If you’re looking for a magic wand to immediately erase all your debt, you’re in the wrong place.

    Paying off debt takes time. It requires patience and discipline. You may not notice much progress in the beginning, but you need to stick with it.

    It most likely took you years to get into debt, so be reasonable with your expectations of how long it will take to pay it off.

    My top 10 strategies for how to pay off debt on a budget.

    1. Write down your Tiara Goals.
    2. Create a Budget After Thinking so the debt stops growing.
    3. Prioritize Later Money funds for debt.
    4. Apply our Top 10 strategies for staying on budget.
    5. Talk to your people about paying down debt.
    6. Track your net worth and savings rate for small wins.
    7. Pick a strategy and stick with it: Debt Snowball v. Debt Avalanche.
    8. Think about loan consolidation.
    9. Get a side hustle.
    10. Don’t let yourself fall backwards.

    1. Write down your Tiara Goals.

    Have you ever asked yourself what you would do with financial freedom?

    I asked myself that powerful question on a beach years ago and came up with my Tiara Goals.

    Debt is a major obstacle on the way to financial freedom. To help you stay motivated to eliminate debt, write down your version of Tiara Goals. By reminding yourself what you’re actually striving for, you’re more likely to stay on track.

    Whenever we talk about good money habits, it always starts with establishing strong motivations. This is especially true when it comes to debt. There are too many temptations that can push us off track.

    When you’re faced with these inevitable temptations, take a look at your Tiara Goals. I keep my Tiara Goals in my notes section on my phone. I also have a picture on my phone of the original sheet of notebook paper I scribbled on.

    All it takes is a quick glance at my most important life values to overcome whatever temptation is in front of me.

    Getting out of debt is not easy. Make it easier by regularly reminding yourself what you would do with financial freedom.

    2. Create a Budget After Thinking so the debt stops growing.

    If you’re currently in debt, it’s crucial that you stop that debt from getting larger. Think about it. If you’re paying off $1,000 of credit card debt each month, but you’re still spending $1,200 more than you earn, your efforts will be for nothing.

    Your debt is growing faster than you’re paying it off. You’re not getting any closer to being debt-free.

    That’s why to eliminate debt, you need to first create a Budget After Thinking.

    Once you’ve stopped the disappearing dollars and learned where your money is going each month, you can make thoughtful decisions to pay off debt on a budget.

    Then, you can be confident that any money you allocate to debt will actually lower your debt balance.

    3. Prioritize Later Money funds to pay off debt.

    As we’ve discussed, the art of budgeting is to generate fuel for your Later Money goals. The more fuel you can generate each month, the faster you will achieve your personal finance goals.

    There are lots of options on what to do with your Later Money. For example, you can invest in real estate or the stock market.

    When you’re in debt, I recommend you prioritize using your Later Money to eliminate that debt. This is especially true if you have Bad Debt, like credit card debt. Your number one money focus needs to be to eliminate that debt.

    This is the key to learning how to pay off debt on a budget.

    There’s a good reason to focus on paying off your Bad Debt.

    The interest rate on Bad Debt is generally very high. The amount you pay in interest each month will be significantly greater than what you may reasonably expect to earn through investments.

    If you only have Good Debt, like student loan debt, you have some more flexibility in whether to focus on that debt or your other investment goals. This is because Good Debt generally carries lower interest rates, so your investment returns may match or even exceed what you’re paying in interest.

    In this scenario, I suggest that you consider splitting your Later Money between debt pay down, savings, and investments. This is what my wife and I are currently doing in 2025.

    Seeing your savings and investments grow while focusing on how to pay off debt on a budget can provide an emotional lift. Establishing good savings and investment habits now will also have longterm benefits that should survive your debt phase.

    4. Apply our Top 10 Strategies for staying on budget.

    Our Top 10 Strategies for staying on budget will help you generate more money to allocate to debt. These tips are crucial if you’re trying to learn how to pay off debt on a budget.

    For example, when you see something that you might want to buy, make a note in your phone instead of buying it right away. After a couple weeks, you probably won’t even want that thing anymore. Take that money you didn’t spend and put it towards your debt.

    As another example, how about playing The $500 Challenge Game? When you come in under budget that month, use the excess funds to pay down debt.

    When you have debt, applying our Top 10 strategies to staying on budget can teach you something powerful. You’ll see for yourself that the emotional high of paying down debt is better than the feeling you’d get from spending that money on things you don’t care about. It’s important not to ignore these emotional wins when learning how to pay off debt on a budget.

    5. Talk to your people about how to pay off debt on a budget.

    Stop me if you’ve heard this before:

    Why do we insist on struggling with our money choices alone instead of talking to the people we trust and love?

    Talking money is not taboo. That includes talking about our current money goals and money challenges. Of course, it includes talking about how to pay off debt on a budget.

    I’m currently focused on paying down HELOC debt, building up my emergency savings, and funding my kids’ 529 college savings plans.

    What are your current money priorities? If you don’t want to share with us, are you sharing with your friends or family?

    I struggled with debt when I began my career as a lawyer. For years, I kept that to myself. I wish I had been more open. I’ve recently learned that many of my friends were struggling in the same way.

    The problem was that none of us talked about it. I think about how much stress we could have saved each other if we were just willing to talk about money like we talked about everything else. Instead, we hid our truths from each other. Even worse, we likely enabled each other’s poor spending habits.

    I now know that it didn’t have to be that way. I would have been better off if I was open about it.This part still bothers me today: I also might have helped my friends facing the same challenges just by starting the conversation.

    6. Track your net worth and savings rate for small wins.

    Remember that your net worth grows when you reduce your liabilities, meaning debt. When we think of net worth, it’s common to focus on growing our assets. Don’t forget that reducing your debts has the same impact on your balance sheet.

    For example, when tracking your net worth, eliminating $1,000 in debt is the same as an investment that grows by $1,000.

    Even when you’re focused on how to pay off debt on a budget, tracking your net worth can be very motivating. Every payment you make to reduce that debt improves your net worth.

