Tag: investing

How to Prioritize Investment Account Types While in Debt
Recently, we’ve been talking about some tricky money questions related to investing.

We first looked at whether it makes sense to invest while you’re in debt.

We then looked at whether to prioritize investing for retirement or for your kid’s college.

These are questions that commonly come up when I’m teaching law students and young lawyers. Of course, these questions are best answered when we consider both the emotions and the math of money.

Today, we’ll look at a third question that comes up regularly:

How should you prioritize certain investment account types, especially if you’re still paying off debt?

This is another great question.

If you’re wondering what I mean by different investment account types, you can read about my four favorite account types here.

Below are my thoughts on how I would choose between different investment account types while paying off debt.

Let me know if you agree or would prioritize a different order in the comments below.

1. Invest just enough to qualify for your employer match.

Your first goal should be to invest enough in your 401(k) plan to qualify for the employer match.

Many employers today offer a match to incentive employees to contribute to their 401(k) plans. To qualify for the match, you must be participating in your company’s plan and make contributions yourself.

The match is usually a percentage of your overall salary, usually between 3% and 6%.

For example, let’s say your salary is $100,000 and your employer offers to match your contributions up to 5% of your salary.

That means if you contribute $5,000 (5% of your salary), your employer will contribute an additional $5,000 (5% match) to your account.

In other words, your $5,000 automatically turns into $10,000.

Think about that for a moment.

That’s a guaranteed 100% return on your contribution. You put in $5,000 and you automatically get another $5,000. You won’t find a guaranteed return like that anywhere else.

That’s why if your company offers a match, it’s a no-brainer to take advantage of that match.

For this reason, an employer match is often described as “free money.”

I don’t like the term “free money” because it implies that you have not earned that money as an employee for your company. I prefer to refer to the company match as a bonus you’ve rightfully earned.

The key is to accept that earned bonus by ensuring you are meeting the minimum requirements to qualify.

Whether you think of it as free money or as a bonus you’ve earned, make sure you contribute enough to your 401(k) plan to qualify for the employer match.

2. Pay off all credit card debt.

After you hit the employer match, and before you think about further investments, you should pay off all credit card debt.

Note that credit card debt is in a category of its own because of the extremely high interest rates that accompany credit cards.

Currently, the average credit card interest rate is 20.12%.

The S&P 500 has historically averaged a 10% annual return.

That gap is so large that it’s a good idea to pay off your credit card debt before turning to further investments.

Think about it like this: with credit card debt, you are guaranteed to pay a penalty of around 20% until you pay off that debt. When investing, you can reasonably hope to earn around 10% interest.

Because the penalty you’re paying is twice the rate you’re hoping to earn, the smart move is to eliminate that penalty.

For help on paying off your credit card debt, check out my top 10 tips here.

Why not pay off your credit card debt entirely before investing in your 401(k)?

You may be wondering why I recommend qualifying for your employer match before paying off credit card.

Even with such high credit card interest rates, there’s a good reason to prioritize qualifying for your employer match. We touched on that reason above.

Let’s revisit our example. With an employer match, if you contribute $5,000, your employer will also contribute $5,000.

As we said, that’s like earning a 100% guaranteed return on your money. A 100% guaranteed return is too good to pass up.

No other reasonable investment option offers a 100% guaranteed rate of return. You can’t even reasonably hope to match the 20% penalty that credit card companies charge.

That’s why eliminating your credit card debt should be your next priority after receiving your employer match.

3. Allocate 75% of available funds to other loans and 25% to investments.

Once you have paid off your credit card debt, I recommend putting 75% of your available funds to loans and 25% to other investments.

When I say loans, I am referring to student loans, personal loans, lines of credit, and HELOCs. Note, I am not referring to primary mortgage debt.

It’s not uncommon for law students to have hundreds of thousands of dollars in debt. The same is true for students in medical school and business school.

It’s not just people with student loan debt who face this question. As one example, perhaps you’ve used a HELOC to buy investment property, like I have.

There’s a reason credit card debt is in a separate category from other loans, like student loans and HELOCs.

Unlike credit card debt, student loan debt and HELOC debt typically come with lower interest rates.

The current lowest federal student loan interest rate is 6.53%.

The current average HELOC interest rate is 8.27%.

Your loans may have even lower interest rates. Regardless, the odds are that your interest rate is below the historical 10% average annual return of the S&P 500.

While it’s never a bad idea to eliminate debt, there are some good reasons why you should invest even though you’re in debt.

We explored these reasons and why I recommend a 75/25 ratio in my recent post on investing while in debt:

A Tricky Money Question: Should You Invest While in Debt?

If you’re on board with investing while paying off debt, the question becomes: where should you invest that money?

That brings us to my next suggestion.

4. Max out your 401(k) plan.

Once you reach this step, you should have no credit card debt. You should also be applying either the 75/25 ratio to invest while you’re in debt, or have no other debt to pay off.

At this point, I suggest maxing out your 401(k) with your remaining available funds.

The reason I suggest maxing out your 401(k) is because these contributions are made with pre-tax dollars. In other words, you get a tax break today by investing in your 401(k).

To put it another way, you will save money on taxes every year you contribute to your 401(k) plan.

Don’t sleep on the impact of taxes on our money decisions. Over the long term, taxes can be hard to predict, but they should not be ignored.

Photo by Ch_pski on Unsplash

Nobody really knows what taxes are going to be like in the future. Yes, it’s a safe assumption that taxes will keep going up.

But, taxes have always been complicated. I’m guessing they will always be complicated. Even if taxes generally go up, there’s no telling the exact impact taxes will have on your personal situation.

That’s why I prefer to take the guaranteed tax savings now. I’m ok with the possibility of paying more in taxes decades from now. That’s especially true because I have plenty of good uses for those tax savings right now.

That’s why I recommend maxing out your 401(k) before moving on to my final suggestion.

5. Max out your HSA, Roth IRA and 529 plan.

Once you reach this step, you’re in great shape. Reaching this point means you have maxed out your 401(k) plan, which means you’re receiving an employer match.

It means you have no credit card debt. On top of that, you are paying down your other loans with a 75/25 ratio or have eliminated those loans entirely.

Now, you have options. You’ve earned the right to choose the best investment account type for your situation.

Besides a 401(k), my other favorite account types are a Roth IRA, a Health Savings Account (HSA), and a 529 account.

You can read all about my favorite investment account types in this recent post:

My 4 Favorite Investment Accounts for Long-term Wealth

Depending on your income, a Roth IRA may be the best account type for additional retirement savings.

If you’re healthy and can cover certain medical expenses, maybe you would benefit from an HSA.

Have kids and worried about paying for college? Maybe a 529 plan is right for you.

The point is you’ve earned the right to pick the best investment accounts for your present situation.

You really can’t go wrong with any of these choices.

What do you think of this plan to prioritize certain investment accounts while in debt?

What do you think about this plan to prioritize certain investment account types, especially if you’re still paying off debt?

Let us know in the comments below.

If you’ve already made it to step 5 and are looking for help with what to do next, the truth is that you have too many options to cover in this post.

To help you start thinking about your choices, you could:
- Invest in a traditional brokerage account;
- Invest in real estate; or
- Pay down your primary mortgage.
If you’ve already made it to step 5, reach out and I’d be happy to help you think and talk about your options.

The best way to reach me is to sign up for my weekly email and reply to any email.
June 5, 2025
Investing for Retirement and Your Kid’s College
We recently talked about the tricky question of whether you should invest while you’re in debt.

It’s a choice many people struggle with because we know debt can be bad and investing can be good.

The desire to tackle both goals raises the question: should we focus on eliminating the bad thing or doing more of the good thing?

In that post, we explored the four main reasons why I think it’s a good idea to invest while in debt. You can read more here.

Today, we’ll talk about another challenging question that many of us face:

Should we prioritize investing for retirement or investing for our children’s college?

Like the question of whether to invest while in debt, this question presents a difficult choice because two things are true at once:

Investing for retirement is a good thing.

Helping our kids is a good thing.

So, what should we do?

This is a question I think about a lot now that I have three young kids.

There are powerful emotional reasons on both sides of the question. And while money decisions are certainly emotional, using simple math can help you choose the right balance between retirement and college.

Let’s start by looking at some of the emotional reasons and then explore how simple math can help us with this difficult choice.

As a parent, I want to help my kids as much as I can.

On the one hand, as a parent, I want to help my kids as much as I can. College is expensive and is only getting more expensive.

I have personally felt the heavy burden of debt. It’s not a good feeling. If I can help my children avoid that feeling by paying for college, I will.

I want to be free to retire on my terms.

On the other hand, I want to be free to retire on my terms. To do so, I know that I need to start investing early and often. Just like college is expensive, retirement can also be very expensive.

I don’t want to be in a position where I’m forced to work longer than I otherwise would because I don’t have enough saved up.

If I skip out on investing for retirement to pay for college, I may end up in that situation.

With powerful emotions on both sides of the question, is it possible to come up with a plan that helps accomplish both goals?

Yes, I think we can. In this instance, it helps to remember that money decisions are both emotional and mathematical.

Let’s revisit some of the math we’ve previously looked at to help us get closer to a decision.

What does the math say about paying for college?

We took a deep dive into saving for college in my post on using 529 plans for sky high college costs.

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

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

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

Whatever online calculator you use, you’ll have to make some assumptions when you start plugging in numbers, like an investment return rate.

The S&P 500 has historically provided a 10% average annual return. So, 10% seems like a reasonable return rate to me for your estimations.

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

Photo by MD Duran on Unsplash

With these assumptions in mind, let’s look at an example using a current kindergarten student.

Since I live in the Chicago-area, we’ll assume in this example that the kindergarten student is going to the largest in-state college, the University of Illinois Urbana-Champaign (U of I).

Illinois’ Bright Start 529 calculator estimates that the cost of a current kindergarten student attending U of I will be $264,735.

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

That comes out to $900 per month.

By doing the math, you now have a reasonable estimate as to how much you should be saving for college.

You do not have to rely exclusively on long-term savings to pay for college.

If $900 per month seems like a lot of money, keep in mind that you don’t have to depend exclusively on these savings to pay for college.

There are two key reasons for that:

1. Your child can take out student loans.

While it may not be your plan right now, don’t forget that your child always has the option of using student loans to help pay for college. Your child may also earn scholarships or qualify for other financial assistance.

On top of that, there are hundreds of good colleges at varying price points around the globe. It is not the end of the world if your child ends up going to a lower-ranked but less expensive school.

