Tag: financial independence

  • Risk is the Cost to Invest

    Risk is the Cost to Invest

    Two young coworkers, Terry and Sally, start the same job at the same time making the same amount of money.

    While still many years away, Terry and Sally both know that they should invest early and often for retirement.

    They each decide to fund a retirement account with an initial contribution of $2,500. They are also dedicated to making contributions of $250 every month until they retire.

    Both plan to retire in 40 years while they’re in their 60s.

    There’s one major difference between Terry and Sally.

    They view risk differently.

    silhouette of man and woman under yellow sky illustrating the different investment paths of Terry and Sally.
    Photo by Eric Ward on Unsplash

    Terry doesn’t like risk.

    Terry doesn’t like risk. He wants to be able to sleep at night knowing that his hard-earned money is safe and sound in the bank. He can’t stand the idea of potentially losing money from one month to the next.

    When Terry wakes up in the morning, he likes to check his bank accounts while he drinks his coffee. He gets a jolt out of opening up his mobile banking app and seeing exactly how much money he has.

    In fact, at any given moment, Terry can tell you within a few hundred dollars what his net worth is.

    Because Terry doesn’t want to take any chances, he decides to stash all of his retirement savings in a savings account that earns an average annual return of 3%.

    Terry is lucky because this is a pretty generous return for a savings account based on historical savings account interest rates.

    Sally is more comfortable with reasonable risk.

    Sally is more comfortable with reasonable risk. Upon starting her career, Sally was aware that she had never learned basic personal finance skills. She was determined to put in a little bit of effort early on to set herself up for a prosperous future.

    She was a frequent reader of popular personal finance websites like Financial Samurai and Think and Talk Money.

    Sally even read JL Collins’ book on investing, The Simple Path to Wealth.

    Through the process of educating herself about personal finance, Sally started thinking about what she really wanted out of life. Since she was young and had just started her career, it wasn’t easy to come up with a good answer.

    Still, Sally knew that whatever she wanted to do in life, investing was an important part of her financial journey. If she wanted to create more time for herself down the road, she would need passive income from investments to sustain her.

    So, after doing her homework, Sally decided to invest her money in a low cost S&P 500 index fund.

    While she appreciated that there are no guarantees when it comes to investing, Sally knew that the S&P 500 has historically earned an average annual return of 10%.

    Unlike Terry, Sally only checked her accounts once per month when she tracked her net worth and savings rate. Sally slept fine at night because she knew time was on her side.

    Let’s see how Terry and Sally turned out 40 years later.

    Using a simple online calculator like the one at investor.gov, let’s see how much money Terry and Sally will have in their retirement accounts after 40 years.

    time steps on illustrating that the cost to invest is risk.
    Photo by Immo Wegmann on Unsplash

    Terry’s retirement savings total $234,358.87.

    After 40 years, Terry will have contributed a total of $122,500.00 to his retirement savings account.

    At a 3% interest rate, Terry will have a total of $234,358.87 after 40 years.

    In other words, Terry has just about doubled the value of his total contributions in his account.

    Not bad, Terry.

    Now, let’s check out Sally’s account.

    Sally’s retirement savings total $1,440,925.81.

    Sally likewise contributed $122,500.00. After 40 years, at a 10% interest rate, Sally’s retirement account will have a total of $1,440,925.81.

    Wow, Sally!

    Sally’s retirement account is worth 10 times more than what she personally contributed. Terry failed to even double his account.

    Recall in our little hypothetical, Sally did the exact same things as Terry, with one key difference. Sally was more comfortable taking on reasonable risk.

    Because Sally was comfortable taking on some risk, her retirement savings were worth more than six times as much as Terry’s savings. She has over a million dollars more than what Terry has!

    Look at compound interest in action.

    One last thing: take a look at the pictures of Terry and Sally’s investments over time. Notice the gaps between each of their red and blue lines.

    While they each benefited from compound interest, Sally benefited exponentially more.

    Look at how Terry’s red line stayed much closer to his blue line. Because he wasn’t earning as much overall interest, he didn’t have as much money to multiply from compound interest.

    Sally’s red line mirrored her blue line closely for the first 12-15 years. Then, the gap widened before the red line skyrocketed over the final decade or so.

    That’s the power of compound interest kicking in.

    So, what can we learn from Terry and Sally?

    The point of this hypothetical is to introduce the concept of risk when it comes to investing.

    We’ve all heard the saying, “You don’t get something for nothing.”

    That motto applies to investing as much as anything else. There is always risk involved in investing.

    The question is how do you react to that risk.

    Some people are so fearful of that risk that they don’t invest at all, like our friend, Terry.

    Other people are so desperate to get rich quickly that they take wild risks.

    The people that tend to reach and sustain financial independence are the ones who educate themselves and become comfortable with taking on reasonable risk. This is what Sally did.

    In future posts, we’ll dive into the various ways you can reduce investment risk.

    At this point, knowing why you’re investing and taking on risk is a powerful first step. I was recently reminded of my Money Why when my baby girl was born.

    Think of risk as the cost to invest.

    If you want to reach true financial independence or any other financial goal, it’s going to cost you something.

    Think of risk as the cost to invest.

    Sure, there may be some people out there who are able to reach financial independence on a massive salary.

    For the rest of us, we’re going to have to get comfortable with investing.

    There’s a reason we spend so much time talking about our ultimate life goals. It’s important to embrace the reasons why you’re investing and why you’re opening yourself up to risk.

    It never hurts to remind yourself what you are hoping to achieve in the future.

    When you know what that thing is, it’s much easier to pay the cost of risk.

    When you look at Sally and Terry’s future outlook, who would you rather be?

    It’s not really a hard question, right?

    It’s not that Sally has a bigger bank account. What matters is that she has created options for herself.

    Sally should be in position to do whatever she wants.

    Terry probably can’t.

    • Are you naturally more inclined to act like Terry or Sally?
    • If you’re more like Terry, have you thought about what outcome in life would be worth taking on some reasonable risk?

    Let us know in the comments below.