    This is especially helpful if you are focused on paying off student loans or paying down a mortgage. You may not have many appreciating assets, but you can still make a positive impact on your net worth by reducing your debt.

    The same logic applies to tracking your savings rate. Measure and feel good about each additional amount you dedicate to eliminating debt. The goal is to stay motivated while you pay off debt on a budget.

    7. Pick a strategy and stick with it: Debt Snowball v. Debt Avalanche.

    There are two common strategies to consider when you hope to pay off debt on a budget. These strategies are referred to as “Debt Snowball” and “Debt Avalanche.”

    Debt Snowball means paying down your smallest debt balance first, regardless of interest rate. When you’ve paid off that loan completely, you then move to the next smallest balance, again regardless of interest rate.

    Debt Snowball is ideal for people that are motivated by the emotional wins that come with eliminating a loan completely, even if it costs more money in interest in the long run.

    Debt Avalanche means you pay down the debt that has the highest interest rate first, regardless of the balance. Once that debt is gone, you move to the loan with the next highest interest rate.

    Debt Avalanche is for people who would prefer to pay less overall interest, even if it will take longer to pay off a single loan and receive the emotional win.

    A snowball has grown large due to the force with which it rolls, tumbling down a forested mountain during the snowy season, lifting small amounts of snow along its path, illustrating the preferred method for how to pay off debt on a budget.

    We’ll discuss the pros and cons of each strategy in a subsequent post. Some people will prefer the emotional wins of the Debt Snowball method, while others will prefer the mathematical advantage of the Debt Avalanche method.

    Personally, I use the Debt Snowball method.

    I value the emotional wins of eliminating a debt entirely, even if it ends up costing me more in the long run. I am currently applying the Debt Snowball method to pay off HELOC debt.

    I’ve experienced firsthand that our money choices have more to do with emotions than they do math. If you prefer to play it strictly by the numbers, I completely understand.

    The key is that whichever strategy you pick, stick with it. You’ll save yourself a lot of unnecessary mental gymnastics by choosing one approach and then moving on.

    One word of caution: whichever method you choose, be sure to always pay the minimum on all of your loans. Otherwise, you’ll be in violation of your loan terms and face devastating penalties.

    The idea with either of these methods is to allocate whatever funds remain to the single loan you have prioritized after paying the minimum on all loans first.

    8. Think about loan consolidation or balance transfers.

    Whether you have credit card debt, student loan debt, or even mortgage debt, you may have the option to consolidate each type of loan into a single loan. If you do your homework, you should end up with a lower overall interest rate and have only one loan payment to make each month.

    If you choose to go this route, make sure you fully understand the fine print involved.

    For example, if you’re thinking about consolidating your student loans, you’ll end up sacrificing certain loan forgiveness provisions that accompany federal loans.

    The same caveat applies when considering a credit card balance transfer. A balance transfer is when you move the balance from one credit card to a different credit card with a lower interest rate. Most major credit cards accept balance transfers from other banks’ credit cards.

    The main reason to consider a balance transfer is if the card you are transferring into carries a significantly lower interest rate than your current card. In some instances, you may even qualify for a promotional rate with no interest charged for a limited period of time.

    I used balance transfers when I was focused on eliminating credit card debt at the beginning of my career. I did my homework and found a card that was advertising 0% interest for 12 months with no balance transfer fees. That meant that for an entire year, I paid no interest. Every payment I made went directly to lowering my overall debt.

    If you’re considering a balance transfer, be mindful that there are usually upfront fees involved, usually around 3%. That fee may end up cancelling out any benefit from doing the transfer in the first place.

    9. Get a side hustle to help pay off debt on a budget.

    You’re not too busy or too important for a side hustle.

    At the end of the day, there are really only two ways to more quickly pay off debt on a budget: spend less money and/or make more money.

    We already talked about creating a Budget After Thinking to help on the spending side.

    If you really want to get rid of your debt faster, earning more money and the same time you’re spending less money is a dominate combination.

    If you take on a side hustle, you can use every dollar you earn to pay off debt. Since this is new money you’re earning, you shouldn’t need it to fund your Now Money or Life Money.

    Avoid the temptation of using that money on things you don’t really want anyways. Think about how much faster that debt will disappear if you’re able to throw additional money at it each month.

    If you’re not ready for a side hustle, the same logic applies anytime you earn a bonus or commission at your primary job. Put that money to good use by paying down your debt.

    10. Don’t let yourself fall backwards while you pay off debt on a budget.

    When you do succeed in eliminating a debt, don’t let yourself fall back into bad habits. It’s hard to pay off a debt. It takes time. It takes patience and discipline.

    Don’t let it all be for nothing.

    When you pay off a loan, celebrate that accomplishment!

    Be proud of yourself and let that good feeling motivate you to continue on your journey towards financial freedom.

    Before you know it, debt will be part of your past life. You can shift all your attention to the opportunities that comes next for you and your family.

    Let us know in the comments below:

    Have you used any of these strategies to pay off debt on a budget?

    What about any other strategies to pay off debt on a budget that have worked for you?

  • How to Responsibly Use Good Debt

    How to Responsibly Use Good Debt

    There may not be a more polarizing debate in personal finance than the concept of Good Debt vs. Bad Debt.

    “Good Debt” generally means loans used to acquire income generating assets, like rental properties or businesses.

    “Bad Debt” generally refers to consumer debt, which is personal debt owed because of buying things for personal or household use. For most people, this simply means credit card debt.

    Two absolute giants in the field, Robert Kiyosaki (of Rich Dad Poor Dad fame) and Dave Ramsey (maybe the most well known personal finance expert in the world), take opposite viewpoints.

    If you’d like to learn more about Kiyosaki, check out his website here. For more on Ramsey, click here.

    Before addressing their different opinions, it’s important to highlight that both Kiyosaki and Ramsey agree on a critical point:

    All consumer debt is bad.

    You’d be hard-pressed to find any personal finance expert who says that credit card debt is OK. I’d be concerned if you found anyone at all, expert or not, who seriously took the position that credit card debt is OK.

