Tag: debt

  • 10 Student Loan Tips for Lawyers and Professionals

    10 Student Loan Tips for Lawyers and Professionals

    Student loans are…heavy.

    That’s it.

    They’re. Just. Heavy.

    They’re a weight that we carry around long before we even make the first repayment. Sometimes that weight feels so heavy, it’s hard to imagine it ever going away.

    And as much as we wish we could, we can’t ignore our student loans.

    One way or the other, we have to get rid of them.

    And when we do get rid of them for good, there might not be a better personal finance feeling in the world. Personally, I’ll never forget the day I made my last payment and shared the news with my future wife and family.

    To help you have that same feeling of accomplishment, here are my top 10 student loan tips for lawyers and professionals.

    Top 10 Student Loan Tips for Lawyers and Professionals

    1. Locate all your loans.
    2. Sign up for automatic payments.
    3. Do not miss a payment.
    4. Consider using Debt Snowball or Debt Avalanche.
    5. Make an extra monthly payment.
    6. Create a BAT that generates fuel for your student loans.
    7. Make more money and use that money for your loans.
    8. Take a tax deduction and use your tax refund for your loans.
    9. Consider a loan consolidation.
    10. Look for ongoing scholarship opportunities.

    1. Locate all your loans.

    As a first step, be sure that you are aware of all of your loans. Most people end up needing both federal loans and private loans, which are not tracked by the same loan servicers.

    Additionally, you may have taken out different types of loans at different stages of your education. It’s not uncommon to forget about some of those loans.

    Before you can implement a thoughtful strategy to pay back your loans, you need to ensure that all of your loans are accounted for.

    The best place to locate all of your loans is on your credit report. The next best option is to ask your school’s financial aid office.

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

    You are entitled to receive a free copy of your credit report from each of the three main credit reporting agencies every year. To do so, simply visit annualcreditreport.com.

    For federal loans, you can also check online at studentaid.gov. But, your private loans won’t be tracked by the federal government at studentaid.gov.

    Besides checking your credit report, you can access all your private loan information from your loan servicer.

    Once you’ve identified all your loans, you can implement a strategy to pay them off efficiently.

    2. Sign up for automatic payments.

    By signing up for auto pay, you can save .25% interest on your federal loans. Many private loan companies also offer a .25% discount for using auto pay.

    Over time, those savings will add up. And, there’s really no downside to you.

    In fact, you should be using automatic payments even if your loan servicer does not offer a discount.

    When it comes to paying back loans or achieving any other financial goal, automating your money is a very good idea. In The Automatic Millionaire, David Bach thoughtfully explains how the single step of automating your finances can help you achieve all of your financial goals.

    You can learn more about Bach’s philosophy on his website.

    I personally implement many of Bach’s strategies in my own life. I used to automate my student loans payments. Now, I automate my mortgage payments. 

    The Automatic Millionaire is definitely worth a read.

    3. Do not miss a loan payment.

    You know that expression, “Act now, apologize later”?

    That absolutely does NOT apply to loan payments.

    No matter how responsible or well-intentioned you are, sometimes life happens. Whether it’s technically your fault or not, a missed loan payment is a big problem.

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

    Pieces of wood with message fair and unfair on wooden background illustrating one of the 10 student loan tips for lawyers and professionals is to not miss a payment.

    Because the consequences of a missed payment are so severe, this is another reason why setting up auto payments is such a good idea.

    If you know ahead of time that you won’t be able to make a payment, it is imperative that you notify your loan servicer ahead of time. Your loan servicer may be able to work with you and figure out a solution before major consequences set in.

    4. Consider using Debt Snowball or Debt Avalanche to pay off your student loans.

    When you apply the Debt Snowball strategy, the idea is to focus on the loan with the smallest balance first, regardless of interest rate.

    Once you have paid off the first loan in full, you move to the loan with the next smallest balance, again regardless of interest rate. The money you had been paying to the first loan can now be rolled into the second loan.

    When you apply the Debt Avalanche strategy, the idea is to prioritize the loan with the highest interest rate, regardless of the balance.