  • Investing is Actually the Easy Part

    Investing is Actually the Easy Part

    Investing is a major part of leading a healthy financial life.

    It also should be the easiest part.

    Despite all the attention, news, and marketing, investing doesn’t have to be complicated.

    Investing simply means committing money now to earn a financial return later. This is why I refer to money I invest as Later Money.

    To be honest, the most difficult part of investing is continuously generating money to invest in the first place.

    The actual investing part is pretty easy.

    That’s because when you invest the right way, your money should earn more money without much additional effort from you.

    This is the best part about investing. Your money can (and should) grow over time without your active participation. This is why investment gains are often referred to as “passive income.”

    If you are on a journey towards financial independence, you know how important passive income is. The best way to get your time back is to earn money passively through investments while you’re off doing something else.

    We’ll soon learn why investing does not have to be complicated. If you can drown out the noise, all you’ll really need to do is regularly fund your investment accounts and watch your net worth slowly grow.

    This is when personal finance starts to get really fun.

    Investing is when personal finance starts getting really fun.

    When you’ve invested the right way, your wealth will slowly multiply. You won’t notice it at first. Trust me, give it time.

    You’ll soon see that all the effort you put into educating yourself about money was more than worth it.

    No, you won’t be immune from market swings like the one we’re in right now.

    But, you’ll be educated enough to not panic. You’ll know that time is on your side.

    Have you noticed that we’re now 50 posts in and have hardly talked about investing?

    There’s a reason we’ve hardly talked about investing in the first 50 posts of Think and Talk Money.

    In order to get the benefits of investing, you need to have the right money mindset. That means knowing why you’re investing in the first place. Without the right motivation, you will struggle to consistently fund your accounts.

    After all, when you invest, you are sacrificing money you could spend right now for the opportunity to spend even more later on. Without the right motivation, too many people put off, or give up on, investing altogether.

    When they do that, they have a little more money to spend today. But, years from now, they will wonder why they’re still working so hard and don’t see an end it sight.

    A morning yoga session peering into the jungle in Ubud, Bali demonstrating how investing does not have to be complicated, it just takes consistency and dedication.
    Photo by Jared Rice on Unsplash

    What is your motivation to invest?

    Your motivation may be to reach financial independence so you can pivot directions in life. This is known as FIPE (Financial Independence, Pivot Early).

    Your goal may be to pay for your kids’ college. One way to do that is to take advantage of 529 college savings plans.

    You may not know exactly what you want down the road. That’s OK, too. Whatever it is, investing now will make it easier to pursue whatever that thing ends up being.

    Once your mindset is in the right place, you’ll be more determined to craft a budget that consistently creates money to invest.

    Think about it: would you rather be someone who invests $1,000 one time or someone who invests $1,000 every month?

    If you practice solid personal finance fundamentals, you can be the person consistently investing to accomplish your ultimate life goals.

    Too many people think personal finance is only about investing.

    Too many people skip over the part where we learn strong personal finance habits. These people think that personal finance is only about investing. 

    Let’s play a game. Walk down the hall at your office and ask the first person you see what they know about personal finance.

    I’m guessing you’re going to get a response like:

    “Personal finance? Oh, yes. I need to learn that. I don’t know anything about the stock market.”

    If I’m right, leave a comment below. This should be fun.

    By the way, people that assume personal finance is only about investing are not bad people. They just haven’t been properly educated. Just like me when I set $93,000 on fire.

    By now, you know that personal finance is about so much more than investing. You know that you need to develop strong habits so you constantly have money to invest in the first place.

    And, you’ll soon learn that investing is really the easy part.

    When you learn basic investing principles, like minimizing fees and playing the long game, your money can slowly grow over time.

    As that happens, you move closer and closer to financial independence without much effort at all.

    It’s actually pretty easy.

    We’ll cover these basic principles in upcoming posts.

    One thing we won’t discuss at Think and Talk Money is the latest hot stock tip.

    If you want to study P/E ratios and company balance sheets in a quest for the best individual stocks, I won’t stop you.

    I just won’t be joining you.

    That’s because it’s very hard to pick winning stocks. Even the “experts” have a very hard time doing it consistently.

    You don’t believe me, do you?

    What if I told you that the vast majority of investment pros underperform the S&P 500?

    Check this out from Yahoo! Finance:

    Making matters worse is that the professionals, who the average investor might turn to for guidance, have poor track records. In the past decade, an alarming 85% of U.S.-based active fund managers underperformed the broader S&P 500. Those who invest in these funds are essentially paying for unsatisfactory results.

    If the “pros” can’t beat typical market returns that are available on the cheap for all of us… why even play that game?

    Why overcomplicate things?

    Sure, maybe you’ll get lucky and your investment pro is one of the few who can beat the market. Odds are that if your pro beat the market one year, he probably won’t the next year.

    If that’s your game, I wish you nothing but good fortune.

    Personally, I’d rather do things the easy way. I’d rather focus on what I can control, like how much money I’m contributing to my investment accounts each month.

    And, that brings us to an interesting point.

    Even if you are working with a professional, you are not excused from participating in your investment journey. You still need to understand the basics.

    Plus, while you may not be watching your portfolio closely, your job is always to make sure there is consistent money to be invested.

    My guess (or is it hope?) is that your advisor has told you as much.

    Investing is a major component of financial independence.

    Whether you are striving for financial independence, or hoping to maintain it, investing is a major component.

    To be a successful investor, you first need to practice strong financial habits.

    Don’t worry. If your mind is in the right place, the investing part is actually pretty easy.

  • How to Set $93,000 on Fire

    How to Set $93,000 on Fire

    My first experience investing did not go well.

    You could say I set $93,000 on fire.

    Here’s what happened.

    Matthew Adair thinking about the valuable lesson he learned about investing in 2008 that was like setting $93,000 on fire.
    Matthew Adair, founder of Think and Talk Money

    Back in 2008, I was a third-year law student. My entire life savings at that point was about $10,000. A lot of this money came from savings bonds gifted to me by my grandma for my birthday since the year I was born.