The bottom line is that there are options when it comes to paying for college. It is not exclusively up to your savings to ensure your child gets a good college education.

In other words, don’t convince yourself that your student will be prohibited from attending college if you don’t save enough right now.

2. You will likely still be earning income when your child starts school.

Besides the availability of other options to pay for college, also keep in mind that you will likely still be working when your child starts school. There is no reason that you can’t use some of that income to help pay for school.

If you continue to make intentional, solid money decisions, you should have extra funds available in your budget when your kid starts college.

One way make sure that happens is to keep your expenses constant as your career progresses and you make more money. As an example, let’s say you bought a home while your kids were young. Of course, this is a common path for a lot of professionals who are starting a family.

If you stay in that home long-term, your housing costs should be relatively fixed. As you earn more money, instead of upgrading your home, you can use that excess money to help pay for college.

Once again, the point is that there are options to help your children pay for college even when your investments fall short.

Now, let’s look at the math to figure out how much we should be saving for retirement.

Just like we can use an online calculator to estimate the cost of college, we can also use a calculator to estimate how much we need to save for retirement.

We took a detailed look at how to do this in my post on figuring out your magic retirement number.

The key is to start with the 4% Rule,

The 4% Rule suggests that you can safely withdraw 4% of your investments each year and expect your money to last for 30 years.

Without getting too technical, the 4% Rule is based off of research looking at historical investment gains, inflation, and other variables.

For simplicity, let’s say you have $1 million in your portfolio. According to the 4% Rule, you can safely withdraw $40,000 per year (4% of your portfolio) and not run out of money for 30 years.

Current Savings x 4% (.04) = Annual Retirement Spending

$1,000,000 x .04 =$40,000.00

The 4% Rule also works in reverse.

By that, I mean you can use the 4% Rule to ballpark how much money you’ll need in retirement to maintain your current lifestyle.

Let’s say that you reviewed your Budget After Thinking and learned that you spend $6,000 per month in Now Money and $4,000 per month in Life Money.

Combined, that means your lifestyle costs you $10,000 per month, or $120,000 per year.

To figure out how much you would need in investments to cover your current lifestyle for 30 years, divide $120,000 by .04.

Current Spending / 4% (.04) = Magic Retirement Number

$120,000 / .04 =$3,000,000.00.

That means to maintain your current lifestyle of spending $120,000 per year for 30 years, you would need $3 million in investments.

In other words, your magic retirement number is $3 million.

Now that you know you will need $3 million in retirement, you can figure out how much you need to be investing today to hit that number.

I like the calculator available on investor.gov for this part.

With this calculator, you can plug in your investment goal, initial investment, years until retirement, and interest rate to figure out how much you need to save each month.

Let’s continue our example assuming your magic retirement number is $3 million.

We will also assume that you currently have $100,000 saved for retirement and you plan to retire in 30 years. We’ll also use the same 10% annual rate of return we used before.

Based on these assumptions, you would need to save $635.82 each month to hit your magic retirement number of $3 million.

With this information, you can now plan accordingly to make sure you are saving enough for retirement each month before you start worrying about college.

Photo by Zach Betten on Unsplash

Aim to hit your monthly retirement target before saving for college.

By using these simple online calculators, you can estimate exactly how much you need to save for college and to save for retirement.

I recommend that you aim to hit your monthly retirement target first before funding your college savings accounts.

As we mentioned above, you and your child will have other options to help pay for college, like loans, scholarships, and concurrent income.

By contrast, these options are not readily available to fund your retirement. You’re more-or-less on your to sustain yourself.

Think about it: by definition, retirement means ceasing to work. That means no income coming in besides your retirement savings. There are not any loans (at least reasonable ones) or scholarships to bail you out in retirement.

Sure, you could try to work part-time during retirement. But, that means you’re really only partially retired. Plus, it would be nice to have the choice to work in retirement because you want to work instead of being forced to do so.

It’s for these reasons why you should prioritize saving for retirement over saving for college.

In an ideal world, you can do both. If you control your expenses as your income grows, you give yourself the best chance to do both.

How are you balancing investing for retirement with investing for college?

While money decisions are certainly emotional, using simple math can help you choose the right balance between retirement and college.

My recommendation is to prioritize retirement over college because of the additional options available to help pay for college. You’re essentially on your own when it comes to retirement.

Once you’ve calculated your magic retirement number, you can then calculate exactly how much to save each month.

When you can comfortably hit that number, you can then figure out how much to be saving for college.
- Are you currently saving for retirement and for college?
- How do you balance doing both?
- Have you thought about other ways to help pay for college besides the options we discussed?
Let us know in the comments below.
June 3, 2025
Money on My Mind: Bears, Net Worth and Exercise
On my journey to financial freedom, I’m consistently striving to learn as much as I can from others who have done it before me.

This week, I read a few great blog posts from some of my favorite authors and bloggers.

Let’s take a look and see what we can learn together.

What to do in a bear market.

JL Collins recently posted about the big mistake that people make during bear markets. A bear market is when the stock market drops by 20%.

Collins is one of my favorite authors on investing. He just released the new edition to his best-selling book, The Simple Path to Wealth.

I highly recommend you pick up a copy if you are interested in learning the easy way to invest and grow your net worth.

Back to the question at hand:

As an investor, what should you do during a bear market?

Nothing!

Easier said than done, right?

Human instinct is to act. Our natural instinct tells us to do something when confronted with danger. We’ve all heard the saying, “fight or flight.” It’s our body’s way of protecting us from potential harm.

For example, if you encounter a bear in the woods, despite what survival experts may tell you, I’m betting you’re running for your life in the opposite direction.

That’s exactly what my wife and I did when we saw a black bear in Colorado a couple summers ago.

Even though we were at least 100 yards away when we saw the bear, and the bear was walking away from us, we ran in the opposite direction as fast as we could.

Survival experts, we are not.

If you zoom in (and squint), you can see the ferocious beast in this picture.

When it comes to investing, the saying should be modified to include a third option: “fight or flight or do nothing.”

And as JL points out, doing nothing is usually the best decision.

When the market drops, you have the chance to buy stocks at a discount. Whenever the market bounces back, you will benefit from all those discounted stocks you purchased.

Of course, nobody knows when the market will bounce back. For that matter, nobody knows when it’s going to drop, either. However, history has shown us that the market has always recovered.

What if the market doesn’t recover?

Then, we all have bigger problems to worry about than our money.

It may take a long time for the market to recover. That’s OK. When you invest early and often, time is on your side.

By combining time and the courage to do nothing, you will benefit immensely in the long run.

The Rise of Middle Class Multi-Millionaires

Another one of my favorite authors and bloggers, Financial Samurai, recently posted about the rise of middle class, multi-millionaires.

If you haven’t picked up a copy of his new book, Millionaire Milestones, I highly recommend it. I recently ranked it as one of my favorite money mindset books.

You can read my full review of Millionaire Milestones here.

In his post on middle class multi-millionaires, Financial Samurai raises a great point:

How come people are so enthralled by high incomes instead of high net worths?

Like me, have you wondered why people tend to be more interested in someone’s salary rather than his net worth?

I have one theory for why society continues to value income more than net worth: income can be more easily measured and more easily used for marketing purposes.

To put it another way: income is sexier than net worth.

One example I thought of: remember when you applied to college, grad school, law school, etc.?

Did you notice how schools commonly advertise the average or median income of their graduates. Schools love to show off that if you go to their school, you’ll make a certain amount of money upon graduating.

However, you’ll never see data on the net worth of its graduates.

Why is that?

Because an impressive net worths can take decades of discipline to manifest. That type of slow progress doesn’t make for sexy marketing for schools.

Plus, a top flight education may help you earn a high income but doesn’t guarantee a high net worth. Many high earners are also high spenders. You’d be surprised how many people are good at making money but not keeping it.

It’s up to each of us to turn that income into a high net worth. Again, that’s harder for schools to market.

If you are a personal finance enthusiast, you know to value net worth more than income. In fact, the most impressive feat of all is when you have a high net worth on just a standard income.

For my kids, I’d be way more impressed to see what schools crank out students with high net worths 20-30 years after graduation instead of the median income upon graduation.

To learn how and why to track your net worth, you can read my post here.

Does early retirement negatively impact your life expectancy?

I read a fascinating post on Early Retirement Now that looked at the potential consequences of someone’s life expectancy based on when that person retires.

There has been a lot of academic research done on the topic. Somewhat surprisingly, there are studies that indicate retiring early may negatively impact your life expectancy.

Check out the post on Early Retirement Now for a closer look at some of these studies.

I’m not too worried about the conclusions about life expectancy based on when someone retires. At best, there are conflicting studies on that question.

Rather, what I found most interesting about the post was that I’ve rarely thought about the potential health consequences about retiring early.

I regularly think about the mental side of retiring early. Specifically, how does someone keep his mind sharp in early retirement?

This is one of the main reasons I believe in FIPE not FIRE.

However, I’ve never really thought about the physical effects of retiring early.

Does retiring early negatively impact your physical health?

I may have mistakenly assumed that someone’s physical health would automatically peak in early retirement. I’ve based that assumption on the idea that you’ll have so much time to exercise and eat right when you don’t have to worry about a job.

In other words, if you’re not spending 50+ hours per week sitting at a desk, there would be no excuse to skip out on exercising regularly and preparing healthy meals at home.

This post has me thinking about other factors I’ve failed to consider.

For one, your body may trend towards lethargy if you’re not forced to wake up, get dressed and work 50+ hours per week. Plus, as much as people may not like commuting, at least it gets you out of the house and moving around.

My takeaway is that if you’re considering retiring early, be sure to plan ahead for physical activity as much as mental activity.

Your body may not want to exercise every day. You may need a motivational boost from group exercise classes or clubs. Maybe you’ll need a personal trainer or coach.

If you don’t currently have any hobbies tied to physical activity, I would suggest exploring different options before you leave full-time employment. It may take some time to find your groove with an activity or two that interests you.

Let us know what you think about these posts.

What do you think about these posts from popular personal finance writers?
- Are you brave enough to do nothing in the face of a bear?
- Have you been tricked into thinking a high income is more impressive than a high net worth?
- What are your thoughts about the physical side of retiring early?
Let us know in the comments below.
May 30, 2025
A Tricky Money Question: Should You Invest While in Debt?
One of the most difficult money decisions people have to make is whether to invest while in debt. That’s because it can be challenging to plan for the future while worrying about past debts.