    We’ve talked about how this type of debt is scary and can drag down your finances. We also explored the three big reasons why people end up with credit card debt. The bottom line is you’ll never be truly financially free if you’re burdened by debt.

    A quick side note: There is some difference in opinion as to what else besides credit card debt qualifies as consumer debt. For example, is your primary home mortgage considered consumer debt? What about your student loan debt? I’ll give you my take below.

    Now, let’s take a look at how each Kiyosaki and Ramsey differ on Good Debt v. Bad Debt.

    Kiyosaki believes in the power of Good Debt.

    Kiyosaki argues that Good Debt is a powerful tool to generate consistent cash flow from investments. Kiyosaki defines Good Debt as debt that is used to buy assets like real estate or businesses that generate income.

    As long as the debt leads to positive income, it’s considered Good Debt. For example, Good Debt would include taking out a mortgage to buy a cash flowing rental property.

    Kiyosaki suggests that Good Debt can be responsibly used to quickly acquire more assets, even if the debt is considered a liability.

    To better understand the difference between assets and liabilities, check out our post on net worth.

    In Rich Dad Poor Dad, Kiyosaki discusses in detail how investors grow their wealth through the responsible use of Good Debt.

    Ramsey believes all debt is Bad Debt.

    Ramsey could not disagree more with Kiyosaki.

    If it were up to Ramsey, there would be no distinction between “Good Debt” and “Bad Debt.” All debt is bad and carries risks that will weigh on your emotions and drag down your net worth.

    Ramsey is adamant that debt should not be used as a tool to build wealth. He contends that a person’s income is the best way to consistently build wealth.

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

    So, where do I come out on the Good Debt v. Bad Debt debate?

    Kiyosaki and Ramsey are personal finance legends. There’s no right or wrong in this debate. I appreciate each of their viewpoints.

    Ultimately, what side of the debate am I on?

    I’m on Team Kiyosaki.

    When you responsibly use Good Debt, you can more quickly create income streams to accelerate your journey towards Parachute Money. However, if you’re struggling with consumer debt, taking on any additional debt, even Good Debt, is a bad idea.

    Like other real estate investors, my wife and I have experienced firsthand the power of Good Debt. In seven years, we have acquired four cash flowing rental properties (three in Chicago, one in Colorado) that add extra income to our personal balance sheet each month. Without that income coming in, our financial picture would look completely different.

    On top of that, we have benefited from appreciation with each of our properties, further increasing our net worth. Of course, appreciation is largely out of anyone’s control. Market conditions have been very favorable for us.

    Some people may condescendingly say that we’re just lucky. As bestselling author and thought leader Mel Robbins would say, “Let them think that!”

    Of course we’ve been lucky!

    That doesn’t change the fact that we acted on opportunities when others only talked. We lived in small apartments for six years with a growing family. We responded to tenants whether we were on vacation or it was the middle of the night. Above all else, we stayed disciplined, focused on our goals, and paid the bills even when money was tight.

    For these and so many other reasons, I believe in the responsible use of Good Debt to acquire cash flowing assets.

    Just because we’ve taken on debt doesn’t mean we don’t worry about it.

    All that said, Ramsey’s voice still rings in my ears when it comes to debt. Up to this point in our lives, my wife and I are comfortable with the Good Debt we’ve taken on to build our portfolio. Even so, we frequently think about Ramsey’s point of view and the valid debt risks he highlights.

    Even with the extra rental income coming in, we still feel the heavy burden of mortgage debt. That’s why our goal for 2025 is to prioritize eliminating as much mortgage debt as possible. While we are comfortable with a certain level of debt, we don’t ever want to be reckless.

    If you’re thinking about using debt to acquire assets, don’t ever ignore the heavy emotional toll that debt will have on you. Just as importantly, if you’ve struggled with debt in the past, be careful about going down that road again.

    It’s easy to get blinded by the potential cashflow of an investment while ignoring the accompanying debt. Long before you ever sign the loan documents, make sure you’ve done your homework and thought hard about what it’ll take to pay that loan off.

    What about primary residence mortgage debt and student loans?

    I mentioned that I would share my perspective on whether debt to buy a primary residence or student loan debt is Good Debt.

    I think both should absolutely be considered Good Debt.

    This is one area where Kiyosaki and I don’t agree.

    Why I consider a primary home mortgage Good Debt.

    Kiyosaki favors using Good Debt to buy assets, meaning investments that put money in your pocket. A primary home does not put money in your pocket, so Kiyosaki would not recommend using debt for this purchase.

    He’s not alone in this viewpoint. Many smart people think it’s financially foolish to buy a primary residence instead of renting. For an in-depth analysis on the question of buying vs. renting, check out this video from Khan Academy.

    I don’t agree with this viewpoint. For most of us, our primary residence is the best way to build generational wealth for our families. This is not my personal strategy for building wealth. That said, I understand that this strategy is how most of us do build wealth.

    Besides just wealth building, I appreciate more than ever how owning a home can be emotionally beneficial. Since we moved to our longterm home, I’ve already experienced the psychological benefits of establishing roots and feeling connected to a community. After bouncing around apartments in Chicago for nearly 20 years, I can tell you that it feels good having a permanent home.

    So, I consider a primary home mortgage Good Debt. For similar reasons, unlike Kiyosaki, I recommend including your primary residence in your net worth.

    Why I consider student loans Good Debt.

    I also disagree with Kiyosaki on whether student loans count as Good Debt.

    I don’t want to put words in Kiyosaki’s mouth, but his perspective seems mostly shaped by how he feels about the modern educational system in this country.

    How exactly does he feel about our education system?

    He… hates it.

    All things considered, it makes perfect sense that he thinks student debt is Bad Debt.

    I don’t agree. I’m grateful for my education through law school. I learned how to think and solve problems. I learned how to challenge myself and do hard things. I think this is true for anyone that goes to school and takes it somewhat seriously.

    I’m not discounting Kiyosaki’s point that maybe the system needs fixing. Regardless, I believe that education opens doors, whether that’s through connections made along the way or licenses earned (like the license to practice law).