    I mentioned the year was 2008, otherwise known as the beginning of The Great Recession. As detailed in Forbes Advisor:

    The Great Recession of 2008 to 2009 was the worst economic downturn in the U.S. since the Great Depression. Domestic product declined 4.3%, the unemployment rate doubled to more than 10%, home prices fell roughly 30% and at its worst point, the S&P 500 was down 57% from its highs.

    Suffice it to say, 2008 was not a great time to be graduating or looking for jobs.

    Those of my friends fortunate enough to have secured a job offer soon learned that their offers were being rescinded. Such were the times.

    But, I digress.

    Back to how I set $93,000 on fire.

    As I mentioned, my life savings at the time totaled about $10,000. I had previously decided to use a financial advisor to invest my money for me.

    I had been working with this financial advisor for a few years prior to The Great Recession.

    All these years later, I couldn’t tell you what she had me invested in prior to the markets imploding. I’m assuming that she took into account my age and risk tolerance and designed a suitable portfolio for me.

    What I can tell you is that my portfolio suffered the same fate as just about everyone else towards the end of 2008. My $10,000 balance was shrinking.

    At that point, my advisor took me out of the markets and stashed the remainder of my money in a savings account earning close to 0% interest.

    I didn’t notice this maneuver right away. In fact, it wasn’t until 2010 that I noticed that my money was sitting in a savings account.

    When I finally caught on that my account balance had not changed for a couple years, I called my advisor. She explained that she had pulled me out of my investments when things weren’t looking too good.

    She didn’t have a good explanation for why I was still in the savings account in 2010. To be honest, it seemed like maybe she forgot about me. 

    By that point, the markets were improving. I had already missed all of the upswing from 2009. Since I had felt neglected, I withdrew my money and closed my account.

    I wish I could tell you that I started investing on my own at that point.

    Nope, that’s not how you set $93,000 on fire.

    Instead of investing, I let the money sit in my checking account until it just kind of disappeared. I had no plan for the money. All these years later, I have no clue what I spent it on. I just know that it disappeared.

    First Job during the Great Recession was not easy to come by.
    Photo by frank mckenna on Unsplash

    But Matt, you said you only invested $10,000. How did you end up setting $93,000 on fire?

    I’m glad you asked.

    If I had known then what I know now, I would have invested that $10,000 in a low-cost S&P 500 index fund.

    I also would not have taken my money out of that S&P 500 index fund when the markets dropped.

    Time was on my side. The smart thing would have been to do nothing at all.

    Between the start of 2009 and the end of 2024, the S&P 500 earned an average annual return of 14.98%.

    That means my $10,000 invested in a low-cost S&P 500 index fund at the start of 2009 would have been worth $93,265.90 by the end of 2024.

    That, my friends, is how I set $93,000 on fire. 

    And, I have nobody to blame but myself. 

    Let me make one point perfectly clear:

    It’s nobody’s fault but my own that I missed out on those earnings.

    It was my fault for not taking a more interested, and educated, approach to my personal finances.

    In a way, I’m glad I learned that lesson with only $10,000 at stake instead of later in life when I had more to lose.

    It’s not my financial adviser’s fault. She did what she thought was best. For some people, her strategy was probably successful.

    My problem was I blindly trusted my adviser without educating myself first. I didn’t know the right questions to ask. I didn’t understand the plan.Worst of all, I didn’t pay attention when my account statements arrived in the mail each month.

    In my mind, once I transferred my money over to my advisor, I was excused from taking any responsibility for my future.

    That was a mistake I’ll never make it again. When things didn’t go well, I had no one to blame but myself. 

    We all need to understand the basics of investing.

    Whether you choose to work with an advisor or not, it’s up to each of us take accountability for our own future.

    We need to educate ourselves enough to be part of the planning process. We need to know why we’re taking certain steps and be savvy enough to ask the right questions.

    You may be more comfortable working with a financial advisor. That’s perfectly fine. You still need to understand the basics of investing.

    My problem in 2008 and 2009 was that I hadn’t educated myself. I like to share this little story to illustrate how important it is to pay attention to our finances.

    These days, I manage my own investments. I’ve determined that paying fees for someone else to manage my money is not worth it to me. 

    By the way, we’re going to spend a lot of time talking about fees so you can decide for yourself if you want to pay them.

    Whether you manage your own investments or you use an adviser, it’s critical to understand the basics about investing in the stock market. The good news is the basic principles of investing are relatively straightforward. 

    Always remember: there are some things we can control and a lot of things we can’t control.

    We’re going to focus on what we can control.

    That means focusing on how much fuel you’re generating each month to invest in the first place.

    Then, it means minimizing fees and maximizing your time in the market. 

    If you can successfully implement just those ideas, you will wake up years from now with major gains to your net worth due to the power of compound interest.

    There are other strategies we’ll cover, as well. You’ve likely heard fancy terms like “diversification” and “asset allocation.” We’ll talk about what those phrases mean with the goal of convincing you that investing does not have to be complicated. 

    That’s right. Investing does not have to be complicated.

    You don’t have to read the Wall Street Journal. You don’t have to study financial statements. Even people who do that for a living struggle to predict what’s going to happen next. 

    So, let’s not waste our time. We’ve got better things to do on our way to financial independence than studying corporate balance sheets. 

    With even just a little bit of knowledge, you can feel comfortable and confident investing in the stock market. Then, all you’ll need to stay on track is the occasional reminder to think and talk about money with your loved ones.

    You won’t even have to set $93,000 on fire first. 

  • Happy that I Delayed Financial Independence

    Happy that I Delayed Financial Independence

    I’m further away from financial independence today than I was five years ago.

    You know what’s funny?

    I couldn’t be happier about where I am today.

    Let me explain.

    In 2020, my wife and I had very minimal expenses.

    At the start of 2020, my wife and I were both working as lawyers in Chicago. We lived in an apartment in a 4-flat that we had purchased in 2018. We had no kids at the start of the year, but were about to welcome our first.

    This was a good apartment in a popular part of town. It had 3 bedrooms and 2.5 bathrooms. That was plenty of space for my wife and I, and eventually the two babies we brought home there.