    Once you’ve paid off the loan with the highest interest rate, you move to the loan with the next highest interest rate. Just as before, the money you had been paying to the first loan can now be applied to the second loan.

    Either approach works perfectly for paying off multiple student loan balances. Regardless of which method you choose, always pay the minimum required amount on all loans every month.

    For more on the pros and cons of each method, check out our deep dive on Debt Snowball v. Debt Avalanche.

    5. Make an extra monthly payment for massive savings.

    You may be surprised how big of an impact even a small additional payment each month can have on your loans.

    Let’s look at an example.

    Let’s say you owe $100,000 in student loans and currently pay back $1,250 per month with an 8% interest rate.

    Using calculator.net, you learn that at this pace, it will take you 9 years and 7 months to pay off your loans. You’ll pay back a total of $143,377.94.

    Student loan calculator illustration showing the power of one additional monthly payment as part of Think and Talk Money's 10 student loan tips for lawyers and professionals.

    Now, let’s imagine you are able to pay back an additional $100 per month.

    Look what happens:

    Student loan calculator showing the power of one additional $100 monthly payment as part of Think and Talk Money's 10 student loan tips for lawyers and professionals.

    You can eliminate your loans an entire year sooner and save $5,040.13 in interest payments. Just with an extra $100 per month!

    What about if you are able to pay back an extra $250 per month?

    This is when I start to get excited.

    Check this out:

    Student loan illustration showing the power of an additional $250 monthly payment as part of Think and Talk Money's 10 student loan tips for lawyers and professionals.

    For just $250 per month, you can knock off 2 years and 2 months of loan repayments and save $10,684.35 in interest!

    Think about how good it will feel to get 2 years and 2 months of your life back without loan payments.

    How are you supposed to come up with an extra $100, $250, or more per month?

    I’m glad you asked.

    6. Create a Budget After Thinking that generates fuel for your student loans.

    If you want to pay off your student loans faster, you really only have two options.

    The first option is to create a Budget After Thinking that prioritizes loan repayment. One of the key purposes of budgeting is to generate fuel for your future goals, including eliminating student loan debt.

    Instead of letting your hard-earned dollars disappear, put them to good use. Even $100 a month can make a big difference, as we just saw.

    If you’re having a hard time generating additional fuel for your student loans, check out my 10 Tips to Win the Budget Game.

    So, the first option to pay off your loans faster is to create a budget and spend less money elsewhere.

    What’s the second option?

    7. Make more money and put those extra earnings directly to your loans.

    If you’re not going to cut spending in favor of student loan repayment, then your only other option is to make more money.

    That might mean getting a valuable side hustle. Or, it might mean earning a raise or a bonus at your primary job.

    Whatever the case may be, as you make more money, focus on improving your savings rate.

    Financial bills and adhesive note with text - Side hustle showing one of the 10 student loan tips for lawyers and professionals is to get a side hustle.

    Your savings rate is simply the amount of money you save each month divided by the amount of money you make.

    Even though it’s called “savings rate,” there’s no reason why you can’t include debt repayment in your calculations. Whether you are adding money to a savings account or eliminating debt, your net worth improves.

    It all counts in my book.

    The point is that when you start to earn more money, put that money to good use.

    Instead of shopping at more expensive stores or eating at fancier restaurants, keep your spending habits the same. Put those higher earnings towards your important life goals, like eliminating student loan debt.

    8. Take a tax deduction and use your tax refund for your loans.

    The IRS permits borrowers, up to certain income limits, to take a federal tax deduction up to $2,500 per year for student loan interest payments. That means that you can reduce your taxable income by up to $2,500 per year based on the interest you paid that year.

    The actual amount of money you’ll save with this tax deduction depends on variables like your tax bracket. Check with your accountant or tax professional for specifics.

    Regardless, as we’ve seen above, even a small amount of extra money can go a long way if used for additional student loan debt payments.

    In the same vein, what if you made it a goal to apply your entire tax refund to your student loan debt?

    Let’s return briefly to our example above.

