When it comes to investment decisions, we all want to make the right decisions. We work hard for our money and know that investing for the future is important.
We just don’t always know what the right decision is.
With so much marketing from big banks and investment companies, not to mention the financial media, the options can seem overwhelming.
Well, what if you decided to drown out the noise and take matters into your own hands?
What if the best thing to invest in was not a stock or a rental property?
What if the best thing to invest in was staring right back at you every time you look in the mirror?
Instead of spending your whole life investing in other companies and other people, what if you decided to invest in yourself?
For my money, there’s no better investment you’ll ever make.
We all invest in ourselves when we go to school.
Investing in yourself is something you’ve long done, even if you didn’t always realize it.
As a lawyer, doctor, consultant, etc., you’ve already made a major investment in yourself through your education.
Following high school, lawyers commit to another 7 years of education before they can start practicing. Doctors can take twice that long.
For consultants and other professionals, it’s not uncommon to return to school for an M.B.A., oftentimes while still working a full-time job.
All this education and training comes at a steep price. Most of us take on huge amounts of debt in exchange for our careers.
The point is that none of us are strangers to investing in ourselves. And, for the most part, we’ve all benefitted because we made major investments in ourselves.
The problem is that a certain point, we stopped investing in ourselves.
So, this leads us to the question of the day:
When was the last time you invested in yourself?
What are ways you can invest in yourself?
There is no shortage of ways to invest in yourself. Just as a few examples, you could:
When you invest in yourself, the cost of entry is very low.
Books are inexpensive. Blogs and podcasts typically offer free and timely content.
Even if you only learn one new idea or strategy from a book or blog post, the cost to learn that idea or strategy is basically zero.
This makes investing in yourself a near risk-free investment.
Let’s talk about the value in attending professional seminars for a minute.
Every professional field, in every corner of the world, offers seminars.
Law firms and businesses recognize the importance of seminars and will oftentimes pay the registration fee for its employees.
What happens when you attend seminars? Not only do you learn skills to help you excel in your career, you also meet people.
Meeting the right person can make your career. You just need to invest in yourself by registering for the seminar.
Online courses are an inexpensive and effective way to invest in yourself.
The same low cost and effective way to invest in yourself that applies to seminars also holds true for online courses.
There’s one crucial advantage to taking an online course:
If in-person seminars aren’t your thing, you can take an online course from the comfort of your home or office, at your own pace.
Many courses offer valuable insight based on the instructor’s personal experiences and acquired knowledge. This learning format can feel more intimate and relatable.
Additionally, online courses may provide the opportunity to meet the instructor and other participants. That gives you the chance to ask questions pertaining to your personal situation. You also get the advantage of building your network, like if you attended a seminar.
One last note about online courses: before you balk at the price, think back to what you paid for law school.
Law school costs hundreds of thousands of dollars. Many lawyers spend years in debt to pay off that education.
Now, compare what you paid to attend law school to the cost of completing an online course.
A quality online course will cost a fraction of what it cost to obtain your degree.
If you were willing to take out loans and pay hundreds of thousands of dollars to become a lawyer, why not invest a bit more in yourself to continue developing your skills?
Investing in yourself does not only relate to your career.
Investing in yourself is not limited to just acquiring skills or connections beneficial to your career.
As one example, I recently committed to running the New York City Marathon in 2026. I’ve never run a marathon before. I’ve never even run a half marathon before. I’m essentially clueless in how to properly train.
There are free articles and training plans for beginners and experienced runners. There is also a paid online course, which I plan to take in the coming weeks.
The thing is, if I’m going to take on the challenge and time commitment of training for a marathon, I want to do it the right way.
I want to learn from other people’s experiences. I don’t want to make preventable mistakes. I’m happy to pay for that knowledge and insight.
This logic applies whether you are training for a marathon or hoping to develop any other skill. Investing a little bit of money upfront can lead to massive benefits down the road.
Personal finance is one of the most important areas of self-improvement.