    We purchased this 4-flat from a real estate investor who had done a decent job on the renovation. It had in-unit washer/dryer, modern finishes, and plenty of storage.

    We had a small outdoor patio with enough room for a grill and little table. We also had a garage parking space but ended up parking our 20-year-old car on the street most days.

    When we purchased the building, it was the most expensive 4-flat that had ever been sold in that part of town. It was a bit of a risk to set the high-water mark in the area.

    In the end, the risk was more than worth it.

    Even though the building was expensive for the area, this was not a fancy apartment. This part of town was still up-and-coming. Some people probably thought it was not a nice part of town.

    I doubt many people came over and thought, “Wow, look at this amazing apartment!”

    The more likely reaction was probably something like, “What the heck are they doing?”

    To be fair, I asked myself that question plenty of times.

    So, what were we doing?

    We were paying ourselves to live there.

    Say that again?

    My wife and I paid ourselves to live in that apartment.

    We lived for free. And made a profit at the same time.

    See, the rental income from the other three units covered the entire mortgage plus all expenses for the property.

    But, that’s not all. On top of covering all the expenses, the rental units generated a profit of $1,000 per month on average.

    So, not only did we spend zero dollars each month on housing, we profited $1,000 per month.

    Looking back, getting paid to live in a decent apartment was maybe the best decision we ever made.

    Landlord working outside the office checking his balance and earnings. Getting paid concept. Internet money income. Showing the power of house hacking even if it means delaying financial independence.

    What happens to your finances when you live for free?

    Let’s take a look at how living for free can be a major advantage on your way to financial freedom.

    The common wisdom is for people to spend no more than 30% of their gross income on housing. Regardless of how much you make, that usually means thousands of dollars.

    Because our tenants were paying our living expenses for us, we did not have that expense for the five years we lived in that apartment.

    In other words, we didn’t have to worry about budgeting for housing.

    We also drove a nearly 20-year-old car and could walk to the “L” (Chicago’s subway). We lived in a neighborhood with plenty of nearby restaurants and shops. That meant our transportation costs were next to nothing.

    Because we weren’t paying for housing and had very minimal transportation costs, we could supercharge our savings.

    How much were we able to save?

    Let’s take a look.

    Between 2018 and 2023, my wife and I acquired three buildings and ten apartments in that same neighborhood. We’re very familiar with market rents in the area.

    We rent our apartments for anywhere from $2,300 to $3,600 per month. Our usual tenants are professionals like engineers, lawyers, doctors, consultants, and pilots.

    The unit we were living in from 2018 to 2022 was one of our larger units. At the time, it would have rented for $3,500 per month on average. That equals $42,000 per year to rent that apartment.

    Keep in mind, if someone was paying rent to live there, that would be $42,000 of after-tax money.

    Since we owned the building, we lived there for free. We could save that $42,000 we would have otherwise paid in rent. Instead of spending that savings on things we didn’t need, we were able to save that money for our next real estate investment.

    Plus, we earned $1,000 on average per month while we lived there. That’s an additional $12,000 per year in profit.

    We lived in that unit for almost five years.

    Add it all up and we saved $270,000 by living in that apartment for five years.

    • $42,000 saved rent x 5 years =$210,000.
    • $12,000 profits x 5 years = $60,000.
    • Total savings = $270,000

    We used that $270,000 for a downpayment on a rental condo in Colorado ski country.

    It took five years of living in a decent, but not-awesome, apartment to have a ski condo that will hopefully be in our family for decades.

    Choosing to live in our 4-flat to save $270,000 over five years was one of the best financial decisions we’ve ever made.

    Snowboarders breath on a cold day illustrating the power of financial independence earned through house hacking.
    Photo by Alain Wong on Unsplash

    I highly recommend you consider house hacking if you’d like to start investing in real estate.

    Many of you are familiar with the strategy of living in a building (or home) you own while tenants (or roommates) pay for it. Brandon Turner, of BiggerPockets fame, popularized the concept he dubbed “House Hacking”.

    You can read all about house hacking on BiggerPockets here.

    For even more information on house hacking, Craig Curelop wrote a book for BiggerPockets called The House Hacking Strategy: How to Use Your Home to Achieve Financial Freedom.

    Without a doubt, there is no better strategy for entry level real estate investors than house hacking. I gave you a glimpse of the financial upside earlier in this post.

    Besides the financial upside, it’s like landlording with training wheels. Since you live on site, you can more easily learn how to manage a rental property, including responding to tenants and handling routine maintenance.

    The naysayers will say something like, “I don’t want to live with my tenants. They’re going to stress me out. I don’t want to be bothered at 2 a.m.”

    Ignore them.

    My wife and I lived with our tenants for five years at this property and two more years at a subsequent property. We did this while working full-time jobs as lawyers and raising two kids.

    Because we didn’t listen to the naysayers, we now have four income-generating properties and our “forever home” just outside Chicago.

    Even though we’re no longer living for free, the income from our rental properties is enough to cover the expenses of our home.

    So, why am I further away from financial independence today?

    I’m further away from financial independence today because my expenses have gone up since 2020. I’ve already alluded to those increased expenses throughout the post.

    In 2020, we had our first child. Now, we have three children.

    Also, after seven years of house hacking, we decided it was time to purchase a long-term home for our growing family just outside the city in a terrific area.

    We also finally traded in our 21-year-old car for our first new car ever.

    How’s this for easy math:

    Three Children + Nice House + New Car = Further Away from Financial Independence

    While that combination means I’m further away from reaching financial independence, I now have everything that I could possibly ever want.

    That’s why I couldn’t be happier with where I’m at today.

    My end game is finally in sight. Five years ago, I didn’t know where I’d be living or what car I’d be driving or what my family situation might be.

    Now, the picture is clear.

    I can calculate with reasonable certainty how much money I need to be truly financially independent. I can use that number as a target and make every financial decision with that target in mind.

    That’s why in 2025, I’m focused on paying down HELOC debt. Each time I make a debt payment, I move closer to financial independence.

    Besides, my goal is FIPE not FIRE.

    My goal is to reach FIPE not FIRE.