    This time, let’s assume that each year, you receive a tax refund of $1,700. Instead of wasting that $1,700 annually on things you don’t care about, you decide to put that money directly towards your student loans.

    Look what happens when you apply that $1,700 tax refund to your student loans each year, without making any additional payments whatsoever:

    Student loan illustration showing the power of an annual $1,700 payment as part of Think and Talk Money's 10 student loan tips for lawyers and professionals.

    With just that one decision to use your annual tax refund for student loan payments, you knock off 1 year and 4 months of payments and save $6,099.26!

    That seems like a great use of money that you’ll never miss anyways.

    9. Consider a loan consolidation.

    Consolidating your various loans into a single loan can help make your life easier and save you money.

    Your life should get easier when you only have to track and pay one loan back each month. There’s also a much smaller chance that you forget to make a payment or lose track of a loan altogether.

    Besides the convenience, when you consolidate, you should receive an overall lower interest rate. That means long-term savings.

    Before you consider a loan consolidation, be sure to do your homework. One major consideration is that you will lose whatever federal loan benefits you currently have if you consolidate, such as the possibility for loan forgiveness.

    10. If you’re still in school, look for ongoing scholarship opportunities.

    This is something that didn’t occur to me until my final year of law school. It took me that long to realize that schools regularly offer scholarships, stipends, and grants to current students, not just prospective students.

    During my third year of law school, I applied for a scholarship and was awarded $2,000. I didn’t think of it at the time, but looking back, I could have used that $2,000 to prepay my student loan interest.

    That would have accelerated my progress towards eliminating my loans while I was still in school.

    This is a good time to point out that personal finance requires consistent attention. You don’t have to think and talk about money every day. Not even I want to do that.

    But, you do have to intentionally make your personal finances a regular part of your life.

    Let’s revisit our example once more.

    Sorry, I can’t help myself.

    What if you combined some of the 10 tips we just talked about?

    Let’s say you decide to make an extra $250 monthly payment, contribute your $1,700 tax refund annually, and make a one-time payment of $2,000 for a scholarship you earned while finishing up school.

    Let’s take one more look at calculator.net:

    With just three relatively painless decisions, you can knock off 3 years and 1 month of student loan payments! And, you’ll save $15,481.76!

    Think about what you could do with an extra 3 years and 1 month of your life without student loan payments.

    You can now use that $1,500 per month you had been using for student loans on other goals. Not to mention what you could do with your annual tax refund.

    On top of that, think about what you could do with that $15,481.76 you saved in interest payments.

    Decisions like these are how financial freedom happens.

    That’s powerful stuff.

    What are your favorite student loan repayment strategies?

    To recap my top 10 student loan tips for lawyers and professions:

    1. Locate all your loans.
    2. Sign up for automatic payments.
    3. Do not miss a payment.
    4. Consider using Debt Snowball or Debt Avalanche.
    5. Make an extra monthly payment.
    6. Create a BAT that generates fuel for your student loans.
    7. Make more money and use that money for your loans.
    8. Take a tax deduction and use your tax refund for your loans.
    9. Consider a loan consolidation.
    10. Look for ongoing scholarship opportunities.
    • Have you applied any of these strategies?
    • What am I leaving out that has worked for you?

    Let us know in the comments below.

  • No Need to Obsess Over Credit Score

    No Need to Obsess Over Credit Score

    Your credit score is very important.

    And, you need to stop obsessing over it.

    Here’s why both those statements are true.

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

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

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

    But, obsessing over your credit score is counter productive.

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

    GPA…

    Weight…

    Social Media Followers…

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

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

    To lose weight, you need to practice healthy living.

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

    The same logic applies to credit scores.

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

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

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

    What is a credit score?

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

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

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

    Your credit report will typically include:

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

    Now, we’ll talk about credit scores.

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

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

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

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

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

    What is a good credit score?

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

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

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

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

    Don’t obsess over your credit score.

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

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

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

    What factors go into your credit score?

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

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

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

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

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

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

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

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

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

    Here’s all you need to know:

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

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

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

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

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

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

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

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

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

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

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

    What factors are not considered in your credit score?