It’s also a tough decision because we know two things to be true at once:

Debt can be bad.

Investing can be good.

So, should we focus on eliminating the bad thing or doing more of the good thing?

You can see why it’s a tricky question.

The way I see it?

You don’t have to choose only one door to walk through.

You can invest while in debt.

I regularly get questions like this from law students who take my personal finance class. People just starting out in their careers are rightfully thinking about whether they should invest while paying off student loan debt.

It’s not uncommon for law students to have hundreds of thousands of dollars in debt. The same is true for students in medical school and business school. The question about investing or paying off debt makes perfect sense.

It’s not just people with student loan debt who face this question. Perhaps you’ve used a HELOC to buy investment property like I have. Maybe you have mortgage debt, medical debt, or consumer debt.

The choice to pay down debt or invest for the future is tricky.

Whatever the case may be, the choice to pay down debt faster or invest for the future is tricky.

For people feeling the heavy burden of debt, the idea of investing for some future goal can seem a little bit comical. I completely understand.

If you’re facing monthly debt payments for the next 10 years, you may not be ready to think about retirement 50 years from now.

Trust me, I get it.

I know firsthand how heavy debt can feel.

In my 20s, I had both student loan debt and credit card debt. It was not fun to carry that debt burden. I’ll never forget the incredible feeling of accomplishment when I paid off those debts. I felt so much lighter.

I now have HELOC debt that I’m focused on paying off. That HELOC debt stems from buying five properties in seven years. My real estate portfolio is now exactly where I want it to be, so I’ve shifted from acquisition mode to debt-reduction mode.

Just about every day, I think about how good it’s going to feel to have that HELOC debt paid off.

The point is: you don’t have to convince me why you may want to focus on paying off debt. I understand completely.

However, I think it’s worth considering the advantages of investing at the same time you’re paying off debt. You don’t have to go all-in on paying off debt or all-in on investing. You can strike a balance.

In today’s post, I’ll share my perspective to help you think about the right balance between debt reduction and investing.

Four main reasons to invest while in debt.

There are four main reasons to consider when thinking about whether you should invest even though you’re in debt. If you’re not investing at all because you’re focused on debt, these four reasons should give you something to think about.

Photo by Caleb Jones on Unsplash

1. Invest while in debt because of the emotions of money.

It feels good to see your investment accounts grow. This is especially true when you are accustomed to looking at huge debt balances on your laptop or phone screen.

Yes, it feels good to see those debt balances shrink. It also feels really good to see your investment accounts grow.

As a professional, you work hard for your money. You spend a lot of hours away from home so you can work and make a living. You deserve to experience the fruits of your labor.

When your career is stressing you out, it can be very uplifting to observe a growing investment account balance month-to-month.

2. Invest while in debt to develop the habit.

It’s important to get in the habit of investing as early as possible in your careers. Once you start investing, even if it’s only $25 per month, you are creating a habit. This is the type of habit that will pay off immensely in the long run.

Humans have a tendency to resist change. That’s why it’s difficult to break bad habits. This tendency also works in our favor when we have established good habits, like investing. We tend to just keep doing what we’ve always done.

When you’ve established the good habit of investing, it’s easy to increase your contributions as you earn more money. The same is true when you’ve eliminated all your debt. You can easily use the money you had been putting towards debt for your already-established investments.

That’s because your accounts will already be set up. All you need to do is increase your monthly investment contributions.

This makes it easier to solidify and benefit from the good habit you’ve cultivated.

3. Invest while in debt because of compound interest.

Compound interest is the most powerful force in all of personal finance. The earlier you start investing, the more benefit you’ll get from compound interest.

You can check out more about the power of compound interest in my post on investing early and often.

Even investing a small amount of money while paying off debt will lead to massive gains over the long term because of compound interest.

4. Invest while in debt because of the math.

Even though money decisions are closely connected to our emotions, the math of investing can be hard to ignore. If you prefer to make money decisions primarily based on the math, here’s what you can do.

We’ve talked before about how the S&P 500 has historically earned an average annual return of 10%. Of course, there’s no guarantee that you will earn 10% if you invest. You may earn less or you may earn more. Still, based on the historical data, it’s a reasonable estimate.

You can then compare that 10% return to the amount you’re paying in debt interest.

Photo by Towfiqu barbhuiya on Unsplash

For example, let’s say you have student loan debt. In this example, let’s also assume you’ve created an extra $200 in your monthly budget to allocate towards either debt or retirement.

You’ll next want to look up your current student loan interest rates. For illustration purposes, the current interest rate for undergraduate federal loans is 6.53%. The current interest rate for graduate and professional students is 8.08%.

Then, you can use an online calculator to help make your decision about whether to invest the $200 or put that money to debt.

If you put the money to debt, you’ll obviously pay off that debt faster. You can read more about how to easily do these calculations in my post on Debt Snowball vs. Avalanche.

Likewise, you can use an investment calculator to see how much that $200 will grow in an investment account over the long run. You can see how to do these calculations in my post on risk as the cost to invest.

Armed with the math, you can then make a decision that makes the most sense to you.

You may value getting out of debt faster. Or, you may be motivated by the larger balance in your retirement account.

It may come down to how high the interest rate is on your student loans. The higher your interest rate is, the more sense it makes to prioritize paying off that loan.

The point is that there are mathematical reasons to start investing even while paying off debt.

One final note about the math: your student loan interest rate is effectively locked in (unless you have a variable rate). On the other hand, your investment return rate is only a projection. That makes a difference.

It means that when you are in debt, you are guaranteed to be charged interest every month. In contrast, there are no guarantees you will make money when you invest. As you make your decisions, don’t ignore this key difference.

I prefer to allocate 75% to debt and 25% to investments.

When you consider these four main reasons, you may be convinced that it makes sense to invest even while paying off debt.

So, the obvious next question becomes: how much money should you put towards debt and how much should you invest?

The ratio that works for me is 75% towards debt and 25% towards investment goals. In other words, if I had $1,000 to allocate in my budget for debt and investments, I would use $750 for debt and $250 for investments.

I used this ratio when I had student loan debt and continue to use it to eliminate my HELOC debt.

You can read more about my primary goal of paying off HELOC debt in 2025 in my post on money and cheeseburgers:

Great Talk: Money and Cheeseburgers

This 75-25 ratio gives me the dual benefit of paying off my debt faster while also seeing my investment accounts grow over time. Once my debts are paid off, I will have already established the good habit of investing. In the meantime, I’m currently benefitting from compound interest and the math of investment returns.

The reason I lean more towards debt is because I don’t like the feeling of being weighed down by debt. It’s hard to feel completely free when you are carrying the burden of debt. That’s why I am currently prioritizing paying off HELOC debt.

That said, I’m not willing to entirely delay investing for the future. The 75-25 ratio is a good balance for me and helps me accomplish multiple goals.

75-25 has worked well for me. Having reached my 40s, I’m very happy that I did not neglect my investments entirely while dealing with debt.

Don’t agonize about finding the perfect ratio between debt and investments.

Whatever balance works for you, keep one important tip in mind:

Don’t agonize about finding the perfect balance between debt reduction and investing for the future.

Take a step back and think about it for a moment:

Paying off debt is great.

Investing for the future is also great.

If you’re doing both of these things in some fashion, you’re already making great money choices!

If you’re able to pay off debt and invest at the same time, you most likely have already created a successful Budget After Thinking. You have proven that you can stay disciplined enough to allocate funds to your Later Money goals each month.

You have already done the hardest part.

I consider this whole conversation of putting money towards debt or investments a win-win decision. There’s no reason to stress yourself out in search of the perfect balance. You’re already winning.

Find a balance between debt and investments that works for you and stick to it. You really can’t go wrong. Either way, you are making progress on your money goals.

Some day in the future your debt will be paid off.

The bottom line is, one way or the other, you are going to pay off your debt. That’s assuming you are a reasonably responsible person on a typical career trajectory.

If you have student loans, it might feel like you will never get out of debt. I assure you that you will.

To put it in perspective, if you are on a standard repayment plan, you’ll be debt-free in 10 years. For most students, that equates to being debt-free sometime in your 30s.

My guess is that by the time you retire, you won’t even remember how much debt you had or exactly when you paid it off. The only reason I remember when I paid off my debt is because I’ve been keeping a money journal since 2011.

On the other hand, towards the end of your career, you will very much be aware of how much money you have saved for retirement. You will be counting on that money to allow you to step away from full-time employment.

If you’ve figured out your magic retirement number, you’ll know how long you can sustain yourself on your retirement savings.

As hard as it is to do when you’re in debt, try and picture that older version of yourself who is nearing retirement. That older version of yourself will be very grateful that you had the discipline to start investing even while paying off debt.

That’s why I allocate 75% of my available funds to debt and 25% to investments. When my debt is gone, I’ll put the full 100% to investments.
- So, what do you think?
- Are you currently investing while paying off debt?
- What other factors went into your decision besides the four main reasons discussed above?
Let us know in the comments below.
May 29, 2025
Why Target Date Funds: The Easy Way to Invest
Don’t be fooled. The easiest option can also be the best option.

You already know I’m a big fan of making things easy, especially investing.

And, there is no better example of making things easy than investing in target date funds.

Maybe we’ve been brainwashed into thinking that the harder something is, the better it is. Of course, there’s that often-repeated phrase, “If it were easy, everybody would do it.”

We’ve been programmed into thinking that “hard work” automatically means “better results.”

I certainly agree that hard work pays off when it comes to things like career and exercise.

As another example, baking cinnamon rolls comes to mind. With cinnamon rolls, the harder way is probably also the better way.

My daughter and I bake pre-made cinnamon rolls every week. We have fun with it and it’s quick and easy.

She loves how they taste, so that’s all that really matters. But, they don’t come close to tasting as good as homemade cinnamon rolls, which are certainly harder to make.

So in the context of cinnamon rolls, I think “harder” does mean “better.”

On the other hand, I don’t agree that investing has to be hard. I don’t believe that just because something is easy, it must not be that good.

And, that brings us to target date funds.

There’s nothing easier than investing in target date funds.

My wife and I have been investing in target date funds for years. Target date funds have been both easy and effective for us.

That’s important because we’re also at the stage in our lives where we are trying to make things easier, not harder.

The idea behind target date funds is that your portfolio automatically rebalances as you move closer to your predetermined life event, like retirement or your kid’s college start date.