    FIPE means Financial Independence, Pivot Early.

    I have no intentions of retiring any time soon. Retiring early is not, and has never been, my goal.

    My goal is to become financially independent to create as many options as possible to protect myself and my family. I want to be financially independent so I can pivot no matter what life throws at me.

    If my goal was to retire early, I may have skipped the single family home in a great neighborhood. I could have continued house hacking, minimized my expenses, and lived off of the rest of the rental income.

    But, I want more for me and my family. I don’t want to just survive.

    Have you delayed financial independence to craft the life you really want?

    My life has certainly changed in the past five years, but all that change has been for the better.

    That meant house hacking at first to keep expenses as low as possible. Now it means enjoying the wealth I created by making those earlier sacrifices.

    In order to have the life I want, I needed to temporarily move further away from financial independence.

    Still, I’m confident that I’ve taken the right steps to not just reach financial independence, but to reach it while living the life I want.

    The tradeoff is that it will take me longer to be truly financially independent. I’m perfectly happy with that.

    Financial independence has never been more clearly in sight. It’s just delayed a little bit.

    • Is your goal to reach FIPE and pivot as quickly as possible?
    • Or, are you OK with delaying FIPE temporarily for the life you truly want?

    Let us know in the comments below.

  • FIPE not FIRE: Financial Independence, Pivot Early

    FIPE not FIRE: Financial Independence, Pivot Early

    We focus a lot on financial independence here at Think and Talk Money. That’s because achieving financial independence is the ultimate goal for most of us.

    To me, financial independence does not mean retiring.

    That’s why I don’t like the popular acronym, FIRE: Financial Independence, Retire Early.

    Instead, I I like to view my financial freedom journey as FIPE: Financial Independence, Pivot Early.

    Let me explain why I believe in FIPE not FIRE.

    FIPE = Financial Independence, Pivot Early

    Whatever it is that you truly want to do in life, financial independence makes it possible.

    When you have financial independence, you have options. You can make decisions based on your core values instead of making decisions based on money. You can pivot, if necessary.

    Financial independence is for people who want to be empowered to take more control of what they do with their working hours.

    It’s not about quitting work. It’s about the freedom to pivot to other work, if you want. I’m convinced that humans are meant to be productive. We are social creatures who at our core want to be contributing.

    That doesn’t mean we have to be or want to be employees. But, it does mean that we want to do something meaningful with our working hours every week.

    That’s why I believe in the power of pivoting, not retiring.

    Why I don’t like the name FIRE.

    Part of the misconception about financial independence may stem from the name of the popular personal finance concept known as FIRE: Financial Independence, Retire Early.

    It’s not uncommon for people to hear financial independence and immediately think that’s only for people who want to quit their jobs and retire. That’s how widespread FIRE has become in the personal finance space.

    I agree with so many of the principles of FIRE. I just don’t agree with the name.

    Financial independence is about much more than retiring early.

    FIRE emphasizes saving more and spending less until you reach the point where your passive investments generate enough income to allow you to quit your job.

    I love this part of FIRE: the idea of creating enough income streams so that you have the freedom to do what you want with your time. I share the primary goal of saving more money and spending less to achieve more life freedom.

    I call this Parachute Money. I like to view each income stream as a separate parachute string. The more parachute strings you have, the safer it is to make a big change in life.

    The problem for me is that the FIRE end game is suggested right there in the name: become financially independent so you can retire.

    I don’t like that part. I don’t like what the word “retire” implies.

    If you look it up, you’ll see that the word “retire“means to withdraw, to retreat, to recede.

    None of those things sound appealing to me at all.

    Each word implies moving backwards. I’m not working so hard to achieve financial freedom so I can move backwards in life.

    Fire burning on beach, depicting the FIRE movement: Financial Independence, Retire Early instead of FIPE: Financial Independence, Pivot Early.
    Photo by Benjamin DeYoung on Unsplash

    I prefer to think of financial independence in terms of creating options. I prefer to think of financial independence as a way to move forward in life.

    I think “pivot” better reflects that mission.

    Pivot means to adapt or improve through modifications and adjustments.

    That sounds so much more appealing to me.

    With FIPE, financial independence is still the primary goal. But, the endgame is not to withdraw or retreat. The endgame is to adapt and improve how you spend your working hours.

    FIPE = Financial Independence, Pivot Early.

    Granted, the name “FIPE” is not as catchy as FIRE.

    But, I think it actually better encapsulates the entire purpose of financial independence in the first place.

    To explain, let’s look back at the modern day origin of FIRE for a minute.

    Vicki Robin and Joe Dominguez are often credited for laying the groundwork for the modern day FIRE movement. Robin and Dominguez wrote an incredible book called Your Money or Your Life.

    It’s one of my favorite personal finance books. You should definitely read it if financial independence is important to you.

    In their book, Robin and Dominguez have a lot to say about the relationship between money, work, and time. 

    Guess what?

    Most of us are doing it all wrong.

    Most of us make the mistake of chasing money at the cost of our precious time. When you read Your Money or Your Life, you will start to value your time for what it’s really worth.

    By making good choices about how to earn money- and as importantly what to do with that money- you can get the most out of your money and your life.

    That’s what FIRE is really all about. It’s about choosing to use your working hours in a way that is more meaningful to you than clocking in-and-out as an employee each day.

    It’s not about retiring from meaningful work. It’s about pivoting to work that is more meaningful to you.

    FIRE proponents would likely agree that the goal is not to withdraw or retreat.

    I think proponents of FIRE would actually agree with me that the end game is really not about withdrawing or retreating. The mission is always about moving forward, not backwards.

    My belief is that people who are disciplined and skilled enough to reach financial independence in the first place are the type of people who don’t retreat or withdraw.

    They may opt for periods of temporary retirement, as they should. But, I don’t think financially independent people are truly wired for full-time retirement.

    That’s why you see so many people who have obtained financial independence continue to pursue income streams.

    That might mean managing real estate investments, teaching others, or even starting a financial freedom blog.

    So, technically speaking, most people who have obtained financial independence have not actually retired. They haven’t withdrawn or retreated. Instead, they have pivoted.