Investing in your physical wellness is important. Hardly anything could be more important.
You know what else is important to invest in?
Your financial wellness.
I’ll even go so far as to say that investing in your own financial wellness is the best investment you’ll ever make.
The potential rate of return for learning personal finance is greater than any other investment.
Whether you subscribe to a money blog, listen to podcasts, read books, or pay for an online course, the return on that investment is potentially infinite.
This especially holds true for anyone willing to pay hundreds of thousands of dollars for an education.
Paying another $1,500 to $2,000 for a quality financial wellness course ensures that the investment in your career will not be wasted.
To me, that makes it a no-brainer to invest in your financial wellness.
What’s the point in working so hard to make money if you’re not going to be knowledgeable or disciplined enough to keep it?
When you have money and understand personal finance, you control the circumstances.
When you empower yourself to make intentional choices with your money, something incredible happens.
You gain a new confidence as your walk through life.
You stop worrying endlessly about money.
Trust me, it’s a relief to know that all the money you’re earning at work is not being wasted.
The best part of investing in your financial wellness is that you’ll be on your way to financial independence.
That means the freedom to pursue work that is meaningful to you and the freedom to spend more time with people who are meaningful to you.
Today, I’ll walk you through my step-by-step guide to buy your first rental property.
If you can follow these steps (in order), you will be in great shape to acquire your first rental property.
And, if I can be of any assistance as you begin your search for a rental property, please feel free to connect via socials or by replying to one of my weekly emails.
You can sign up for my email list here. I personally respond to every email.
Step-by-Step Guide to Buy Your First Rental Property
Use common sense and your own life experience to develop your target criteria.
Pick an initial location that matches your criteria.
Learn the common, important attributes of properties in your area.
Study the average rent for units in that area.
Ballpark how much you’ll need to spend for an attractive property.
Work with a real estate broker to test your findings.
Contact a mortgage broker and determine your budget.
Return to your search and do basic deal analysis.
Start touring the properties that look good on paper.
Determine if the numbers will work in your area.
1. Use common sense and your own life experience to develop target criteria.
Don’t believe anyone who tells you he has a one-size-fits-all solution for evaluating properties. Every market is different. What works in Chicago won’t necessarily work in Los Angeles.
That said, there is certainly some advice that applies across the board.
For starters, regardless of what market you’re in, you can and should use common sense and your own life experiences to evaluate rental properties.
Don’t overcomplicate this part.
Before you do anything else, think about what you would personally want in a rental property.
Forget about complex formulas and deal metrics. We’ll get to the numbers soon enough.
Start with a basic question:
What would I want if I were a renter in this market?
Before anything else, write down a list of the most important features that you would want in an apartment. Then, use that list as a guide to finding the right kind of properties.
By the way, using your own common sense is one of the best parts about investing in real estate. You don’t need an advanced degree or a background in real estate.
We all have some idea of what makes a neighborhood a good place to live. The same goes for what makes an apartment a good apartment.
We may not always agree on what those things are, and that’s OK. It may be for a simple reason, like we are not targeting the same potential tenant pool.
The bottom line is you should absolutely use your common sense and life experiences to help formulate your investing strategy.
Ask yourself what you would want in an apartment. Don’t waste your time running the numbers on any property that doesn’t match your criteria.
2. Pick an initial location that matches your criteria.
There are potential investment properties in every part of the country. Before you start looking at individual properties, you first need to select an area you want to invest in.
Based on your own life experiences, you are probably already drawn towards certain parts of the country. You may even have a good sense for different neighborhoods within certain cities that match your general criteria.
From there, you should do some preliminary research online to confirm what you think you know about specific areas.
For example, I know through my own life experiences that many recent graduates from the Midwest move to Chicago after college. The question then becomes: where do these young professionals tend to live in Chicago?
To find out, I might Google something like “best coffee shops (or restaurants/bars/nightlife) in Chicago.”
Likewise, if you’re targeting families, you might search for “best schools” or “best parks.”