    From my perspective, debt incurred to pay for that experience and training is well worth it.

    If that wasn’t enough, the data shows highly educated people earn more money. In fact, men with graduate degrees earn $1.5 million more over a lifetime than those with only high school degrees. That’s another reason why I consider an investment in yourself through student loans Good Debt.

    Are you Team Kiyosaki or Team Ramsey?

    Maybe you feel there is such a thing as Good Debt. Maybe not. Either perspective is completely valid.

    In the end, can we at least all agree that credit card debt is always bad debt?

    Are you Team Kiyosaki or Team Ramsey?

    Let us know in the comments below.

  • Three Big Reasons Why You’re in Debt

    Three Big Reasons Why You’re in Debt

    “Live below your means.”

    “Money doesn’t grow on trees.”

    “Don’t break the bank.”

    We’ve all heard these common money phrases. If you were to ask someone older than you for one piece of personal finance advice, I’m betting you’ll hear one of these lessons. Let me know if I’m right about that in the comments below.

    There’s a reason these phrases are so common. They’re simple and easily reflect some of our core personal finance principles. In fact, we’ve covered these concepts in detail in earlier posts:

    Like many personal finance concepts, it’s not too challenging to understand the meaning of these phrases.

    Most of us understand that it makes sense to spend less money that we earn, right?

    How many of us remember rolling our eyes as kids after our parents wouldn’t buy something we wanted because “money doesn’t grow on trees”?

    Does anyone truly disagree with these lessons? If so, I’d be very appreciative to hear your perspective in the comments below.

    Assuming we’re in relative agreement on these philosophies… what am I getting at?

    I’ll answer that with a question of my own:

    Why is it that we can all agree with these core personal finance lessons and at the same time choose to ignore them?

    For example, we intuitively know that we should live below our means, but nearly half of us carry a credit card balance.

    On top of that, hardly any of us are completely satisfied with our savings.

    It’s not that we want to have high debt and low savings. So why is this the reality for so many of us?

    I have 3 main theories why we fall into debt.

    There are countless theories on why people end up in debt. I have three primary theories. Looking at each of these explanations can help us understand and avoid common pitfalls that lead us into debt.

    1. We fall into debt because we are simply careless.

    When I struggled with debt at the beginning of my career, it was basic carelessness.

    I didn’t have any idea how to budget or make intentional choices with my money. I had never thought about why or how to be good with money.

    Like many people, I failed to create a budget and assumed that my W-2 income was plenty. I ignored emergency savings and never even thought about creating Parachute Money.

    The saddest part is that I didn’t even realize that I was slipping backwards. I had no idea because I didn’t track my net worth or savings rate. I worked hard all year long and just hoped things would work out.

    By the way, if this sounds familiar, you should know by now I’m not judging anyone. I’ve been very open about my money mistakes. We all deserve a chance to learn about and talk about strong personal finance habits.

    That’s why I’m on a mission to flip the script: talking money is not taboo.

    2. We don’t plan ahead for emergencies.

    So, being careless with money is one common reason people fall into debt. Another common reason is that bad things happen in life.

    This might include medical emergencies, home repairs or car troubles. It’s not our fault that these things happen. But, it is our fault if we’re not prepared in advance. 

    While these events are unfortunate, and maybe even tragic, they are not unexpected. We all need to expect that bad things will happen.

    Preparing for the unexpected is part of every solid organization’s planning. In government, planning ahead means having a “rainy day fund.”

    When managing properties, planning ahead for big repairs means having a “Capital Expenditures” or “Cap Ex” fund. For our personal finances, planning ahead means having an emergency fund.

    Whether it’s government, business, or personal finance, the goal is to have options other than taking on debt to get through challenging circumstances.

    3. Blame the Kardashians.

    Besides carelessness and emergencies, there’s another powerful force that contributes to rising debt levels across the world. This force is nearly impossible to ignore. It’s become a part of our daily lives, whether we want to admit it or not. 

    What is this powerful force that contributes to our rising debt levels?

    The Kardashians.

    OK, not just the Kardashians, but they’re kind of the mascots.

    The era of social media and on-demand entertainment has made it harder than ever to avoid temptation. It’s everywhere we look.

    Blaming the Kardashians realtes to another timeless, common money phrase: “Keeping up with the Joneses.”

    The Kardashians are the modern day Joneses.

    Once upon a time, “the Joneses” represented your neighbors, people you could observe from a distance on a regular basis. The idea behind the phrase is that you can see what your neighbors are spending money on and are either consciously or subconsciously tempted to do the same.

    If your neighbors buy a new car, you buy a new car to keep pace. If your neighbors vacation in Australia, you research diving tours at The Great Barrier Reef. When you notice your neighbors hosting a backyard BBQ party with lots of happy looking people, you decide to host a party the next weekend.

    As humans, it can be difficult to ignore the temptation to keep up with our neighbors. Whether we like it or not, we are concerned with our social status. Part of our self-worth gets tied to comparing ourselves to others.

    Who better to measure up against than the people in our neighborhood who we probably have a lot in common with?

    This same idea is oftentimes compounded in the professional setting. It is not uncommon to compare ourselves in the same way to our colleagues at the office.

    Some professions heighten the pressure to keep up. Have you ever noticed that real estate agents seem to always drive nice cars? Or, big city lawyers wear fancy suits? It’s easy to get caught up in expensive tastes when you’re expected to fit in.

    One of my favorite personal finance books, The Millionaire Next Door, discusses this concept in detail. I highly recommend you read this book if you are struggling with comparing yourself to others.

    What does this all have to do with the Kardashians?

    In today’s world dominated by social media and the internet, we’re no longer influenced just by our neighbors or colleagues. We’re now influenced by people throughout the world. That could mean friends or complete strangers.

    Instead of just learning your neighbors went on vacation, now you know when anyone in your circle is on a trip. At any moment, you may be on the train in 12 degree weather heading to work. One look at your phone and you’ll see plenty of wonderful pictures of people doing cool things. It’s hard to not want that for yourself.