    They are now spending their working hours doing other things. They may not be working full-time for an employer, but they’re still working.

    They’ve achieved financial independence and have earned the right to pivot.

    Financial Independence, Pivot Early.

    Even FIRE leaders would likely agree that the end game is not to completely retire.

    FIRE is not about retiring or quitting. It’s about pivoting to more meaningful life pursuits.

    I don’t want to speak for Robin, but I think this is what she was getting at.

    I also think this is what modern day FIRE leaders like Mr. Money Mustache and the Financial Samurai believe in. Not long ago, Financial Samurai actually wrote an excellent post called “Why Early Retirement / FIRE is Becoming Obsolete.”

    I just think the name FIRE doesn’t accurately portray the mission. Pivoting early seems more appropriate to me than retiring early.

    We all have the same goals in mind: financial independence. And, I believe we have the same end game in mind: pivoting to more meaningful work.

    That’s why I like FIPE instead of FIRE.

    Are you looking to retire early or simply to pivot?

    What is it that you’re aiming for by getting your personal finances in order? If you want to retire early, there’s nothing at all wrong with that. You may be at the point in your career and life where that makes sense.

    Personally, I’m not looking to retire early. That’s why I like to view financial independence as a chance to pivot.

    Pivoting doesn’t mean you have to switch jobs or change things up just for the sake of change. It just means that you have that option if you want it or need it.

    By the way, I’m not alone in viewing financial independence as a chance to pivot instead of retire.

    Scott Trench, CEO and President of BiggerPockets has been beating this drum for a while. He’s also talked about it on the BiggerPockets Money podcast.

    I’m in complete alignment with Trench. I like almost everything about FIRE, just not what the name implies. 

    With FIPE, the goal is not to retire. The goal is to give yourself the freedom to choose what to do next.

    Whether you want to retire early or just pivot to a new chapter in your life, being good with money is key.

    Do you like the name FIRE or FIPE?

    At the end of the day, whether you like to view it as FIRE or FIPE, the mission is the same. We are all looking for the freedom to choose what to do next.

    When striving for financial independence, the goal is to create options. Those options likely include pivoting to more meaningful work, rather than withdrawing or retreating.

    Personally, I think the name FIPE better encapsulates that mission.

    • Do you agree?
    • What name resonates more with you on your financial freedom journey?
    • Are you interested in retiring early or pivoting early?

    Let us know in the comments below.

  • My Journey to Financial Freedom

    My Journey to Financial Freedom

    Financial freedom doesn’t happen overnight. I’ve been on my journey to financial freedom for more than a decade.

    I’m not there yet.

    Here’s a look at how my journey to financial freedom has progressed since I graduated law school in 2009.

    My journey to financial freedom began in my late-20s and was focused on eliminating debt.

    In my 20s, I needed to pay off credit card debt and student loan debt. All I knew about the journey to financial freedom back then was that it seemed very far away.

    I started budgeting, which meant reigning in my spending on things I didn’t really care about.

    I began to establish good money habits. It wasn’t easy, and I was far from perfect. That’s OK. The 80/20 rule reminds us that we don’t need to aim for perfection.

    By the way, my life didn’t all of a sudden become boring and miserable when I became more money conscious. Quite the opposite, actually.

    I became more confident in myself because I had a plan. I no longer felt like I was sliding backwards. With each paycheck, I moved one step closer to erasing my debt. That was a powerful feeling.

    In my early-30s, my journey to financial freedom was about fueling my savings.

    By the time I turned 30, I had paid off my credit card debt and my student loan debt. I’ll never forget the day I made my last student loan payment as my family and I were heading out to Colorado. A huge weight had been lifted from my shoulders.

    I felt free. My journey to financial freedom was still in the early stages, but I was on my way. Most importantly, I still had good habits and a plan.

    The byproduct of eliminating my debt was that I had more fuel to accomplish my other goals.

    Financial Freedom wooden sign with a beach on background, illustrating that my journey to financial freedom and the journey to financial freedom for lawyers and professionals does not happen over night.

    What other goals?

    The money I had been allocating to student loan and credit card debt could now be put towards more fun goals and experiences.

    Instead of aimlessly spending the thousands of dollars each month that had been going towards debt, I rolled that money directly into savings. Highest on my list was saving for an engagement ring.

    Within a year, I had enough saved to purchase the ring. I thought being free from debt was strong motivation. Turns out that motivation was nothing compared to the desire to buy a ring for the woman you love.

    As your career progresses and you earn more money, you will benefit from strong personal finance habits.

    As my career progressed, like many of you, I started earning more money. When I earned more, I did my best to use that additional income as fuel for my goals.

    I’m grateful I had previously learned strong personal finance habits on my journey to financial freedom when I earned relatively little.

    For most of us, our usual career progression is the exact opposite of the typical lottery winner. Who hasn’t heard the stories about the lottery winners that hit it big and then quickly go broke?

    These stories are unfortunately all too common. What starts out with so much elation usually ends in tragedy.

    The normal downfall involves unrestrained spending on things like houses, cars, and extravagant nights out. It also involves the pressure to give money away to family, friends, and charities.

    The same pattern has been well-documented for professional athletes who earn millions before quickly going broke.

    The challenge is the same for lottery winners and professional athletes. They come into a lot of money suddenly without any prior personal finance education. When this happens, that money disappears quickly.

    What can we learn from lottery winners and professional athletes?

    I think it’s safe to say that none of us are going to win the lottery or earn millions as a professional athlete. I hope I’m wrong about that!

    But, we can still fall victim to the same set of challenges on the journey to financial freedom. It may not be a sudden rise and then an equally sudden drop-off. Our financial growth presents itself more slowly.

    Over time, we may earn referrals/commissions, raises, and bonuses. These earnings certainly add up and can make a huge difference in our lives, if we have a plan. That’s a big “if” for most of us.

    I didn’t have the full plan figured out in my 20s. Our goals change as life changes. There’s nothing wrong with that.