That means over time, your target date fund will gradually become more conservative to protect all the money you had saved and earned over the years. It typically does so by reducing exposure to stocks and increasing exposure to safer assets, like bonds.

You do not have to do a thing.

It simply cannot get any easier than this.

Today, we’ll take a closer look at how target date funds work. The goal is to help you make an informed decision on whether they are the best option for your situation.

Before we jump in, if you need a refresher on some key investment terminology, check out my post on the language of investing:

Learn the Language to Make Investing Easier

What are target date funds?

Target date funds are a form of mutual fund. When you invest in target date funds, you are essentially getting a complete portfolio in a single fund.

Target date funds are typically comprised of broad stock index funds and bond index funds.

That is one of the keys to remember about target date funds. They automatically provide investors with strong diversification and optimal asset allocation based on their chosen time horizon.

Target date funds are ideal for long-term investment goals. They are designed to help you manage risk as you move closer to your pre-determined goal.

Typically, target date funds invest more heavily in stocks in the early years in an effort to earn greater returns. As you move closer to your pre-determined goal, the fund will automatically shift to buying safer assets, like bonds.

What types of investments are typically in target date funds?

Most target date funds are made up of index funds. That means that when you buy a target date fund, you are getting exposure to a wide variety of stocks and bonds through index funds.

An index fund is a type of mutual fund that seeks to track the returns of a market index, like the S&P 500 Index.

As explained by Vanguard:

An index mutual fund or ETF (exchange-traded fund) tracks the performance of a specific market benchmark—or “index,” like the popular S&P 500 Index—as closely as possible. That’s why you may hear people refer to indexing as a “passive” investment strategy.

Instead of hand-selecting which stocks or bonds the fund will hold, the fund’s manager buys all (or a representative sample) of the stocks or bonds in the index it tracks.

It’s very hard, even for professionals, to beat the returns of the S&P 500. Historically, the S&P 500 has averaged an annual return of 10%.

Photo by Artur Matosyan on Unsplash

I Invest in target date funds because they give me a great chance to match those historical average returns without any effort on my part.

What are the advantages of investing in target date funds?

Target date funds share the same benefits as investing in index funds. That’s because, as we just discussed, most target date funds are comprised of index funds.

In addition to the benefits of index funds, target date funds offer one additional major benefit we’ll discuss below.

By the way, you already know 7 things I love about index funds:
1. Anybody can do it
2. No wasted mental energy
3. Low fees
4. Automatic diversification
5. The closest thing to predictability
6. I don’t have stock FOMO
7. Good enough for Buffett, good enough for me
For a more in depth look, check out my post here:

7 Things I Love About Index Funds

Target date funds automatically rebalance

In addition to sharing the 7 benefits of index funds, target date funds offer one additional, major benefit:

automatic rebalancing

Importantly, target date funds automatically rebalance to continuously maintain your optimal mix of stocks and bonds.

That means as time goes on, you don’t have to worry about rebalancing on your own. That’s one less stressor on your plate.

What do I mean by rebalancing?

Let’s say an investor’s optimal asset allocation is 50% stocks and 50% bonds. After a year of impressive stock market growth, this investor’s portfolio now consists of 60% stocks and 40% bonds. That’s because his stocks increased in value at a greater rate than his bonds.

As a result, he’s now weighted more heavily in stocks than his optimal asset allocation. To rebalance his portfolio, he could take a variety of steps. He could sell some stocks or purchase more bonds to get back to where he wants to be.

With target date funds, he would not have to worry about this situation. That’s because target date funds automatically rebalance for you.

That’s a big load off an investor’s plate. It’s the main reason why I like investing in target date funds.

Target date fund or build your own?

After you open an investment account, you can select a combination of index funds on your own or choose a target date fund.

There’s nothing wrong with buying index funds on your own instead of through a target date fund.

You will actually save money on fees if you go that route, but not very much.

For example, the popular Vanguard Total Stock Market Index Fund (VTSAX) charges a fee of .04%.

Vanguard’s Target Retirement 2065 Fund presently charges a fee of .08%.

Just remember to rebalance your portfolio from time-to-time to stay within your preferred asset allocation.

If you don’t want that added responsibility, you can invest in a target date fund that automatically chooses the index funds for you.

Then, the target date fund will automatically rebalance your portfolio over time to maintain an optimal balance of stocks and bonds.

As you saw above, you will pay slightly more in fees for the added convenience. To me, that extra .04% in fees is absolutely worth it.

In the end, both options are good ones.

Investing with target date funds is the easiest choice.

How can you invest in a target date fund?

Most employer-sponsored retirement plans, like 401(k) plans, now offer target date funds. In fact, target date funds are usually the default investment option for new plan participants.

You can also invest in a target date fund outside of your employer-sponsored plan. Most major investment companies offer target date funds in a variety of account types.

In addition to retirement accounts and traditional brokerage accounts, 529 college savings plan providers usually offer target date funds based on when your child will start college.

If you’re curious about my favorite investment account types, you can read more here:

My 4 Favorite Investment Accounts

Regardless of the account type, the process for selecting the right target date fund is the same.

Generally, you’ll see various target date fund options based on your personal time horizon.

For example, if you are currently 25-years-old and plan to retire in 40 years, you would select the target date fund corresponding to 2065. This fund will automatically rebalance as your career progresses towards that retirement date.

Typically, there are target date funds offered in 5-year intervals. Choose the one closest to your preferred retirement year, even if there isn’t one that matches your exact year.

The same concept applies to a 529 college savings plan. If you have a newborn, like I do, you would select the plan that corresponds with your child starting college around 2043.

After you make this one decision, there’s nothing more to do it.

Your focus should be on adding as much money to that account as possible without worrying about things like rebalancing.

I personally invest in target date funds.

My wife and I invest in multiple target date funds. We have various target date funds for our retirement savings and for our kids’ college education.

At this stage in our lives, we’ve placed a premium on doing things the easy way.

We have full-time jobs as attorneys, manage our own rental properties, and have three kids at home. The last thing we need is to add more complication to our lives.

Our personal accounts are with Vanguard, which has long been known as an investor-friendly company that prioritizes low fees.

Why target date funds?

Just because something is easy doesn’t make it wrong.

Investing in target date funds is as easy as it gets. By taking the easy option, you can have exposure to a broad range of index funds that automatically rebalances over time.

Are you doing things the easy way?

If you’re a busy professional like I am, don’t sleep on target date funds.

You’ll always have people that look down upon target date funds as too basic. Ignore them. Let them stress about picking the next hot stock, rebalancing, and timing the market.
- So, are you doing things the easy way? Are you a target date fund investor?
- Do you agree that target date funds are an easy and effective way to invest for the long term?
- Has anyone ever looked down on you for investing in target date funds?
Let us know in the comments below.
May 23, 2025
7 Things I Love About Index Funds
For my money, there’s no beating index funds.

More important, than my money, for my sanity, there’s no beating index funds.

In today’s post, I want to highlight 7 things I love about index funds.

My 7 reasons range from the low costs and automatic diversification to the minimal mental effort required for long-term wealth.

If you’ve been a consistent reader of the blog, you know that money is as much emotional as it is rational. I don’t want to be worried about my money any more than you do.

That’s why the reasons I love index funds take into account both the numbers and the emotions of investing.

Let’s dive in.

7 Things I Love About Index Funds
1. Anybody can do it
2. No wasted mental energy
3. Low fees
4. Automatic diversification
5. The closest thing to predictability
6. I don’t have stock FOMO
7. Good enough for Buffett, good enough for me
1. Anybody can do it

I’ve said it before, and I’ll say it again:

Investing is actually the easy part.

And, when I say investing is actually the easy part, I’m talking mostly about investing in index funds.

You don’t need an MBA or a financial background. You don’t need to read the Wall Street Journal.

All you need to do is consistently fuel your investment account and to let compound interest work its magic.

Oh wait, one more thing:

You also need to read Think and Talk Money. I post three times every week.

Oh, and tell your friends about Think and Talk Money!

2. No wasted mental energy

It goes without saying that most professionals are busy people. On top of working our day jobs, we’re also doing our best to stay healthy, be good family members, and have some semblance of a social life.

Some of us even have side hustles that occupy our time and mental energy.

Photo by Robson Hatsukami Morgan on Unsplash

The last thing we need is another stressor in our lives, like actively trading stocks.

I invest in index funds to take this stressor out of my life.

Yes, I could pay someone a lot of money to manage my money for me.

Or, I could invest in index funds and rest comfortably knowing that I’m going to be in great financial shape down the road.

Why am I confident I’m going to be in great financial shape?

For three main reasons, discussed next.

3. Low fees

Because index fund are passively managed, the fees are significantly lower than actively managed mutual funds.

My favorite index fund is Vanguard’s popular fund called the Vanguard Total Stock Market Index Fund (VTSAX). This fund currently charges .04%, which is just about the lowest fee you will ever see.

Compare that to the 1% fee commonly charged by investment advisors. Also, don’t forget it’s very difficult for even the professionals to beat the returns consistently generated by the S&P 500.

If you don’t think that difference in fees matters, check out my post on what a 1% fee really costs you:

What a 1% Fee Really Costs You

While I can’t control what returns I may earn, I can control the fees I pay.

I’d rather pay .04% than 1%.

That’s especially true when there’s no guarantee that an advisor can perform better than the returns I earn through index funds.

4. Automatic diversification

By investing in an index fund, like an S&P 500 index fund or a total stock market index fund, my stock portfolio is by definition diversified.

For example, when I invest in an S&P 500 index fund, I essentially own a piece of 500 large companies.

Some companies may go up in value, others may go down. I’ll never know which ones are going to make money or lose money. By investing in an S&P 500 index fund, it doesn’t matter. I’m covered either way.

That’s the point of diversification: smooth out the ride so I’m less susceptible to the fortunes of one particular company.

Photo by Artem Beliaikin on Unsplash

As another example, I also invest in Vanguard’s total stock market index fund (VTSAX). This fund offers exposure to nearly the entire U.S. stock market, which consists of 3,598 companies.

Now, that’s really good diversification.

5. The closest thing to predictability

The S&P 500 has historically earned an average annual return of 10%.

By investing in an index fund that tracks the S&P 500, like I do in my 401(k), I have a pretty good chance of earning consistent returns in the long run.

Sure, there may be ups and downs.

But, check this out:

Since 1996, the S&P 500 has ended the year in positive territory 23 times and negative territory only 7 times.

In other words, the S&P 500 has generated positive returns three times more frequently than it generates negative returns.