    The byproduct of social media and the internet is the never ending temptation to spend money. Even if that means spending money we don’t have. That’s a powerful force pushing us deeper into debt.

    I am fighting this temptation in my life right now. Having moved to a new home not long ago, there are so many things we want to buy and projects we want to do. I need to constantly remind myself to slow down so I don’t again fall victim to consumer debt.

    So, what’s the solution? 

    Deactivate social media? Cancel the internet?

    Nah. If you did that, you’d miss out on epic Instagram reels like this one where I share my top five favorite personal finance books.

    Instead, the first part of the solution is to recognize when you’re making careless money decisions based on what you think other people are doing.

    Making money decisions based off of your neighbors, let alone the Kardashians, is the fast road to debt. You have no idea why or how another person is spending money. For all you know, it’s all for show and that person is barely getting by.

    Do you really want to blindly follow this person’s choices? Wouldn’t it be better to confer with people you trust to help you think through money decisions? 

    The second part of the solution is to recognize that everywhere you look, companies are clamoring for your dollars.

    Not an exaggeration: nearly $2 Trillion (with a ‘T’) of marketing dollars are spent worldwide each year with one goal in mind: to separate you from your money.

    Digital Marketing Technology Solution for Online Business Concept - Graphic interface showing analytic diagram of online market promotion strategy on digital advertising platform via social media, leading to us spending more money and sinking into debt as learned on Think and Talk Money.

    If you let that reality sink in, you’ll hopefully pause the next time you’re about to spend money on something you don’t actually care about.

    This is where we circle back to money mindset.

    To counteract social media and mass marketing, you need to have a competing force in your life that’s strong enough to overcome all the noise.

    I’m referring to your ultimate goals in life. I mean the reasons you wake up every morning to go to a job or stay up late to finish a project.

    Why are you working so hard?

    When you can answer that question, you’ll know what your ultimate goals are in life. With those goals in the forefront of your mind, it’s much easier to make consistent, intentional money decisions. 

    Most importantly, you’ll stay on budget and avoid sinking into debt.

    You’ll also be much happier when you stop worrying about what random strangers are spending money on.

  • Scary Stats to Know about Debt

    Scary Stats to Know about Debt

    My four-year-old daughter created a game recently that I’ll call “The Raise Your Hand Game!”

    At random times, she’ll say something like, “Raise your hand if you have an ‘M’ in your name!”

    I raise my hand. Refusing to play along is not an option.

    With my hand in the air, she’ll nod in approval that I participated and didn’t lie.

    That’s the whole game.

    Let’s play. I’ll be the host.

    “Raise your hand if you currently have debt!”

    Come on, play along. Get those hands up.

    Nearly 80% of you should have your hand in the air.

    Yup, 8 out of 10 of us have some form of debt. Put another way, just about everyone reading this post has debt. That’s why learning to effectively deal with debt is a core personal finance concept.

    For the next couple of weeks in the blog, we’re going to focus on debt so we can continue our progress towards financial independence.

    Those of us who can successfully eliminate debt will move closer and closer to financial independence.

    Those of us who don’t want to learn will remain debt’s financial prisoner.

    As we begin our discussion on debt, let’s start with some scary statistics.

    According to the Federal Reserve Bank of New York, total household debt in the United States grew to $18.04 trillion by the end of 2024. That’s such a big number, it’s hard to know what to do with that information.

    Let’s break it down by the type of debt:

    • Credit card balances increased by $45 billion from the previous quarter and reached $1.21 trillion at the end of December 2024.
    • Auto loan balances increased by $11 billion to $1.66 trillion.
    • Mortgage balances also increased by $11 billion and reached $12.61 trillion.
    • HELOC balances increased by $9 billion to $396 billion.
    • Other balances, reflecting retail cards and other consumer loans, increased by $8 billion.
    • Student loan balances increased by $9 billion to reach $1.62 trillion.

    While these numbers are still too big to comprehend, one powerful conclusion is hard to miss:

    In every category, the amount of debt increased from the previous quarter.

    This pattern of increasing consumer debt has been consistent for some time now. HELOC balances have increased for eleven consecutive quarters. Credit card balances have increased or remained the same for 10 of the last 11 quarters.

    Now, let’s look at the statistics on a per household basis.

    Per household, we see the same picture of increasing consumer debt in the United States.

    According to an Experian report that compared consumer debt per household from 2023 to 2024, we see that:

    • Credit card balances increased 3.5% to $6,730.
    • Auto loan balances increased 2.1% to $24,297.
    • Mortgage balances increased 3.3% to $252,505.
    • HELOC balances increased by 7.2% to $45,157.
    • Student loan balances actually decreased by 9.2% in 2024 to $35,208. This one’s an outlier due to federal loan forgiveness programs.

    Let’s look closer at credit card debt for a moment.

    According to a recent survey looking at credit card debt in 2024 by Bankrate.com:

    • 48% of credit card holders carry a debt balance, an increase of 9% since 2021.
    • 53% of the people have been in credit card debt for more than a year.
    • The main causes of credit card debt are unexpected medical bills (15%), car repairs (9%) and home repairs (7%).

    According to another Bankrate.com survey, 33% of Americans report they have more credit card debt than emergency savings.

    These last couple stats helps us begin to understand why so many people fall into debt in the first place. It goes back to our previous conversation about the importance of emergency savings. When we don’t have savings, the first place we turn is to our credit cards.

    Consumer debt is a worldwide problem.

    While the above statistics are specific to the United States, you’re not off the hook if you live elsewhere. In fact, the data in your nation may be worse.

    Any readers in Denmark, Norway or Switzerland?

    According to a recent study by Compare the Market, these three nations lead the way with the highest household debt. The same study ranked the United States at number 18.

    What can we learn from these scary debt statistics?

    Whether we look at the national figures or per household numbers, the picture is clear.

    Worldwide, we have a consumer debt problem. And, it’s getting worse.

    For most of our conversation on debt, we’ll focus on credit card debt. Most everyone agrees this is the worst kind of debt to have. It’s also the type of debt that’s the most relatable applicable to many of us, regardless of where we are in our careers.