    That said, because of the steps I took in my 20s to learn about personal finance, I was better prepared for the opportunities and challenges that arose in my 30s. I learned that when you create a solid foundation for yourself, you have options.

    To me, life is all about giving yourself options. Nobody likes feeling stuck, including me.

    In my mid-30s, my journey to financial freedom was about building wealth through real estate.

    Besides saving for an engagement ring and a wedding, I was able to save up for a downpayment on a home. At the time I started saving up for a home, I had no idea that I could use my savings to invest in real estate.

    It wasn’t until I went to a Cubs game with a good friend of mine, The Professor, that I learned about real estate investing.

    This is when my journey to financial freedom really accelerated.

    See, The Professor had a beautiful condo with an incredible rooftop deck near Wrigley Field. During the game, he told me he was selling the condo and moving into a 4-flat with his fiancee in an up-and-coming part of town.

    Huh?

    Why on earth would you give up your amazing condo? And move to a random neighborhood I’d maybe been to one time in my life?

    I thought The Professor had lost his mind. Back then, I had no idea what a 4-flat even was. I couldn’t even point to his new neighborhood on a map of Chicago.

    The Ivy at Wrigley Field illustrating when Matthew Adair accelerated his journey to financial freedom through real estate investing.

    The Professor set me straight.

    He walked me through the numbers. He explained that he was going from paying $3,000 per month for his condo to receiving $700 per month on top of living for free in the 4-flat. That’s a $3,700 difference per month!

    The Professor also introduced me to BiggerPockets. That was huge for me because I believe in the motto, “Trust but verify.”

    Over the next week, I read everything I could and listened to podcasts every day. It didn’t take long before I was convinced that I wanted a 4-flat of my own.

    Eight years later, I own three buildings and 10 apartments in that same Chicago neighborhood. I have a ski rental condo in Colorado.

    Without that great talk with The Professor, I don’t think I would be where I am today on my journey to financial freedom.

    Man I’m glad The Professor wasn’t afraid to talk money with me!

    He knew that taking about money is not taboo.

    We all need to position ourselves to benefit when luck comes our way.

    I was fortunate to have learned from The Professor’s experience. We all need some luck on the journey to financial freedom. I’m convinced that we’ll all catch a break here or there. The question is what we do with that luck when it comes our way.

    If I hadn’t taken the time to learn about personal finance in my 20s, I wouldn’t have been positioned to benefit from that conversation with The Professor.

    That’s why I say the journey to financial freedom doesn’t happen over night. It’s about one building block at a time.

    For any aspiring real estate investors out there, please take that message to heart. Before you can successfully invest in real estate, you have to invest in your own financial literacy.

    I’ve learned firsthand that the same principles that apply to personal finances apply to managing a real estate portfolio. Each pursuit takes a plan that only works with discipline and patience.

    In my late-30s, my journey to financial freedom was about paying off debt.

    In my late-30s, my journey to financial freedom pivoted from acquiring properties to optimizing my portfolio. My wife and I decided we were ready to transition from growing our real estate portfolio to paying off our debt.

    In a way, I’ve come full circle on my journey to financial freedom.

    We owe a lot of credit to Chad “Coach” Carson and his excellent book, Small and Mighty Real Estate Investor: How to Reach Financial Freedom with Fewer Rental Properties.

    Reading Small and Mighty Real Estate Investor helped us conclude that at this point in our lives, we have enough. Our portfolio generates enough income to help fuel our current goals. If we were to continue expanding, the headaches could end up outweighing the financial benefits.

    Progress is not linear, either. I’ve taken on debt in the form of mortgages and HELOCs to invest in more real estate.

    In the short term, that mortgage debt pulls me further away from financial freedom.

    If my plan works, that same debt will push me more rapidly to financial freedom.

    Financial freedom through real estate has existed for decades, if not centuries.

    By the way, I didn’t invent the plan of achieving financial freedom through real estate. That idea has existed for decades, if not centuries. I’d avoid anyone who tells you they pioneered this concept.

    Years ago, I remember sharing my newfound passion for real estate with mom. She had this smile on her face as I excitedly shared this “new” phenomenon of investing in real estate to achieve financial freedom.

    The next time I saw her, I realized her smile was actually more of a smirk.

    She handed me a book called How You Can Become Financially Independent by Investing in Real Estate.

    It was written by Albert J. Lowry, Ph. D.

    In 1977!

    Picture of a financial independence book showing that my journey to financial freedom through real estate is a concept that has existed for decades.

    Financial Freedom doesn’t happen over night.

    It’s natural to want to jump to the finish line. I’m guilty of that, too. I think about achieving financial freedom every day and need to remind myself to take it one step at a time.

    Even with all I’ve learned about personal finance, it can sometimes feel like I’m heading in the wrong direction.

    Wherever you currently are on your journey to financial freedom, remember that it doesn’t happen over night. I need to constantly remind myself to stay the course.

    Keep coming back to Think and Talk Money for daily reminders that financial freedom is within all of our grasps.

  • What is Your Money Why?

    What is Your Money Why?

    What is your Money Why?

    I had the happiest occasion to think about that question this past week.

    My wife and I welcomed our third child, a little baby girl.

    We were very fortunate and had a smooth delivery process.

    Even so, when you’re in the delivery room, your mind runs wild. You just want everything to go well. It’s completely out of your hands by that point.

    Things get really interesting when you’ve been at the hospital for a while and haven’t slept. There’s no telling where your mind will go.

    No matter how much you tell yourself not to do it, you can’t help but think of all that can go wrong.

    During these moments, I can assure you that one thing you’re not thinking about is money. If anything, you’re thinking that you would trade all the money you have for a healthy baby and a healthy mom.

    I guarantee you won’t be thinking about free falling markets. You’re not thinking about setting up a 529 college savings plan, either.

    When you finally hold your new baby, nothing else in the world matters. Everything around you goes quiet. The sense of relief is overwhelming and you cry.

    It’s a beautiful thing.

    In those first few moments, I told my baby girl that I love her. I promised that I will always protect her. Whatever she needs, I will be there.

    If I want to keep that promise, I need to be good with money.

    To be good with money, I need a powerful Money Why.