Performing this kind of basic research is how my wife and I stumbled upon the Logan Square neighborhood in Chicago.
The truth is that when we first started looking for rental properties in 2017, we knew very little about Logan Square, even though we both always lived in Chicago or the Chicagoland area.
3. Learn the common, important attributes of properties in your area.
Once you’ve picked an area to focus on, use an app like Redfin or Zillow to create a broad search for that area. You should filter your search based on the criteria you established above.
Take some time to casually study the listings in that area. At this point in the process, don’t worry about running the numbers. You’re still in learning mode.
If you study enough listings in a particular location, you’ll start to notice certain features that separate the premium properties from the mediocre properties.
For example, you may notice that the more attractive properties all have in-unit washer/dryer. Or, you may learn that the attractive properties all seem to have wood floors and stainless steel appliances.
Your goal is to understand the common and important property attributes in that area because those are the features potential tenants will expect to find.
Think of it like this: you don’t want to buy the only property on the block that doesn’t have in-unit washer/dryer. Even if you buy that property at a good price, you’ll struggle to find good tenants if the expectation is to have in-unit washer/dryer.
It’s not an exhaustive list, but here are some of the key attributes we’ve learned are important to young professionals renting in Chicago:
Location, location, location. Proximity to the L and social life (coffee shops, restaurants, bars, etc.) are crucial. Most of the young professionals we rent to are still in the “going out” phase of life. They want to live in fun neighborhoods so they can enjoy themselves when they’re not working. They typically stay in our apartments for 2-3 years, oftentimes before buying a place of their own and “settling down.”
Taxes. Property taxes can eat away your cash flow. We have high property taxes in Chicago across the board, but taxes vary widely from neighborhood to neighborhood. I look for properties in areas that have more attractive taxes.
Big bedrooms. One of the most common questions I get when I do apartment showings is, “Can I fit a king size bed in here?” People love big beds these days. This can be a challenge considering Chicago’s standard 25-foot wide lot. I look for properties with a minimum bedroom size of 10 x 10.
Outdoor space. Young professionals want to have outdoor space, even if they never use it. When I was a renter, I always wanted an apartment with a balcony for my grill. It didn’t matter to me that I only used it a handful of times each year. Maybe having outdoor space made me feel more grown up?
Parking. Even though Chicago is a very public transit-friendly city, people still like having cars. Because most young professionals aren’t using their cars every day, they want to keep it safe in a dedicated parking space.
When we shop for a rental property, we look for as many of these features as possible. We don’t expect to check every box because it’s nearly impossible to find a property that has all of these features (at least at a price that makes sense).
4. Study the average rent for units in that area.
Before you commit to a particular area, you need to know what kind of rent payments you might expect.
You can usually find rental information directly on the listing. You may see the actual rent for that property or the projected rent. For this part of the process, this estimate is good enough to get a basic sense of what you may be able to charge.
Word of caution: it’s not unheard of for these rental estimates to be exaggerated in the listings.
As you get to know your market better, you’ll know whether the projected rent is accurate. Plus, you’ll have a real estate broker on your team who can validate the numbers. More on that below.
Finally, studying the average rent goes hand in hand with the previous step of learning the important attributes of rental properties in your area.
For example, you may discover that a renovated 3 bed, 1 bath apartment with in-unit washer/dryer and a parking space rents for around $2,500. Similar units without parking may go for $2,300. Units that have not been updated may rent for $1,800.
Your mission is to differentiate between the property attributes that seem to increase the potential rent in your area from the attributes that don’t add much value.
For instance, we’ve learned that dedicated parking spots are important in Logan Square. However, renters don’t seem to care very much if the parking spot is in a garage or a parking pad.
For that reason, we don’t care too much whether a rental property has a garage, as long as there is dedicated parking available.
5. Ballpark how much you’ll need to spend for an attractive property.
By this point in the process, you’ll have a good idea of what constitutes an attractive property in your target area. You’ll also have a good idea of what these properties rent for.