And even with those 7 negative years, with the exception of 2000-2002, the S&P 500 returned to positive territory the following year.

What this all means is that while the S&P 500 will drop occasionally, the down periods are historically short-lived.

Because of this historical consistency, index funds give me the best shot at predictability.

Note that predictable returns does not mean guaranteed returns. There are no guarantees in the stock market. That’s why my preference is predictability.

I’m very happy with consistent returns and a smoother ride.

6. I don’t have stock FOMO

Depending on the index fund you choose, you may own pieces of a handful of companies or as many as 3,598 companies.

I invest in S&P 500 index funds and total stock market funds. That means I own pieces of lots of companies.

It also means I never have stock FOMO.

You know what stock FOMO is, right?

Stock FOMO is when you find yourself in a conversation talking about something fun like your favorite new show. Then out of nowhere, someone volunteers the hot stock he bought that’s up 20%.

If you have stock FOMO, you feel like you’re missing out by not owning that stock. You think to yourself, “Oh man, that guy’s going to be so rich and I missed the boat!”

You might even run back to your desk so you can buy that hot stock, not realizing that you’ve probably already missed the train.

Stock FOMO can cause a lot of stress. I don’t want that stress.

So, I invest in index funds.

When a stock jumps 20%, I feel good because I already own every company in the U.S. stock market.

No stock FOMO here.

7. Good enough for Buffett, good enough for me

In 2013, Buffett famously instructed that after he dies, his wife’s cash should be split 10% in short-term government bonds and “90% in a very low-cost S&P 500 index fund.”

Good enough for Buffett, good enough for me.

It’s not just Buffett, though. One of my favorite authors on investing, J.L. Collins, wrote about the advantages of investing in a total stock market index fund in his seminal book, The Simple Path to Wealth.

In fact, Collins makes a compelling argument that the Vanguard Total Stock Market Index Fund (VTSAX) we discussed above may be the only stock fund that you’ll ever need.

Buffett and Collins are smart guys. Taking advice from smart guys seems like a good idea to me.

I highly encourage you read The Simple Path to Wealth.

What do you think of the 7 things I love about index funds?

To recap, I love index funds for these 7 reasons:
1. Anybody can do it
2. No wasted mental energy
3. Low fees
4. Automatic diversification
5. The closest thing to predictability
6. I don’t have stock FOMO
7. Good enough for Buffett, good enough for me
My reasoning combines the emotional side and the rational side of investing.

Like you, I want to earn a nice investment return. At the same time, I don’t want to be worried about my investments 24-7.

Index funds give me the best of both worlds.

What am I missing?

Help me grow my list of 7 into a list of 10 by leaving a comment below on why you invest in index funds.
May 21, 2025
My 4 Favorite Investment Accounts for Long-term Wealth
We recently talked about that to start investing, there are really only two main steps:
- Step 1: Open an account.
- Step 2: Pick the investments for inside that account.
Today, we’ll discuss my four favorite investment accounts. These accounts are all tax-advantaged and match my evolving priorities, like saving for retirement and paying for college.

To help explain why you may want different investment accounts, I’ll show you how I went from a single account in my 20s to 14 investment accounts today.

Even if you’re just starting out in your career or new to investing, it’s likely that you’ll eventually have multiple types of investment accounts.

You’ll almost certainly have different goals and priorities as life moves on.

Before you do anything else, you’ll need to decide what type of investment account matches your investment goals. As we’ll see, investing is about more than just saving for retirement.

By understanding the type of accounts to use that match your evolving priorities, you’ll have a better chance of reaching your goals.

Let’s begin by looking at how my investment accounts have changed from the time I started investing in my 20s to the present day.

My investment accounts in my 20s.

When I started working in my 20s, I had one investment account:
1. My 401(k).
In my 20s, I was just starting my career and was proud to be investing in a 401(k). Back then, tracking my net worth was pretty easy.

Part of the reason I only had one investment account was because I didn’t really know there were other types of accounts.

It wasn’t until I prioritized learning about personal finance that I realized what else was out there.

Quick side note: during law school, I did have a traditional brokerage account with a financial advisor. But, I closed that account when I learned we had set $93,000 on fire.

There were two other main reasons I only had one investment account back then.

First, I had student loan debt to pay off. I didn’t exactly have the means to invest in other accounts.

If you’re in a similar boat and have student loan debt, be sure to check out my post:

10 Student Loan Tips for Lawyers and Professionals

Second, in addition to student loan debt, I also had credit card debt.

It was only after a year of working and seeing my credit card debt grow each month that I decided to do something about it. In a lot of ways, my experience with credit card debt is what led me to start Think and Talk Money.

If you’re likewise dealing with credit card debt, check out my post:

10 Credit Card Tips for Lawyers and Professionals

As time went on, a few things happened that led me to opening more investment accounts.

First, I educated myself and learned that there were other investment accounts I could take advantage of.

Then, as my career progressed, I started making more money. Because I had paid off my student loan debt and credit card debt, I had money leftover to invest.

Finally, I got married and had kids. That meant my investment goals evolved.

To match my evolving goals, it was beneficial to open different types of investment accounts.

My investment accounts at age 40.

Fast forward about 15 years, and my family’s balance sheet looks a little bit different than it did in my 20s.

Between my wife, our three kids, and me, we now have 14 investment accounts:
1. My 401(k)
2. Wife’s 457(b)
3. Wife’s Roth IRA
4. My Roth IRA
5. Wife’s Traditional IRA
6. Wife’s Pension
7. Daughter’s UTMA
8. Son’s UTMA
9. Baby’s UTMA
10. Daughter’s 529
11. Son’s 529
12. Baby’s 529
13. HSA
14. Traditional Brokerage Account
Photo by MIGUEL GASCOJ on Unsplash

The point in sharing my various account types with you is to give you an idea of how your investment priorities will change over time.

The most savvy investors know how to match their investment accounts to those changing priorities.

With this context in mind, let’s now take a closer look at my four favorite investment account types that help me maximize tax benefits.

With these tax-advantaged accounts, I have a better chance of reaching financial freedom.

Favorite Account No. 1: 401(k)

A 401(k) is likely the first investment account most people will have.

401(k) plans are employer-sponsored retirement plans. Employees can elect to participate in their company’s 401(k) plan and choose from a variety of investment options, usually mutual funds and index funds.

There are four major reasons to invest in a 401(k) plan.

1. You can invest with pre-tax dollars.

That means more of your money gets invested rather than going towards your taxes. When you have more money invested, you can earn more in returns.

2. Your contributions are automatic.

Once enrolled, your employer will automatically deduct money from your paycheck and invest it directly into your investment selections.

Because the money never hits your checking account, you won’t be tempted to spend it on things you don’t really care about. You’ll be used to living without this money because it never hits your account.

You also don’t have to worry about consistently making transfers into your account because it will happen automatically.

3. Your earnings grow tax-free.

In addition to not being taxed on your contributions, you also won’t be taxed on your earnings. That’s a double tax advantage that acts to magnify the power of compound interest. You will be taxed when you make withdrawals.

4. Your employer may offer a match.

Many employers today offer a match to incentive employees to contribute to their 401(k) plans. To qualify for the match, you must be participating in your company’s plan and make contributions yourself. The match is usually a percentage of your overall salary, usually between 3-6%.

For example, if you contribute 5% of your salary, your company may match you with an additional 5% contribution.

If your company offers a match, it’s a no-brainer to take advantage of that match. It’s often described as “free money.”

I don’t like the term “free money” because it implies that you have not earned that money as an employee for your company. I prefer to refer to the company match as a bonus you’ve rightfully earned.

The key is to accept that earned bonus by ensuring you are meeting the minimum requirements to qualify.

401(k) Contribution Limits and Penalties

Keep in mind there are annual limits to how much you can contribute to your 401(k) plan. The IRS regularly increases the contribution limits. In 2025, you may contribute up to $23,500.

If you are between the ages of 50 and 59, or 64 or older, you may contribute an extra $7,500 per year. If you are between the ages of 60 and 63, you may be eligible to contribute up to $11,250.

Also, remember that 401(k) plans are intended for retirement savings. To discourage early withdrawals, a 10% penalty on top of regular income taxes apply to people under the age of 59 ½.

Because of these contribution limits, early withdrawal penalties, or other strategic reasons, you may benefit from another type of investment account.

Let’s look at our next popular type of investment account called a Roth IRA.

Favorite Account No. 2: Roth IRA.

A Roth IRA is another type of retirement investment account that also provides double tax benefits.

Unlike a 401(k), you make after-tax contributions to your Roth IRA. Your earnings then grow-tax free, and your withdrawals are tax-free.

Another major advantage is that you can withdraw your contributions tax-free and penalty-free at any time.

There are penalties if you make withdrawals from your earnings before the age of 59 1/2.

Roth IRA Contribution and Income Limits.

Because of the amazing tax advantages associated with Roth IRAs, there are income limits that apply. In 2025, individuals must have a Modified Adjusted Gross Income (MAGI) of less than $150,000, and joint filers less than $236,000.

On top of the income limits, there are annual contribution limits, as well. In 2025, the contribution limits are $7,000 if you’re under age 50, and $8,000 if you’re over age 50.

Why think about opening a Roth IRA?

For many investors, it’s not a bad idea to consider opening a Roth IRA in addition to your 401(k).

For starters, we mentioned the contribution limits to each account. You may need more money in retirement than just what your 401(k) plan will provide.

For another reason, 401(k) plans and Roth IRAs are treated differently from a tax perspective. It may be wise to have some tax-free income in retirement from a Roth IRA to go along with your taxable income from a 401(k).

You can open a Roth IRA with any number of investment companies, like Vanguard, Fidelity, and Charles Schwab.

Favorite Account No. 3: Health Savings Account (HSA)

A Health Savings Account (HSA) is another tax-advantaged account that you can use to pay for eligible medical expenses.

HSAs are linked to employer-sponsored health insurance plans. Oftentimes, employers will make an annual contribution to help fund your HSA.

Photo by Derek Finch on Unsplash

One of the trade-offs to having an HSA is that you’ll need to enroll in a high deductible insurance plan. You are still covered by insurance, but you’ll pay more out-of-pocket each year for medical treatment.

But, if you’re relatively healthy and/or have the means to pay for your present day medical care, you stand to benefit immensely down the road.

That’s because you can choose to invest your HSA contributions just like you might invest in a 401(k) plan.

If you do so, your contributions, earnings, and withdrawals are all tax-free if you follow some basic rules.