    Matthew Adair, founder of Think and Talk Money, holding his baby girl and remembering why he wants to be good with money.

    What is my Money Why?

    I’ve known my Money Why since I wrote down my Tiara Goals for Financial Freedom on a beach in 2017. My number one Tiara Goal for Financial Freedom is to be with my wife and kids as much as I want.

    I wrote down that goal before I was even married or had kids.

    Years later, my Money Why hasn’t changed. The only thing that’s changed is my Money Why has gotten stronger and stronger since then.

    • In 2017, my Money Why got stronger when I got married.
    • In 2020, my Money Why got stronger when my daughter was born.
    • In 2022, my Money Why got stronger when my son was born.
    • This week, my Money Why got stronger when my baby girl was born.

    My Money Why has never been more clear. It doesn’t even matter if my brain is functioning at half speed right now on limited sleep.

    My Money Why is my baby girl, my son, and my daughter. My Money Why is my wife.

    Of course, I want to provide for my family financially.

    But my Money Why is more than that.

    I don’t want to just provide money, I want to provide time. I want to be present and share experiences.

    I want to be with them.

    My overall goal in life is to spend as much time as possible with the people who are meaningful to me. To accomplish that goal, I need to be good with money.

    If I’m good with my money, I can achieve financial freedom.

    With financial freedom, I can choose how to spend my time. That means I can choose who to spend my time with.

    My Money Why is not about being rich.

    Saying that I want to be good with money is not the same thing as saying that I want to be rich. Funny enough, people that are good with money oftentimes feel rich regardless of what their net worth is.

    As nicely put by Sam Dogen, founder of Financial Samurai, one of the preeminent personal finance blogs:

    But I’ve noticed on my path to financial freedom there were several times when I felt incredibly rich and money wasn’t the dominant reason.

    I couldn’t agree more with Dogen. There’s no richer feeling than having just come home from the hospital with a healthy baby girl. That feeling has nothing to do with money.

    Check out more from Dogen at his website financialsamurai.com. There’s a reason why he is one of the leading voices in the personal finance space.

    Simply making a lot of money will not make you feel rich.

    On the flip side, people that make a lot of money but are not good with money often feel like they’re struggling to get by. As CNBC explained after talking with financial psychologists:

    Whether you’re aiming to save more cash or boost your overall earnings, it’s important to ask yourself what you hope to achieve by obtaining more money, Chaffin says. Otherwise, if you don’t change your internal money beliefs, you may still feel anxious about money even if you hit millionaire status.

    The takeaway is that it is pointless to make money without stopping to think why you want that money and what you’re going to do with it.

    If you’ve never thought about money that way before, here are three three powerful reasons to get you started:

    1. Money can give you choices.
    2. Money can give you personal power.
    3. Money can give you time.

    Money is nothing but a tool that you can manipulate to get what you truly want out of life. The thing is, you have to actually think about what you want if you are going to use that tool effectively.

    Don’t wait for a major life event to start thinking about money.

    You don’t have to wait until you have a baby to start thinking about what money can do for you. In fact, if you wait for a major life event like that, it’s going to be a lot harder than if you start thinking now.

    Ask yourself:

    “What is my Money Why?”

    Whatever comes to mind, write it down.

    Maybe you want to retire early. Maybe you’re just looking for a life pivot, as Scott Trench, CEO and President of BiggerPockets wrote about recently and has regularly discussed on the BiggerPockets Money podcast.

    I personally agree with Trench. I like almost everything about FIRE, which stands for Financially Independent Retire Early. I just know that retiring early is not for me.

    I prefer to think of it as FIPE:

    Financially Independent Pivot Early

    With FIPE, the goal is not to retire. The goal is to give yourself the freedom to choose what to do next.

    Whether you want to retire early or just pivot to a new chapter in your life, being good with money is key.

    Besides, I’ve never seen the point in working endless hours to make money, while spending hardly any time seriously thinking about how to keep that money.

    What’s your Money Why?

    My Money Why gets clearer by the day. It has never been more clear than it is right now after bringing home a little baby girl.

    • What is your Money Why?
    • Has your Money Why changed over time?
    • How does your Money Why impact your relationship with money?

    Let us know in the comments below.

  • The Time is Now: Student Loan Basics

    The Time is Now: Student Loan Basics

    Have you noticed all the attention on student loans lately?

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

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

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

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

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

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

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

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

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

    Let’s dive in.

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

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

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

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

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

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

    Let me help you get started.

    Federal loans are better than private loans.

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

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

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

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

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

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

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

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

    What to Know about Federal Student Loans

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

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

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

    There are 3 main types of federal student loans.

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

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

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

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

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

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

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

    Direct PLUS Loans are available for parents and graduate students.

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

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

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

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

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

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

    Federal loans offer the best interest rates and lowest fees.

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

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

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

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

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

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

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

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

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

    The federal government currently works with the following loan servicers:

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

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

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

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

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

    The federal government offers a number of loan repayment plans.

    At least, for now.

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

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

    So, what is a loan repayment plan?

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

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

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

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

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

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

    Loan Deferment, Forbearance, Forgiveness and Discharge

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

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

    Again, this may be all in flux.

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

    What to Know about Private Student Loans.

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

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

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

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

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

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

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

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

    Where are you in your student loan journey?

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

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

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

    Where are you in your student loan journey?

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

  • Money on My Mind: Global Happiness

    Money on My Mind: Global Happiness

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

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

    The World Happiness Report 2025

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

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

    That sounds like a great mission to me.

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

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

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

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

    “Freedom to make life choices.”

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

    The top five countries in the happiness rankings are:

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

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

    Where is the United States on the happiness chart?

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

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

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

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

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

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

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

    That ranking truly shocked me.

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

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

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

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

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

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

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

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

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

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

    How would you rank yourself on the freedom question?

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

    What are your core values?

    Have you ever written down your core values?

    Do you know what you’re striving for?

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

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

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

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

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

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

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

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

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

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

    Millennials want more kids but can’t afford them.

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

    This makes me sad.

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

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

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

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

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

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

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

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

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

  • 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.