Next, you can ballpark how much you’ll need to spend to purchase one of these attractive properties.
When I refer to attractive properties, I mean one that has most (but probably not all) of the features that you are looking for and still commands a decent rent. By “decent rent,” I mean not the absolute highest and also not the lowest for the area.
Additionally, the property should be priced reasonably for the market. That means it likely won’t be the most expensive property or the cheapest property.
The goal here is to have a general idea of how much good properties cost in your target area. With this information, you can then decide if it’s an area you want to target, or if you want to explore other locations.
One point that’s worth repeating: don’t expect to find a property that has every one of your key features. If you’re waiting on such a property to hit the market, you’re likely to be disappointed for one of two reasons.
First, you’ll likely end up overpaying for that property. If you overpay, you’ll struggle to earn cash flow. As investors, cash flow is crucial.
Or, you won’t ever buy a property because your expectations are too high. Investing in real estate is all about trade-offs. The fun part of the gig is deciding what trade-offs make sense.
Remember, you’re not searching for your picture-perfect, dream home. You’re searching for an asset that puts money in your pocket.
Now that you’ve educated yourself on your target market, it’s time to seek out the assistance of an experienced real estate broker.
A good broker will talk with you about what you’ve learned and offer additional guidance on your target market.
Also, a good broker will:
Send you properties that match your goals.
Tour properties with you to help identify any red flags.
Negotiate on your behalf to ensure you get the best possible price.
Connect you with other key members of your team.
Steer you away from making poor choices.
Don’t make the mistake of jumping right to this step without completing steps 1-5.
It’s important to have done your homework on your target market before talking to brokers. That’s because you need to know enough to have informed conversations with potential brokers.
You don’t have to know all the answers. But, you have to know enough to ask the right questions.
And, you have to know enough to recognize if your broker is giving you misguided advice.
Mortgage lending is big business. Just about every person out there needs a mortgage to buy a home or an investment property. As a result, there are a lot of banks and companies out there who want your business.
To be sure, not all mortgages are created equal.
And, not all brokers, banks, and lending companies are created equal.
That’s why your job as an investor is to find a mortgage broker who truly has your best interests in mind.
That means working with someone who wants what’s best for you and your family, not what’s best for him and his family.
Plus, because rental property investing is a long-term game, you want someone on your team who’s also in it for the long run.
A good mortgage broker will:
Recommend the best loan for your goals.
Stop you from borrowing more than you really can afford.
Help get your loan approved.
Explain the numbers.
Not let you refinance until the time is right.
In sum, a good mortgage broker understands exactly what you’re trying to accomplish with each purchase. You can be straight with him and he can be straight with you.
8. Return to your search and do basic deal analysis.
Now that you have a real estate broker and a mortgage broker on your team, you can start to analyze deals that match your criteria in your target area.
Don’t let this part of the process intimidate you.
Rest assured, you’ve already done the hard part of educating yourself on the key assumptions you’ll need to make to properly analyze deals.
Now, you just need to plug those numbers into a simple spreadsheet or online calculator.
For a step-by-step example on how to run the numbers, check out my post here.
9. Start touring the properties that look good on paper.
After running the preliminary numbers on properties that match your criteria, you should have a smaller list of properties that seem like real contenders.
These are the properties that you should tour.
Again, you want to make sure you don’t jump ahead to this step without having completed the other steps.
That’s because it’s impractical (if not impossible) to tour every property that appeared in your initial search. By running the numbers first, you can weed out the properties that would be a waste of time to see in person.
After touring a property, you should then update your preliminary analysis based on what you learned.
For example, maybe you learned that the bedrooms are smaller than advertised. Maybe the finishes aren’t as nice as in the pictures.
The point is that after seeing a property in person, you may determine that you previously overestimated what the unit will rent for.
You also will have a better idea of what you think the property is worth.
A final word here: some investors are content buying properties without touring them in person.