    Before we go any further, it’s important to understand the two main reasons why I share studies like these about debt.

    1. If you are currently in debt, please know that you are not alone.

    These scary stats make it abundantly clear that many of us are struggling with debt. You probably don’t know if your friends and family are in debt because we’ve been brainwashed not to talk about money.

    As you know, I’m on a mission to change that.

    Nearly half of us in America are burdened with credit card debt. And yes, it is a heavy burden. There’s no sense in trying to convince yourself that you’re not worried about it.

    The good news is there are proven strategies for getting out of debt that we will learn in upcoming posts.

    These strategies are not hard to implement, but they are challenging to stick with. Temptation to overspend is everywhere. To succeed in eliminating your debt, you need to have strong motivations.

    Personal finance always come back to your money mindset. Just like with budgeting, I can give you proven techniques and strategies.

    If your money mindset is not in the right place, it won’t matter. You’ll stay in debt, or worse, your debt will continue to increase.

    2. If you think you are immune from falling into debt, think again.

    When we are presented with statistics like this, it’s not uncommon for us to be in denial. We might say to ourselves:

    “No, I understand that other people are in debt. But, that won’t happen to me.”

    Or, “No, I make good money. I can pay off my credit card debt if I really wanted to.”

    If it were really that easy, then why do half of Americans carry credit card debt? Why is our credit card debt growing instead of shrinking?

    You may not currently be in credit card debt, and that’s a very good thing. But, what if one of those emergencies mentioned above surfaces in your life?

    • If you were hit with a large, unexpected medical bill, could you cover it without credit cards?
    • What if your roof needs to be replaced? Or, your furnace breaks during the middle of winter? Do you have tens of thousands of dollars saved to cover these necessary expenses?
    • Do you own a car? How awful is that annoying “Check Engine” light? A simple trip to the mechanic could be another few thousand dollars out of your pocket.

    These types of financial emergencies do not discriminate. Each one of these situations could happen to any of us at any time. Let’s not forget that 90% of us are not completely satisfied with our savings. That means almost all of us would have to turn to credit cards to cover these emergencies.

    Credit cards, close up, illustrating on Think and Talk Money that too many people worldwide have some form of debt.

    Ending up in debt might come as an unpleasant shock to you. Knowing these statistics will hopefully put your mind at ease that you’re not alone.

    So, even if you’re comfortable in your job and make good money, you may still end up in debt. If you do end up in debt, the lessons we’ll soon learn will ensure that your stay in the financial penalty box is as short as possible.

    In our series on debt, we’ll soon learn:

    • How in today’s world of social media, “Keeping up with the Joneses” is really more like “Keeping up with the Kardashians.”
    • There is a difference between “good debt” and “bad debt.” When used responsibly, good debt can help you reach your financial goals faster.
    • Paying off debt is hard. It’s heavy. It’s stressful. There’s no shame in admitting that. Just because it’s hard, doesn’t mean we can ignore it any longer.
    • The top strategies to pay off debt as efficiently and painlessly as possible.

    Whether you currently have debt or smartly want to be prepared just in case, our series on debt is crucial for anyone seeking financial independence. There is no faster way to undue all your hard work than to fall into debt.

    You don’t need me to tell you that debt is a major barrier to reaching financial freedom. In fact, debt is oftentimes the exact opposite of financial freedom.

    When you have debt, your choices are limited. It’s like you’re in financial prison. When you are free of debt, you are in control.

    Learning about handling debt does not have to be depressing or scary. When we talk it out together, I think you’ll find that you’re not alone. Like with all hard things, there’s no point in struggling by yourself.

    Hands in the air. We got this.

  • Money on My Mind: Capital One Edition

    Money on My Mind: Capital One Edition

    From time to time, I’ll post about current events and news I come across that adds to our recent discussions.

    In today’s post, we’ll talk about Capital One’s alleged deceptive practices, rising credit card balances, and how much we should save for retirement.

    Like with our Q&A posts, please leave a comment below, email me, or reach out on the socials if there are any stories you’d like to discuss here.

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    Let’s start with recent news that impacted me personally.

    A reminder to consistently evaluate your banking relationships.

    For a long time, I used Capital One for all my savings accounts. When I started law school in 2006, there was a Capital One cafe right next to my school. You could get a cup of coffee for $.75 and talk to a banker at the same time. It was a cool concept and convinced me to bank with Capital One.

    I told everyone about how great Capital One was. I had Capital One savings accounts and a Capital One credit card. You could say I was a huge Capital One fan.

    Key word: was.

    In November 2023, I had been a loyal Capital one customer for 17 years. This was during the time period when interest rates on savings accounts were rising dramatically. Many banks were advertising rates as high as 4% or 5%, which were higher than most of us had ever seen.

    One day that November, for whatever reason, I logged into my Capital One account to see what rate I was earning. I was sure it would be in the 4% range, and probably closer to 5%, since Capital One was a leader in online banking.

    When my statement loaded, I was shocked.

    0.30%!

    Shocked probably isn’t the right word. I was disgusted.

    0.30% in 2023 might as well have been 0.0%… from a bank that had been a leader in online savings accounts that I had banked with for 17 years.

    What the heck happened?

    Capital One, unbeknownst to me, switched my savings from its high interest platform into an account with the much lower interest rate. At the same time, Capital One was still advertising and offering top rates to new customers.

    It wasn’t just me. I am one of the many people that Capital One switched out of high interest rate savings accounts into inferior products. These deceptive practices are now the subject of a federal lawsuit brought by the Consumer Federal Protection Bureau.

    Dishonest word or phrase in a dictionary symbolizing how Capital One treated its customers by switching us to lower interest accounts.

    When I discovered the sneaky switch, I immediately closed all of my accounts and transferred my money to a new bank. I no longer have a Capital One credit card, either.

    Capital One, of course, denies the allegations. Maybe they did nothing legally wrong. For me, I saw the deceit in my own statement and the damage was already done.

    Why do stories like Capital One’s alleged deceptive practices matter?

    It wasn’t the amount of interest I lost out on that bothered me.