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

    Credit scores also do not consider income or employment history.

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

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

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

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

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

    As FICO explains:

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

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

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

    How to check your credit score.

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

    Most major banks offer free credit scores to their customers.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    In other words, can you be trusted with money.

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

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

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

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

    Credit scores are especially important before big purchases.

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

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

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

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

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

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

    Have you ever needlessly obsessed over your credit score?

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

  • Great Talk: Money and Fences

    Great Talk: Money and Fences

    Know anything about fences?

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

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

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

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

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

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

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

    Talk to your people about expensive purchases.

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

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

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

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

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

    Expensive purchases test your personal finance habits.

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

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

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

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

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

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

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

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

    We’ll make our final decision this weekend.

    What would you do?

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

    Sharing Think and Talk Money with Others.

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

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

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

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

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

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

    It’s not taboo to to talk about money.

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

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

    Your friends are likely going through the same money challenges.

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

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

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

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

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

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

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

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

  • 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.

  • Debt Snowball or Avalanche Better?

    Debt Snowball or Avalanche Better?

    Let’s take a deeper dive into the two most common strategies for paying back debt when you have multiple loans: Debt Snowball v. Debt Avalanche.

    In our post on how to confidently tackle debt, we discussed that it’s a smart idea to apply one of these strategies. Here, we’ll see why.

    You’ll notice we have lots of charts and numbers in this post. Don’t worry, you don’t need to do any math. I’ll show you how to use a simple online calculator to help you decide with strategy is best for you.

    Before we look at the strategies, always keep in mind the number one rule:

    Always pay the minimum required amount on every loan no matter what.

    Whatever strategy you end up using, always pay the minimum payment on every loan. If you fail to do so, you will be charged penalties and your credit history and score will be negatively impacted. You will also accrue interest on those penalties, compounding your mistake.

    Don’t worry if this sounds confusing right now. We’ll discuss credit cards and the responsible use of credit in detail in upcoming posts.

    The below strategies apply to any excess funds you have left after paying at least the minimum on every loan balance. No matter what, you need to make the minimum payment on each loan every single month.

    What is the Debt Snowball method?

    The first strategy is known as “Debt Snowball.” When you apply the Debt Snowball strategy, the idea is to focus on the loan with the smallest balance first, regardless of interest rate.

    Remember, these strategies are for helping you pay back multiple loan balances.

    Once you have paid off the first loan in full, you move to the loan with the next smallest balance, again regardless of interest rate. The money you had been paying to the first loan can now be rolled into the second loan.

    What is the Debt Avalanche method?

    The second strategy is referred to as Debt Avalanche. With this method, you will prioritize the loan with the highest interest rate, regardless of the balance.

    Once you’ve paid off the loan with the highest interest rate, you move to the loan with the next highest interest rate. Just as before, the money you had been paying to the first loan can now be applied to the second loan.

    You can apply either of these strategies in the same way no matter how many loans you have.

    The first step in choosing a debt payoff strategy is to gather some basic information on each loan that you have.

    For each loan, you’ll need to find the outstanding balance, the interest rate, and the minimum required monthly payment. You can pull this information from your most recent monthly statement.

    Once you have this information, you can plug the numbers into a simple online calculator. By doing so, you’ll get an idea of how much it will cost you (in terms of time and money) to pay off these debts.

    I like using calculator.net.

    They have calculators for all sorts of different purposes, including a Debt Payoff Calculator. Using the Debt Payoff Calculator, you can decide the best payoff strategy for your personal situation.

    You may prefer the quicker emotional wins that come with the Debt Snowball method. Or, you may prefer the savings that come from the Debt Avalanche method.

    There’s no wrong answer. The choice is yours.

    Let’s see how Debt Snowball and Debt Avalanche work in practice.

    Note, for simple illustration purposes, the minimum payments in these examples remain the same throughout the life of each loan.

    Example 1: Two Different Credit Card Balances

    Imagine you have two credit cards with balances owed.

    Credit Card 1: $5,000 balance with a 15% interest rate and a minimum required payment of $150 per month.