Personally, I would never buy a property without walking through it first. I want to see for myself what condition the property is in and make my own assessment of what it could rent for.
10. Determine if the numbers will work in your target area.
The final step is to put together everything that you learned in steps 1-9 to determine if it’s a good idea to invest in your target area.
If you like what you’ve learned, you can stay disciplined and wait until you find an attractive property to offer on.
On the other hand, you may find that your initial target area is not ripe for investment.
That’s OK. It’s certainly better to find that out before you commit hundreds of thousands of dollars to a poor investment.
Before my wife and I settled on Logan Square, we went through this process and ruled out a number of other promising neighborhoods.
By putting in the effort to complete steps 1-9, we learned that the math simply did not work in certain parts of the city.
In some neighborhoods, the properties were just too expensive to earn positive cash flow. Then, in other areas, the rent was not high enough to justify the purchase price or high taxes.
In the end, we determined that Logan Square had the right combination of attractive properties and decent rents.
Step-by-Step Guide to Buy Your First Rental Property
Use common sense and your own life experience to develop your target criteria.
Pick an initial location that matches your criteria.
Learn the common, important attributes of properties in your area.
Study the average rent for units in that area.
Ballpark how much you’ll need to spend for an attractive property.
Work with a real estate broker to test your findings.
Contact a mortgage broker and determine your budget.
Return to your search and do basic deal analysis.
Start touring the properties that look good on paper.
Determine if the numbers will work in your area.
Like any new skill in life, implementing this step-by-step guide takes some time and effort in the beginning.
The upshot is that if you can follow these steps, you’ll get that first rental property and have the skills to acquire additional properties when you’re ready.
If I can be of any assistance as you begin your search for a rental property, please feel free to connect via socials or by replying to one of my weekly emails.
You can sign up for my email list here. I personally respond to every email.
When I graduated law school in 2009, I never thought about money.
Within a year, I had racked up $20,000 in credit card debt ($30,000 in today’s dollars).
And, that was on top of my student loan debt.
My salary at the time was $62,000. This was a problem.
After all these years, I still ask myself, “How did I let that happen?”
The answer, I now realize, is actually pretty simple.
I never learned about personal finance.
I wasn’t thinking about money. And, I certainly wasn’t talking about money.
It wasn’t until later that I learned that I had made every common money mistake in the book.
Rented a fancy apartment with a garage parking spot that I didn’t need?
Paid for Cubs season tickets I couldn’t afford?
Traveled coast-to-coast? Traveled overseas? Put it all on credit cards?
Check… check.. and check.
It’s not that I intentionally decided to get into debt. Frankly, there was nothing unusual about me at all.
I generally wanted to make good choices. I am a relatively smart human. You are, too. You’re reading a personal finance blog with the entire internet at your fingertips.
I didn’t know the first thing about money when I began my career.
When I graduate law school, I blindly assumed that I would earn a high enough income that I didn’t have to worry about money.
As I fell deeper and deeper into debt, I realized what a huge mistake that was.
Maybe that’s why I still remember the day so clearly when I realized I was financially heading in the wrong direction.
It was an ordinary Monday. I had grabbed my mail on the way out the door as I headed to my job at the courthouse. When I got to my desk, I opened my credit card statement and was stunned by what I saw.
$20,000 owed ($30,000 in today’s dollars) one year into my career.
I was ashamed. I was supposed to be smart. Responsible. Trustworthy.
Looking back, I shouldn’t have been so hard on myself. I had never learned about personal finances.
It would be like getting upset today that I’m bad at playing the piano when I never learned how to play in the first place.
I’m certain that if I taken a personal finance course, or read a personal finance blog, I wouldn’t have made the same mistakes.
I would have saved myself a lot of worry, frustration, and time if I had a basic personal finance education.
I also would have learned that so many others were struggling with consumer debt like I was. There was no reason to make it harder on myself by keeping my debt a secret and struggling alone.