    This all happened during that time we talked about when my wife and I were aggressively acquiring properties, so we never had a lot of money sitting in savings for an extended period.

    For me, it was about the principle. I don’t want to have any relationship with a bank that would do that to its customers, especially long-term customers like me.

    That said, I have to admit that writing this post is reopening old wounds.

    I did a quick search in my inbox and found a Capital One statement from December 2022 showing a 0.30% interest rate. That means Capital One had deceived me for at least a year before I caught on.

    Now I’m getting hot all over again.

    “Take a deep breath,” as my son says to his sister when she’s crying.

    On the bright side, this experience was a good reminder of how important it is to look at our accounts regularly.

    You could also say it’s a good reminder to regularly think and talk about money so something like this doesn’t happen to you.

    No matter how much you trust your bank, keep an eye on your accounts.

    Americans are spending more on credit cards and carrying bigger balances.

    The Wall Street Journal reported this week that Americans are spending more on credit cards and carrying higher balances month to month.

    As The WSJ notes, “Bigger credit-card balances mean people are paying more in interest charges, with rates hovering around their highest levels on records. The average credit-card rate was around 21% late last year, according to data from the Federal Reserve.”

    These findings are consistent with a recently published study by The Federal Reserve reporting that consumers are using credit cards more often when compared to cash transactions.

    Higher credit card balances combined with more frequent credit card use is a problematic combination.

    I am no stranger to carrying a credit-card balance. These reports don’t come as a shock to me. Especially in an era where the cost of living is rising so sharply everywhere.

    It’s because I’ve personally felt the negative emotions tied to credit card debt that I never like seeing stories like these.

    Indoor shot of unhappy young lady using mobile phone in front of laptop and analyzing home finances and credit card bills.

    I understand that some people don’t have options besides using credit cards because of life circumstances. I’m hopeful that through money wellness education, more and more people will realize that they do have options.

    I’m not saying it’s easy. But, there is a path forward. You can create a money plan that is consistent with your life goals and does not include high-interest debt.

    How much money should you have saved for retirement by age 50?

    Investopedia recently summarized reports from three major 401(k) providers on the average balances people have in their 401(k) plans. These articles can be helpful to measure your progress. Just be careful on what you take away from them.

    We all have different goals in retirement. That could mean when we hope to retire. Or, how we plan to spend our money in retirement.

    Plus, some of us have different investments, such as real estate holdings, that would not be reflected in studies like this.

    For many of the same reasons that I’m not a fan of a rigid 50-30-20 budget framework, I don’t find these types of comparisons too helpful. I prefer we strive for personal improvement, like fitness instructors have been teaching us for years.

    Let’s look at one of the potential issues with articles like these. Empower reports that the average balance for someone in their 50’s is $592,285, and the median balance is $252,850.

    That’s a big difference. Let’s refer back to high school math (ok fine, Google) for a refresher on what “average” and “median” are.

    The average balance is calculated by adding up everyone’s account balance and dividing by the total number of people. The median reflects the middle account balance if we list everyone’s balance from smallest to largest.

    Using Empower’s data, the average balance seems skewed on the high side. This is likely because of a subset of high net worth individuals driving the average up. The median value is probably a more informative number for the average American.

    Let’s put this all another way. Whether my colleague has $50,000 saved or $500,000 saved should not impact my retirement planning. The amount he has saved doesn’t matter to me.

    Instead of talking about his numbers, I can still benefit from talking to him about his goals. I should be talking to him about his money mindset, like what motivates him to save in the first place.

    Am I saving too little or too much for retirement?

    Since 2011, I’ve represented individuals with mesothelioma, a terminal cancer caused by exposure to asbestos. Most of my clients are in their 70’s and don’t get the chance to enjoy their retirements because of their mesothelioma.

    My perspective on work, family, and life has undoubtedly been shaped by visiting with my clients in their homes and talking about their life experiences. I am forever grateful for what I have learned in these moments.

    When I see stories like this one from The WSJ about the financial regrets of people over age 80, I pay attention. I read these stories about people who are living longer than they expected and can’t help but think of my clients with mesothelioma who won’t have that same experience.

    I also think about Bill Perkins and his excellent book, Die with Zero. You can read more about Perkins and his philosophy that many of us are saving too much for retirement on the Die with Zero website.

    For my own money decisions, I’m still sorting out these three competing realities:

    1. Some people, like my mesothelioma clients, don’t get to enjoy a full retirement;
    2. Others outlive their money in retirement; and
    3. Still other people saved more than they’ll ever spend in retirement.

    My main takeaway is that I want to make choices today that allow me to spend more time with the people I love and more time doing the work that I love. However those three realities play out in my own life, I’m confident I won’t regret living this way.

    This mindset is what led me to start Think and Talk Money. I enjoy helping people think through these types of choices.

    Please help me spread the word about Think and Talk Money so more of us can consider these important concepts.

  • You will Easily Know and Feel Money Well Spent

    You will Easily Know and Feel Money Well Spent

    Coming up, we’re going to do our first Q&A post where I’ll answer questions from readers. So many good questions have already come in. Please keep them coming! Leave a comment below, subscribe to our newsletter, or find us on Instagram.

    One question we already received was so good, I’ve answered it here in a dedicated post. The question came from someone that I love to talk money with. He read the Think and Talk Money Welcome Post where I mentioned that my credit card debt was partially due to having Chicago Cubs season tickets.

    He knows that I’m a big Cubs fan and asked me if I would I really trade all those great experiences and memories just to save money.

    It’s such a good question because it points to the intersection of money and life. It took me all of two seconds to know and feel the answer was, of course, “No, I would not have given up my Cubs tickets.”

    He was absolutely right. If I gave up my tickets in 2010 when I was struggling with debt, I never would have been in the stadium in 2016 with my family for the Cubs’ World Series run. Those are some of the best memories I have.

    In hindsight, I would have done some things differently so I could enjoy the experiences without the money worries. Let’s talk about that.

    But first, story time.

    Our nice friends, Phil and April.