Because of these triple tax benefits, HSAs are my absolute favorite investment account.

Remember, 401(k) plans and Roth IRAs only offer double tax benefits. HSAs are even better because they offer triple tax benefits.

What are the key rules to follow with HSAs?

To get the triple tax benefits, you need to follow some basic rules.

One of the key rules is that you must use your withdrawals for eligible medical expenses. The good news is that “eligible medical expenses” is a very broadly defined term.

You can take a look here for a comprehensive list of eligible medical expenses. Some examples include prescriptions, contact lenses, and flu shots.

Another key rule to know is that there are no time limits for when you have to use your HSA funds. As long as you keep your receipts, you can reimburse yourself for eligible medical expenses years, or even decades, later.

If you put these two rules together, you’ll see why HSAs are so beneficial.

As long as you have the means to pay out-of-pocket for your current medical expenses, you can allow your pre-tax HSA investments to grow tax free for years.

That means you can take advantage of the magic of compound interest for decades, tax-free.

Then, years later, you can withdraw those funds to reimburse yourself for eligible medical expenses you paid for years prior.

HSA contribution limits.

Like 401(k) plans and Roth IRAs, there are annual contribution limits for HSAs.

In 2025, the contribution limit for an individual with self-coverage is $4,300 and $8,550 for family coverage.

Favorite Account No. 4: 529 College Savings Plan

529 college savings plans are state-sponsored, tax-advantaged investment accounts.

While there are certainly other ways to save for college, 529 plans are hard to beat because they typically offer triple tax benefits.

To read more, check out my in-depth post on 529 Plans for Sky High College Costs:

529 Plans for Sky High College Costs

What do you think of my 4 favorite investment accounts?

There are certainly others, but these are my 4 favorite investment account types. Each comes with tax advantages that will help me reach financial freedom sooner.

As your life and priorities change, you may also benefit from opening multiple investment account types.

So, what do you think of my four favorite investment accounts?

Did I miss any?

Let us know in the comments below.
May 19, 2025
What is Your Magic Retirement Number?
Have you thought about your number recently?

According to a recent study by Northwestern Mutual, Americans expect they will need $1.26 million to retire comfortably.

When you first hear that retirement number of $1.26M, does that sound impossibly high? Does it sound way too low?

Or, maybe your reaction was like what my five-year-old says when questioned about who made the mess:

“No clue.”

I think it’s safe to say that, at some point, most professionals accept that they need to save for retirement. Hopefully, you are in that group and have been investing early and often.

However, I suspect most people have never thought about how much they’ll actually need to retire comfortably. That’s understandable since retirement can seem like such a far-off goal.

Still, it’s a good idea to start thinking about how much you’ll need to retire comfortably. We’ll refer to that amount as your magic retirement number.

That way, you can start taking the necessary steps today to reach that magic retirement number.

Today, we’ll learn how to calculate your magic retirement number.

So, how do I figure out my magic retirement number?

To answer that question, let’s turn to the “4% Rule.”

The 4% Rule is one of the most popular ways in the personal finance community to ballpark how much money you’ll need in retirement.

Of course, your personal answer depends on a variety of factors, like when you want to retire and how much you expect to spend in retirement.

You can imagine how someone hoping to achieve FIPE (Financial Independence Pivot Early) may require a different amount than some retiring in his 70s.

Your answer may also change after reading a book like Die with Zero, where author Bill Perkins brilliantly argues that most of us are actually saving too much for retirement.

In any event, the 4% Rule can give you a good idea of where you currently are. Then, you can decide what changes you may want to make to ensure you hit your magic number.

Let’s dive in.

What is the 4% Rule?

The 4% Rule suggests that you can safely withdraw 4% of your investments each year and expect your money to last for 30 years.

Without getting too technical, the 4% Rule is based off of research looking at historical investment gains, inflation, and other variables.

For simplicity, let’s say you have $1 million in your portfolio. According to the 4% Rule, you can safely withdraw $40,000 per year (4% of your portfolio) and not run out of money for 30 years.

Using the magic retirement number of $1.26 million, you could safely withdraw $50,400 and not run out of money for 30 years.

These simple examples show how you can take your current retirement savings and project how much you can safely spend so your money lasts 30 years.

The 4% Rule also works in reverse.

By that, I mean you can use the 4% Rule to ballpark how much money you’ll need in retirement to maintain your current lifestyle. We’ll look at exactly how to do that below.

In either case, the 4% Rule is an effective and easy way to start thinking about a magic retirement number.

Use the 4% Rule as an easy projection tool, not an actual withdrawal rate.

I view the 4% Rule as a tool to ballpark your magic number, as opposed to a strict withdrawal rate once you actually retire.

I point that out because there’s some debate in the personal finance community as to whether 4% is still a safe withdrawal rate in today’s economic environment.

For our purposes, I’m not too concerned about that debate.

Once you get to retirement, your actual withdrawal rate may be higher or lower than 4% depending on a variety of factors.

Regardless, the 4% Rule is a great way to start thinking about how much you’ll need in retirement.

So, let’s practice using the 4% Rule.

Our goal is to help you project a magic retirement number based on your current spending habits.

How to use the 4% Rule based on your current savings.

We mentioned above that the 4% Rule works two ways.

First, you can take your current retirement savings and calculate how much you can safely spend so your money lasts 30 years.

If you have $1 million invested, the 4% Rule says you can safely spend $40,000 annually and expect your money to last 30 years.

Current Savings x 4% (.04) = Annual Retirement Spending

$1,000,000 x .04 =$40,000.00

That’s a useful calculation, especially if you’re nearing retirement age and just want to know how much you can spend each year.

Photo by Hugo Delauney on Unsplash

But, what if you don’t exactly know when you want to retire?

Your main priority may not be to retire by a certain age. Instead, your aim may be to retire with enough money to maintain your current lifestyle. You’re determined to continue working for as long as it takes.

To calculate that magic retirement number, you can once again use the 4% Rule.

How to use the 4% Rule based on your current spending habits.

The second way to use the 4% Rule is to start with your current spending habits to project how much money you’ll need to maintain that level of spending in retirement.

This may seem obvious, but to do so, you’ll first need to know your current spending habits.

If you don’t know how much you’re currently spending on a monthly basis, take a look at our budgeting series here.

The good news is that once you’ve created a Budget After Thinking, this next part is easy.

To calculate your magic retirement number based on current spending, simply follow these steps:
1. Add up the amount your’re spending each month in Now Money and Life Money.
2. Take that number and multiply it by 12 to see how much your lifestyle costs per year.
3. Divide that yearly spending by .04
That’s your magic retirement number.

Current Spending / 4% (.04) = Magic Retirement Number

One note related to your Budget After Thinking: for this exercise, ignore your Later Money (with one caveat). Only use your Now Money and Life Money totals.

The reason is that since you’re retiring, you likely won’t be focused on saving for future goals anymore. Presumably, you’ve already reached your goals. If you include your Later Money in your monthly spending, you’re magic retirement number will be artificially inflated.

The caveat is for those people pursuing FIPE. In that case, you should include your Later Money in your calculations. That way, you have a buffer in place to cover you over a longer retirement period.

Now, let’s use some real numbers to help illustrate how to use the 4% Rule to project your magic retirement number.

Here’s how to use the 4% Rule to forecast your magic retirement number.

Let’s look at an example using the 4% Rule to forecast your magic retirement number.

Let’s say that you reviewed your Budget After Thinking and learned that you spend $6,000 per month in Now Money and $4,000 per month in Life Money.

Combined, that means your lifestyle costs you $10,000 per month, or $120,000 per year.

To figure out how much you would need in investments to cover your current lifestyle for 30 years, divide $120,000 by .04.

Current Spending / 4% (.04) = Magic Retirement Number

$120,000 / .04 =$3,000,000.00.

That means to maintain your current lifestyle of spending $120,000 per year for 30 years, you would need $3 million in investments.

In other words, your magic retirement number is $3 million.

If that number seems impossibly high to you, you now know to make some adjustments to your current spending.

Let’s look at how your magic number changes with some tweaks to your spending habits.

Assume you’re open to cutting some expenses in retirement to reduce your magic number. That might mean spending less money on transportation, meals out, your wardrobe, and whatever else.

Let’s assume that by making those cuts, you shaved $1,000 off your Now Money expenses.

As a result, you only need $9,000 to cover your retirement lifestyle each month. That’s $108,000 per year.

Using the 4% Rule, your magic retirement number has now shrunk to $2.7 million.

$108,000 / .04 =$2,700,000.00.

That means that by reducing your spending by $1,000 per month, you have reduced your magic retirement number by $300,000.

It also means you have just sped up your timeline to retirement by reducing your lifestyle expenses.

A surprising note about people’s magic retirement number in 2025.

At the beginning of this post, we learned that according to a recent study by Northwestern Mutual, Americans expect they will need $1.26 million to retire comfortably.

What’s most interesting to me is that this year’s magic retirement number dropped from $1.46 million reported in the same study just last year.

Think about that for a minute.

Because of inflation (and now tariffs), things are only getting more expensive year over year. If anything, you would think that people would say they need more money to retire comfortably in today’s enviornment.

Except, the study found the opposite happened. Instead of wanting more money to pay for all these more expensive things, people think they can retire comfortably on nearly 14% less money.

How does that make any sense?

For starters, I doubt many of these respondents used the 4% Rule to project their magic retirement number based on their current spending habits.

If they had, they would have seen that their spending has likely gone up this year, unless they’ve made big cutbacks. Then, they would have seen that their magic retirement number also went up to account for those higher expenses.

Besides ignoring the 4% Rule, my other takeaway relates to one of our major themes at Think and Talk Money:

Money is emotional.

If our money thoughts were strictly rational, there would be no way that someone could say he needs less money to survive when everything is more expensive.

The reality is that our decisions don’t always make rational sense.

And, that’s OK.

Recognizing that our money decisions are not always rational, what can we do about it?

We can think and talk about money.

Talking to our people about our money decisions, like we would anything else, is the best way to find a balance between our emotional side and our rational side.

So, what is your magic retirement number?

Now you know how to use the 4% Rule to calculate your magic retirement number.

Be sure to use the 4% Rule as a tool to help you think about making adjustments to your current spending or savings habits.

Knowing how to use the 4% Rule, does a magic number of $1.26 million seem too high, too low, or maybe just right?

Let us know in the comments.
May 16, 2025
2 Easy Steps to Start Investing
By now, I hope I’ve begun to convince you that investing is actually the easy part. The more challenging part is consistently coming up with money for your investments.