    Credit Card 2: $10,000 balance with a 20% interest rate and a minimum required balance of $200 per month.

     BalanceRateMin. Pay.
    Credit Card 1$5,00015%$150
    Credit Card 2$10,00020%$200

    After creating a Budget After Thinking, you’ve determined that you have $1,000 per month to put towards these two loans. Because you have to pay a minimum of $150 to Credit Card 1 and $200 to Credit Card 2, you have $650 left to deploy.

    How should you do it?

    Debt Snowball

    If you apply the Debt Snowball approach, you prioritize paying off the loan with the smallest balance. That means paying $800 to Credit Card 1 ($150 minimum payment plus $650 remaining funds) until that loan is paid off completely. The remaining $200 needs to be applied to cover the minimum payment on Credit Card 2.

    Once Credit Card 1 is paid off completely, you will add that $800 payment to Credit Card 2 for a total payment of $1,000.

     BalanceRate.Min. Pay.Snowball
    Credit Card 1$5,00015%$150$800
    Credit Card 2$10,00020%$200$200

    Using calculator.net, you’ll see that it will take you 18 months to eliminate both loans with the Debt Snowball approach. It will cost you a total of $17,303.70, of which the total interest is $2,303.73.

    Importantly, Credit Card 1 will be completed paid off in 7 months.

    Debt Avalanche

    Now, let’s see what happens when we apply the Debt Avalanche approach. Under this approach, you would prioritize Credit Card 2 because it has the higher interest rate. That means you would pay $850 to Credit Card 2 and only the $150 minimum payment to Credit Card 1. Once Credit Card 2 is paid off, you would pay the full $1,000 to Credit Card 1.

     BalanceRateMin. Pay.Avalanche
    Credit Card 1$5,00015%$150$150
    Credit Card 2$10,00020%$200$850

    Using calculator.net, you’ll see that it will take you 18 months to eliminate both loans with the Debt Avalanche approach. You’ll end up paying a total of $17,071.84, of which the total interest is $2,071.87.

    It will take you 14 months to eliminate the first loan, Credit Card 2.

    Now, we can compare the results of using Debt Snowball or Debt Avalanche.

    Under the Debt Snowball approach, you’ll pay $231.86 more in interest. It will take you 18 months to eliminate both debts under each approach.

    However, under the Debt Snowball approach, it will only take you 7 months to completely erase one loan. Under Debt Avalanche, you will not erase the first loan until 14 months have gone by.

    Now that you have this data, you can decide whether you prefer Debt Snowball or Debt Avalanche. Some people may prefer the emotional win of eliminating one loan completely after 7 months using the Debt Snowball method.

    Other people will prefer the Debt Avalanche approach, which results in more savings. The tradeoff is that they won’t eliminate any loans completely until month 27.

    As we said before, there is no right or wrong answer. It is entirely a matter of personal preference.

    Why not just pay the same amount to each credit card?

    If you pay $500 to each credit card from the beginning, let’s see what happens:

     BalanceRateMin. Pay.Equal
    Credit Card 1$5,00015%$150$500
    Credit Card 2$10,00020%$200$500

    You will end up paying off both loans in 18 months and paying a total of $17,249.39, of which the total interest is $2,249.42. You won’t eliminate any loans completely for 11 months when Credit Card 1 is paid off.

    Compared to the Debt Snowball approach, splitting the payments evenly means four more months to pay off the first loan completely. That means you’re waiting longer for your first emotional win.

    Compared to the Debt Avalanche approach, you’ll end up paying $177.55 more in total interest. If you’re looking to maximize your savings, splitting payments is not the way to go.

    As you can see, whatever your preference is, it makes sense to pick either Debt Snowball (fastest emotional win) or Debt Avalanche (most money saved).

    Personally, I prefer the Debt Snowball approach.

    I prefer the Debt Snowball approach because of the emotional win that comes with eliminating a debt in less time, sometimes even twice as fast.

    That victory is more important to me than saving $231.86 spread out over 18 months (the length of time it takes to eliminate both debts).