    Throughout that World Series run, we sat next to the nicest couple in the world, Phil and April. Phil was a diehard Cubs fan. April was more reserved. Both were smart and very friendly. They were enjoyable people to sit with. We chatted baseball, mostly. Pitching changes. Send the runner. Question the manager. That sort of thing. Completely normal, unremarkable stuff.

    Until Game 5.

    Game 5 was played on a crisp, October evening. Jackets and beanies weather in Chicago. Phil and April were sitting next to my brother and I, as usual. Mike Napoli was playing first base for Cleveland.

    Around the 3rd inning, a jerk four rows in front of us taunted Napoli with a crude, juvenile insult. It was apparent the jerk was doing his part to keep Old Style in business for another year.

    Phil was nice…and tough.

    Anyway, the rest of our section was none too pleased with the jerk’s shameful display. Nobody was more displeased than Phil, who did what the rest of us were thinking but were too scared to do ourselves. Phil stood up. In so many words, Phil sternly recommended that the jerk knock it off and show some class.

    The jerk turned around, aggressively scanning the crowd for the man who had publicly shamed him. The jerk had that unmistakable look in his eye that meant, “Let’s dance.” My brother and I were a bit worried for our nice… and all of a sudden tough…friend, Phil.

    April did not look worried. She sat there like nothing strange was happening. Almost like she had seen this movie before.

    When the jerk locked eyes with Phil, he immediately saw that Phil was happy to accept the invitation to tango. Well, the jerk was sloppy, but he had enough sense to recognize that he wanted no piece of Phil. He wisely turned back around and sat down quietly.

    That was the last we heard from the jerk that night. Our nice, and now confirmed tough friend Phil had restored order.

    Phil’s on TV!

    On the day of the Cubs’ championship parade, my brother called me excitedly, “Phil’s on TV! Phil’s on TV!” It didn’t register right away who he was talking about. When I turned on the TV, sure enough, there was Phil, our World Series friend. I was so confused. Phil was giving an interview on set with the Cubs announcers. Our nice (and tough) friend, Phil? On TV?

    I turned up the volume and listened to Phil talk about his experience watching the Cubs win the World Series. Maybe I was hoping he’d mention his nice friend, Matt. He didn’t.

    I still couldn’t figure out why Phil was on TV. Why won’t they just put his name on the screen already!?

    It wasn’t until the end of the interview that I learned who Phil was. All I could do was laugh.

    Our nice, and confirmed tough, friend Phil is better known as World Wresting Entertainment (WWE) champion and icon, CM Punk.

    His wife? WWE champion and bestselling author, AJ Mendez.

    Life, huh?

    A memory I wouldn’t trade for anything.

    As much fun as the World Series was, my favorite Cubs memory actually took place during the 2015 season, the year before they won the World Series. It was during the 7th inning of Game 4 of the NLDS. This was the game where the Cubs knocked the rival St. Louis Cardinals out of the playoffs.

    In the 7th inning, with the Cubs up 5-4, Kyle Schwarber hit one of the most epic home runs in Cubs history, landing his moonshot on top of the new right field video board. It was such a feat, the ball is now enshrined where it landed.

    The entire stadium was rocking so loud, you could feel the ground shaking beneath your feet. Every fan was jumping up and down, hugging anyone close enough to touch. We were all dancing like nobody was watching. That moment was pure happiness.

    I was there with my mom. A lifelong Chicagoan, she too was jumping up and down and high-fiving all the other diehard fans in our section. After the game, we met up with my wife at a restaurant and relived the victory over Champagne.

    What does this have to do with money?

    What does any of this have to do with money? When I said money was emotional, this is what I meant. I wouldn’t trade that memory with my mom for anything. My brother and I still joke about our nice friends, Phil and April.

    These are the types of experiences that I want more of. These memories, and the desire for more like them, continue to motivate me today. I want to be good with money, not so I can stash it in the bank, but so I can use that money to create joy for me and my family.

    So, to get back to my friend’s question. Would I really have given up my Cubs tickets? No, absolutely not.

    What would I have done differently to keep the tickets but not the worries?

    In hindsight, what could I have done differently so my Cubs tickets were not a major source of financial worry?

    Even back then, I knew and felt that spending money on Cubs tickets was money well spent. I didn’t need to wait for hindsight to come to that conclusion.

    That said, I would have put more thought into solutions to keep the tickets and the experiences without the debt and the shame. I would have looked at expenditures in my Now Money and Life Money buckets that were ripe for adjustment.

    Maybe that would have meant giving up something else less meaningful, like my gym membership. Or, I could have looked into a side hustle as a way to earn more money, something we’ll explore at another time.

    Whatever the solution was, I would have been more intentional with my decisions so my experiences were not overshadowed by my worries.

    Talking money is really just talking life.

    This was such a good question to illustrate a foundational concept of Think and Talk Money. Yes, we discuss money. But, we’re really talking about our lives and our experiences. Money is just a tool to help us.

    And before you get cynical on me, of course money is not required for good experiences. That’s not the point. What I’m suggesting is that if you’re spending most of your time each week at your job, like most of us do, shouldn’t we think about the money we earn so we can maximize experiences like I had with my mom?

    Think and Talk Money is all about awakening that thought process so we can use the tool of money to fuel meaningful lives. Would you use that tool to get you Cubs tickets? Or, do you prefer trips to Disney World? What if money is just the currency that you trade to get your time back, so you can do more of what you want with who you want?

    Whatever it is that you’re after in life, thinking and talking about money will help get you there.

    Keep the questions coming!

  • How to Budget with a Real Life, Really Lost, Boy

    How to Budget with a Real Life, Really Lost, Boy

    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 MoneyBaseline BudgetBudget 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

    Two happy girlfriends looking on the shopwindow while standing with shopping bags near the mall because they created a budget with think and talk money

    Life Money is what you spend every month on things and experiences in life that you love.

    Life MoneyBaseline BudgetBudget 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

    happy family mother father and children dancing at home in their home they bought by budgeting with think and talk 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 MoneyBaseline BudgetBudget 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 BudgetBudget 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.