If you’ve been worried about the risks associated with investing, we covered that, too. At the end of the day, reasonable risk is the cost to invest.

Because of inflation, the reality is that it’s more risky to not invest than it is to invest. Take a look at what happened to our pretend friend Terry who chose to play it safe.

At a bare minimum, investing is a way to play offense and defense. Investing to do fun things later on is playing offense. Investing to counteract inflation is playing defense.

We’ve also previously covered three great ways to minimize investment risk:
1. Invest early and often. Take advantage of the power of compound interest by starting early and being consistent. Over time, compound interest will lead to wealth.
2. Minimize fees. One of the few things we can control when we invest is what we choose to pay in fees. Keep fees to a minimum to maximize your long term gains. Even a fee of only 1% can do significant damage to your future prosperity.
3. Learn the language. Investing can seem intimidating when you hear phrases like “asset allocation” and “diversification.” Once you learn the language, you’ll realize that practicing asset allocation and diversification is actually not that hard.
With this backdrop in mind, there should be no more excuses for why you can’t start investing.

So today, we’re going to talk about the two main steps to get started investing.

How to start investing in 2 steps.

If you’ve never invested before, are you nervous about how complicated the process is going to be?

Don’t be.

To start investing, there are really only two main steps involved.
- Step 1: Open an account.
- Step 2: Pick the investments for inside that account.
There really isn’t much more to it.

But, don’t forget to complete both steps.

Step 1: Open an account.

The first step to investing is simply to open an account.

There are endless investment companies available where you can easily open an account online. Some of the more popular companies are Vanguard, Fidelity, and Charles Schwab.

I personally use Vanguard.

Once you’ve chosen an investment company, you’ll next select the type of investment account to open.

There are two main types of investment accounts and some other popular accounts I’ll highlight below.

Before you do anything else, you’ll need to decide what type of account matches your investment goals. Once you know the type of account that best suits you, you will need to open that account before moving on to step 2.

It really is that easy to start investing.

Photo by Jay Clark on Unsplash

You don’t need a financial advisor or a broker to open an account. Like most things these days, as I mentioned above, you can easily open an account on-line by yourself.

In fact, most of us begin investing in employer-sponsored retirement accounts, like 401(k) plans. When you start a new job, your HR department will provide you detailed instructions on how to enroll.

So, what are the main types of investment accounts to choose from?

Tax-advantaged retirement accounts.

The most common tax-advantaged retirement accounts include 401(k) plans, Roth IRAs, and traditional IRAs. “IRA” stands for Individual Retirement Account.

We’ll soon take a deep dive into the advantages and disadvantages of each type of account.

As a whole, the primary difference between tax-advantaged retirement accounts and traditional brokerage accounts relates to taxes.

The government wants us to save for retirement. To encourage us to do so, retirement accounts come with major tax advantages. That’s why most investors begin investing in these types of retirement accounts.

Traditional brokerage accounts do not have the same tax advantages.

In addition, tax-advantaged retirement accounts, like a 401(k) plan, are commonly offered by employers. That makes it easy for employees to invest.

You may be wondering: with these great tax advantages, why would someone open a traditional brokerage account?

Let’s take a look.

Traditional brokerage (non-retirement) accounts.

There are two main reasons to open a traditional brokerage account.

First, tax-advantaged retirement accounts have caps in place for how much someone can invest per year.

While the government is happy to encourage investing for retirement, its generosity only goes so far. Uncle Sam still depends on tax revenue and can’t afford to give us an unlimited free pass.

Once you reach those caps, and still have money that you want to invest, you’ll need to open a traditional brokerage account.

Most investors try to max out their retirement accounts to receive the full tax advantages before moving on to investing in traditional brokerage accounts.

The second reason is that tax-advantaged retirement accounts are intended for long-term retirement planning.

If you withdraw from your account before reaching a certain age, typically 59 1/2, you’ll be subject to penalties and taxes.

Of course, Think and Talk Money readers know that there are other reasons to save and invest besides retirement.

You may be investing to buy a home in 10 years. Maybe you have reached financial independence and rely on your investment income to fund your life.

Whatever the case, traditional brokerage accounts provide flexibility for people to withdraw their money when they want to.

Other types of investment accounts.

Besides tax-advantaged retirement accounts and traditional brokerage accounts, there are two other popular investment accounts to highlight.

529 Savings Plans for College: 529 college savings plans are state-sponsored, tax-advantaged investment accounts. While there are certainly other ways to save for college, 529 plans are hard to beat because they typically offer triple tax benefits.

To read more, check out my in-depth post on 529 Plans for Sky High College Costs.

Health Savings Accounts (HSA): An HSA is a tax-advantaged account that you can use to pay for eligible medical expenses.

These accounts are typically linked to employer-sponsored health insurance plans. You can choose to invest your HSA contributions, similar to how you might invest in a 401(k) plan.

Like with 529 plans, the reason to invest in an HSA is to receive triple tax benefits that are hard to beat. Your contributions, earnings, and withdrawals are all tax-free if you follow some basic rules.

We’ll explore this further in a future post.

You are not limited to just one type of account.

To recap, the first step to investing is simply to open an account.

There are two main types of investment accounts to consider: tax-advantaged retirement accounts and traditional brokerage accounts.

There are also other investment accounts intended to help with specific goals, like saving for college or medical expenses.

For almost all investors, it makes sense to first open a tax-advantaged retirement account before considering the other types of accounts. For many of us, that means participating in our employer-sponsored 401(k) plan.

Keep in mind, you are not limited to just one investment account. Many investors have various accounts for different goals. My wife and I have multiple retirement accounts, 529 plans for each of our kids, an HSA, and others.

Once you’ve opened an account, you’re ready to move onto step 2. The next step is choose what investments you want inside that account.

Step 2: Pick the investments for inside that account.

Now that you have an account opened up, the next step is to pick what investments you want inside that account. By that, I mean selecting what mutual funds, index funds, individual stocks, or bonds you want to buy.

Each major investment company offers a variety of investments to choose from, including target retirement date funds that are as easy as it gets.

Picture the account you just opened as a bucket. Now, you need to fill that bucket with something.

What you fill that bucket with are your investments.

This second step is crucial. It’s also easily overlooked.

More often than you might think, when people new to investing complete step 1 by opening an account, they mistakenly believe that their job is done. That’s not the case.

When you first open an account (other than employer-sponsored plans), you will need to fund that account with a minimum required deposit.

The key to remember is that once you make that transfer, your money will sit in your new investment account, not earning much or any interest, until you choose how to invest it.

Until you complete this second step, your money sits in your account and you don’t reap the benefits of investing.

As a side note, you’ll likely need to complete this second step every time you make a transfer into your investment account. You can link your checking account to your new investment account to make transfers easier.

One other side note, I mentioned that employer-sponsored plans, like 401(k) plans, operate a little differently. That’s because when you first enroll in your 401(k) plan, you will make your investment selections right then and there.

Because your contributions are automatically deducted from your paycheck, they will automatically be invested in your preselected investment choices.

Don’t laugh about people forgetting to choose their investments.

When I first taught my financial wellness course to law students, I thoughtlessly made a joke about people who forget to complete this second step. At the time, it seemed obvious to me that once an account was opened, the next step was to select the investments.

Boy, was I wrong.

In that first class, a student raised her hand and said she had made that mistake before. Her money sat in her investment account, without earning any interest, for more than a year before she realized her mistake.

She was not laughing at my joke.

Nor was she the only person in my class who had made that mistake. It turned out nobody was really laughing.

Since that first class, I’ve realized that it’s actually a common mistake.

That’s why I now emphasize there are two steps to start investing. The first step is to open an account. The second step is to pick investments for that account.

Photo by Kenny Eliason on Unsplash

And, guess what?

I recently made the exact same mistake.

My HSA had been with one provider for years before that provider changed. My money was automatically transferred over to the new provider.

However, somehow I missed the announcement that my money would not be invested until I chose the investments for that new account.

It took me about six months of earning no interest to realize what was going on.

That’s what I get for making a joke about step 2!

How do I pick the right investments to fill my account?

We recently discussed the importance of learning the language of investing. In that post, we talked about stocks, bonds, mutual funds, and index funds. When you’re selecting investments, you’re choosing between these types of options.

We also talked about the importance of asset allocation and diversification. These terms make investing seem more complicated than it really is.

Ultimately, you’ll need to do your homework or pay an advisor to do it for you. Before you make your decision, be sure to check out my previous posts on investing so you have a good understanding of your options.

Personally, I invest in index funds to keep my costs down and to ensure a certain level of diversification. If I don’t have the option to invest in a total stock market index fund, I invest in an S&P 500 index fund.

I also invest in target date retirement funds since these funds automatically rebalance for me as time goes on. It doesn’t get any easier than this.

Now you know how easy it is to start investing.

If you were ever hesitant to start investing in the past, now you should be feeling more confident in how to get the process started.

There are really only two steps:
1. Open an account.
2. Pick investments for that account.
It doesn’t have to be any more complicated than that.

As always, leave a comment below if I can answer any questions as you get started.
May 14, 2025
What a 1% Fee Really Costs You
I recently attended a “financial empowerment” workshop hosted by a financial advisor.

The financial adviser was smart and very passionate about helping people plan for retirement. She shared a lot of valuable information, such as investing early and often.

She also shared good examples on how compound interest works and how inflation eats away at our purchasing power.

I liked just about everything she was sharing with the audience. It was solid advice, and her presentation included many informative charts and examples.

I was not even bothered that she was frequently pitching her services in hopes that audience members would hire her to manage their money. It was her presentation and she earned the right to promote herself.

The thing is, and I was not surprised by this in the least, the topic of fees hardly came up at all.

In fact, the first mention of fees did not come up until the very last slide. In total, fees were addressed for maybe 30 seconds in an hour-long presentation.

I don’t necessarily blame the advisor for not discussing fees until the very end. She’s trying to make a living and doesn’t want to scare people off before hearing what she had to say.

I think most people in her situation would have structured the presentation the same way.

That said, in my opinion, fees should be one of the first things discussed when it comes to investing. It should not be a throw-in at the end of a presentation.

The amount we pay in fees is one of the main things we as in investors can control.

There is not much we can control as stock investors. Markets are unpredictable. One of the only things we can control is the amount we pay in fees.