    If you prefer paying the least amount in interest, I won’t argue with you. There’s nothing wrong with saving money. It’s a personal choice.

    That said, there is one instance where I prefer Debt Avalanche to Debt Snowball.

    If you have Bad Debt, like credit card, always pay that debt first.

    Bad Debt typically has significantly higher interest rates than other forms of debt, like student loans, auto loans, or mortgages.

    Compare these current (February 2025) average interest rates for various types of loans:

    It’s not hard to see that credit card debt comes with a significantly higher interest rate than any other form of common debt.

    This is why I recommend you always pay your credit card debt first.

    Let’s look at a second example to illustrate this point.

    Example 2: Auto Loan and Credit Card Balance

    Auto Loan: $8,000 balance with an interest rate of 5% and a minimum required payment of $50 per month.

    Credit Card: $20,000 balance with an interest rate of 20% and a minimum required payment of $400 per month.

     BalanceRateMin. Pay.
    Auto Loan$8,0005%$50
    Credit Card$20,00020%$400

    Just as before, you’ve determined that you have $1,000 per month to put towards these two loans. Because you have to pay a minimum of $400 to your credit card and $50 to your auto loan, you have $550 left to deploy.

    How should you do it?

    Debt Snowball

    If you apply the Debt Snowball approach, you would prioritize paying off the loan with the smallest balance. That means paying $600 to your Auto Loan until that loan is paid off completely. The remaining $400 needs to be applied to cover the minimum payment on your credit card debt.

    Once the auto loan is paid off completely, you will add that $600 to the credit card debt for a total of $1,000.

     BalanceRateMin. Pay.Snowball
    Auto Loan$8,0005%$50$600
    Credit Card$20,00020%$400$400

    Using calculator.net, you’ll see that it will take you 37 months to eliminate both loans with the Debt Snowball approach. It will cost you a total of $36,753.16, of which the total interest is $8,753.18.

    Importantly, the auto loan will be completed paid off in 14 months.

    Debt Avalanche

    Now, let’s see what happens when we apply the Debt Avalanche approach.

    Under this approach, you would prioritize the credit card loan because it has the higher interest rate. That means you would pay $950 to the credit card and only the $50 minimum payment to the auto loan. Once the credit card is paid off, you would pay the full $1,000 to your auto loan.

     BalanceRateMin. Pay.Avalanche
    Auto Loan$8,0005%$50$50
    Credit Card$20,00020%$400$950

    Using calculator.net, you’ll see that it will take you 34 months to eliminate both loans with the Debt Avalanche approach. You’ll end up paying a total of $33,822.14, of which the total interest is $5,822.17.

    It will take you 27 months to eliminate the credit card debt.

    We can again compare the results of using Debt Snowball and Debt Avalanche.

    Under the Debt Snowball approach, you’ll pay $2,931.01 more in interest. It will also take you three months longer to eliminate both debts.

    On the plus side, your auto loan will be completely paid off in 14 months, which is nearly twice as fast as with Debt Avalanche.

    Some people may still prefer the emotional win of eliminating one loan completely after 14 months using the Debt Snowball method.

    For me, the price of that emotional win has gotten too expensive. I would prefer to save the $2,931.01 and have both loans paid off in less time, even if that means waiting longer to pay off a single loan.

    If you do this exercise with any normal credit card compared to another form of loan, you’re likely going to find that the credit card interest rates are so high that you should target those loans first.

    Do you prefer Debt Snowball or Debt Avalanche?

    As we said before, there’s no right or wrong answer. Money decisions are emotional. Paying off debt is the perfect example.

    Using a simple online calculator can help you make the best decision for your situation. All you need to do is find the balance, interest rate, and minimum payment for each of your loans and the calculator will do the rest.

    Whichever method you choose, stick with it. Save yourself the stress of doing mental gymnastics each month.

    The most important thing is that you are making your payments every month.

    Have you used Debt Snowball or Debt Avalanche?

    Which method do you prefer?

    Let us know in the comments below.  

  • 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?

  • 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.