There are two primary types of fees: transaction fees and ongoing fees.
- Transaction fees are charged each time you make a transaction, like buying a stock.
- Ongoing fees are charged regularly, like account maintenance fees.
Whenever you are choosing how to invest your money, pay close attention to the fees associated with that investment option.

You cannot avoid fees completely, but you can minimize the amount you pay depending on the investments you choose.

Below, we will take a look at how even a seemingly small fee of 1% can have a huge negative impact on your account balance over time.

As a general rule, passively managed investments like index funds, charge lower fees. Actively managed investments charge higher fees.

If you choose to work with an investment advisor, be sure to understand all of the fees charged for those services. Pay particular attention to the ongoing fees, which can have a big impact on your investment portfolio.

I am not on a crusade against financial advisors.

Before all the financial advisors out there bite my head off, let it be known that I am not on a crusade against you.

Believe it or not, I’m not here to tell anybody whether he should work with a financial advisor or not. That’s not for me to decide.

I believe that advisors can offer significant benefits to a lot of people, including benefits that are difficult to quantify. For example, an advisor may help someone stay calm during market dips so that person stays invested for the long term.

I view my role in the personal finance food chain as that of an educator. I am not a financial advisor, and I won’t be giving personal investment advice.

My purpose in writing this post is to help you decide whether the cost of hiring an advisor is worth it to you.

Photo by Benjamin R. on Unsplash

I do the same thing when I teach personal finance to law students. I try my best to present options and information so they can make the best decisions.

When it comes to investment fees, it’s hard to know exactly what we’re paying. What does a 1% fee even mean?

By looking at the examples below, you should get a better idea of what a 1% fee looks like over the long term. Then, you can be better equipped to make a thoughtful decision on whether to work with an advisor.

In the end, I’ve done my job if I’ve helped you acquire enough personal finance knowledge to make educated choices with your money.

So today, we’re going to talk about fees.

Remember, none of us can control the market, and that includes financial advisors. The best any of us can do is project what may happen in the future based on what has happened in the past.

Since we can’t control the market, let’s focus on what we can control, like fees.

To help us understand how fees can be a drain on our investment returns, let’s revisit our friend Sally.

Sally earns 10% a year and pays no advisor fees.

Remember our friend, Sally?

While in her 20s, Sally funded her retirement account with an initial contribution of $2,500. She then made contributions of $250 every month for 40 years.

She was comfortable with reasonable risk and invested in the S&P 500, which has historically earned an average annual rate of return of 10%.

After 40 years, Sally had contributed a total of $122,500.00. Her retirement account grew to $1,440,925.81.

Sally set herself up to have a lot of choices come retirement.

Now, let’s make one slight adjustment to our hypothetical to account for a fee of “only 1%.”

Sally earns 10% a year and pays a 1% advisor fee.

Let’s assume that Sally decided to work with a financial advisor that charges a 1% fee. That means every year, Sally pays her advisor 1% of her account balance.

We’ll assume that her advisor also averaged a 10% annual rate of return for Sally. However, because Sally pays her advisor a 1% fee, Sally’s actual earnings rate drops from 10% to 9%.

Let’s see how that 1% fee changes Sally’s performance over 40 years.

After 40 years of earning 9% after paying a 1% fee to her advisor, Sally will have $1,092,170.89.

The 1% fee resulted in Sally’s account dropping by $348,754.92.

That’s 24% less money than she had in our example when she earned 10%.

The impact of even a 1% fee is monumental.

Through this example, you should be able to see that even a seemingly small fee can have major consequences on your long term gains.

When people start investing, the 1% fee does not seem like a bad deal. In my experience, whenever a financial advisor has explained fees to me, he uses words like “just 1%” or “only 1%”.

I think that language is misleading and deceiving. Sally would probably agree that words like “only 1%” do not accurately express a cost of $350,000.

If you look at the very beginning of Sally’s investment profile, it’s true that the 1% fee seems to have little impact.

In Sally’s case, the difference in her account in the two scenarios after 1 year is only $25.
- Sally’s account after 1 year at 10% interest: $5,750.
- Sally’s account after 1 year at 9% interest:$5,725.
That’s a pretty marginal difference. However, it takes time for the impact of fees to materialize.

The reason is because it takes time for the magic of compound interest to set in. That’s why we need to invest early and often.

Let’s look at the difference in Sally’s account over time:

10% Return
9% Return
After 1 year $5,750 $5,725
After 10 years $54,296.63 $51,497.20
After 20 years $188,643.75 $167,491.39
After 30 years $537,105.57 $442,091.81
After 40 years $1,440,925.81 $1,092,170.89

Looking at these numbers, it becomes clear how much a 1% fee can impact your overall investments.

One other consideration: the fee also typically gets taken straight out of your account. That can make it feel like the fee is relatively small or doesn’t exist at all.

It would feel much different if each month you had to go through the process of writing a check to your advisor. Maybe feeling that pain would impact your decision to pay the fee.

Decide for yourself if the real cost of an advisor is worth it to you.

You can play with these numbers to match your personal situation. Maybe you have an advisor charing less. Maybe yours charges more.

If you want to tweak the annual rate of return you expect to earn by working with an advisor, please do.

Or, maybe you just want to ask your advisor or potential advisor about fees and how they may impact your portfolio over the long term.

Hopefully, looking at these numbers gives you something to think and talk about.

I personally do not work with a financial advisor.

Let’s circle back to the financial empowerment workshop I attended the other day.

At its conclusion, the advisor’s husband came by to collect the sign-up sheet. I happened to be the last person to receive the clipboard.

Seeing that I had not signed up for a free consultation, he looked at me and said, “Oh, you forgot to sign up!”

I chuckled.

Uhh, no I didn’t “forget”.

I respectfully declined to be added to the list. I’ve chosen not to work with an advisor.

I shared my story about how I set $93,000 on fire when my former advisor pulled me out of the markets in 2008.

In that post, I also shared that it wasn’t her fault. It was my fault for not being educated.

Since then, I’ve been convinced by endless reports, such as this from Yahoo! Finance, that I’m better off without an advisor when considering the cost:

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.

How much does 1% matter to you?

I recently calculated how much I would have paid an advisor by this point in my life. I determined that If I had been working with an advisor, I would have paid more than $100,000 in fees so far.

When I think about all the things I could do with more than $100,000, I’m very happy that I chose to educate myself and keep that money instead of paying it to an advisor.

Maybe I would have earned more if I worked with an advisor. Maybe that $100,000 would have been a worthwhile price to pay. Then again, maybe not.

If you choose to work with an advisor, I won’t blame you. Hopefully your advisor consistently beats the returns of the S&P 500 or provides value to you in other ways.

Whatever the case may be, you now should have a better understanding of what you’re paying when you hear the phrase “only 1%.”
- Do you work with an advisor?
- What fee does your advisor charge?
- What are the top benefits you receive in exchange for the cost?
Let us know in the comments below.
May 5, 2025

	10% Return	9% Return
After 1 year	$5,750	$5,725
After 10 years	$54,296.63	$51,497.20
After 20 years	$188,643.75	$167,491.39
After 30 years	$537,105.57	$442,091.81
After 40 years	$1,440,925.81	$1,092,170.89

Tag: investing

How should you prioritize certain investment account types, especially if you’re still paying off debt?

1. Invest just enough to qualify for your employer match.

2. Pay off all credit card debt.

Why not pay off your credit card debt entirely before investing in your 401(k)?

3. Allocate 75% of available funds to other loans and 25% to investments.

4. Max out your 401(k) plan.

5. Max out your HSA, Roth IRA and 529 plan.

What do you think of this plan to prioritize certain investment accounts while in debt?

Should we prioritize investing for retirement or investing for our children’s college?

As a parent, I want to help my kids as much as I can.

I want to be free to retire on my terms.

What does the math say about paying for college?

With these assumptions in mind, let’s look at an example using a current kindergarten student.

You do not have to rely exclusively on long-term savings to pay for college.

1. Your child can take out student loans.

2. You will likely still be earning income when your child starts school.

Now, let’s look at the math to figure out how much we should be saving for retirement.

The key is to start with the 4% Rule,

The 4% Rule also works in reverse.

Let’s continue our example assuming your magic retirement number is $3 million.

Aim to hit your monthly retirement target before saving for college.

How are you balancing investing for retirement with investing for college?

What to do in a bear market.

As an investor, what should you do during a bear market?

And as JL points out, doing nothing is usually the best decision.

The Rise of Middle Class Multi-Millionaires

How come people are so enthralled by high incomes instead of high net worths?

Does early retirement negatively impact your life expectancy?

Does retiring early negatively impact your physical health?

Let us know what you think about these posts.

You can invest while in debt.

The choice to pay down debt or invest for the future is tricky.

I know firsthand how heavy debt can feel.

Four main reasons to invest while in debt.

1. Invest while in debt because of the emotions of money.

2. Invest while in debt to develop the habit.

3. Invest while in debt because of compound interest.

4. Invest while in debt because of the math.

Armed with the math, you can then make a decision that makes the most sense to you.

I prefer to allocate 75% to debt and 25% to investments.

Don’t agonize about finding the perfect ratio between debt and investments.

Some day in the future your debt will be paid off.

There’s nothing easier than investing in target date funds.

What are target date funds?

What types of investments are typically in target date funds?

What are the advantages of investing in target date funds?

Target date funds automatically rebalance

Target date fund or build your own?

How can you invest in a target date fund?

Regardless of the account type, the process for selecting the right target date fund is the same.

I personally invest in target date funds.

Why target date funds?

7 Things I Love About Index Funds

1. Anybody can do it

2. No wasted mental energy

3. Low fees

4. Automatic diversification

5. The closest thing to predictability

6. I don’t have stock FOMO

7. Good enough for Buffett, good enough for me

What do you think of the 7 things I love about index funds?

My investment accounts in my 20s.

There were two other main reasons I only had one investment account back then.

As time went on, a few things happened that led me to opening more investment accounts.

My investment accounts at age 40.

Favorite Account No. 1: 401(k)

There are four major reasons to invest in a 401(k) plan.

1. You can invest with pre-tax dollars.

2. Your contributions are automatic.

3. Your earnings grow tax-free.

4. Your employer may offer a match.

401(k) Contribution Limits and Penalties

Favorite Account No. 2: Roth IRA.

Roth IRA Contribution and Income Limits.

Why think about opening a Roth IRA?

Favorite Account No. 3: Health Savings Account (HSA)

What are the key rules to follow with HSAs?

HSA contribution limits.

Favorite Account No. 4: 529 College Savings Plan