I unnecessarily did it the hard way, but I figured out personal finance.
At that moment when the full weight of my debt hit me, I made it a priority to turn things around.
At the time, I didn’t know the solution.
But, I had been trained to do research in law school so I could find answers to hard questions. So, that’s what I did.
Along the way, I realized that the fundamental and basic personal finance principles are, well, basic.
George S. Clason wrote “The Richest Man in Babylon” nearly a century ago. His collection of parables set in ancient Babylon is legendary.
Everyone should read it. His advice is simple and excellent: spend less than you earn. Save. Invest.
The same fundamentals are as true today as they were then.
Personal finance education should be a constant in your life.
Money is about continuous mindset and choices.
The basic concepts are easy enough to understand. Consistently making good choices is hard.
Even as I was racking up credit card debt, I could have aced a quiz that asked, “Is it a good idea to spend more money than you earn every month and plummet deeper and deeper into debt?”
I knew that I was supposed to spend less than I earned. That didn’t stop me from overspending.
Knowing the right answer is not the same as actually doing the right thing.
The law students and lawyers I teach are smart people. Like me back in 2010, they generally know the right answers. They don’t need me to tell them to spend less than they earn.
I help them get to the next level by building a strong money mindset. Then, we work on the habits and skills that will allow them to consistently use money as a tool to control their circumstances.
It’s not enough to learn the basics of personal finance and then stop. As your life changes, you need to regularly evaluate your personal finances so your money stays in line with your values.
That’s why it’s important to make personal finance education a constant in your life, whether it’s through a blog, a course or coaching.
Too many of us choose to struggle with money alone.
For some reason, though, most of us choose to deal with money on our own. Alone, we struggle with anxiety about credit card debt and guilt about splurging on things we love.
This has never made sense to me.
Making good choices with our money is essential to a healthy and meaningful life.
Why don’t we talk more about these things with our friends and family?
That’s what I’m trying to change.
I’m done with this stigma that we shouldn’t talk about money.
I want us to get comfortable with the idea of going to our friends and loved ones to talk about money, just as we would talk about anything else.
There should be no embarrassment or shame in it. We’re all dealing with the same challenges.
By talking about money, we can help each other turn those challenges into opportunities.
If we can alleviate our money stress, perhaps we can reverse the trend of lower happiness levels among young people today.
Talking about money is not about numbers.
We’ll have plenty more to say about how to talk money. For now, let’s agree that talking about money is not about prying into how many dollars we each have in the bank.
We can benefit by talking about our money mindset, habits, and strategies, while still keeping certain information private.
Let’s also agree that talking money is a “no judgment” endeavor.
We have all had different experiences that have shaped our relationship with money.
It’s important not to pass judgment, especially when talking to our significant others. Your conversation won’t last very long if you ignore this advice.
Each session I’m with my students, I learn from their experiences and money mindset, same as they learn from mine. I encourage them to continue the conversation outside the classroom with their loves ones.
When my students report back, they tell me how empowered they felt after starting these conversations. The more we can talk money, the less we’ll feel alone. We’ll all make better choices because of it.
People tend to skip this step. They want to jump straight to investing and real estate before learning about money mindset.
But, why focus on investing if you and your significant other are not aligned on what those investments are for?
The same logic applies to budgeting. While very few people enjoy the budgeting process, it’s a crucial step to generate fuel for our savings and investments, which ultimately fund our major life goals.
When I teach my personal finance seminar to lawyers or law students, I typically reach out ahead of time asking about topics of interest.
The most common response I get is something like, “I want to learn about investing.”
The other common response is, “I want to invest in real estate.”
I totally get it. Investing in the stock market and owning real estate are sexy topics.
Without a doubt, these are both important topics to cover in a personal finance seminar. We spend a lot of time in my course and here in the blog talking about investing and owning real estate.
Of course, the best way to generate wealth is through consistent investments over a long time horizon.
So, my students are asking the right questions when they are concerned about investing and real estate.
The hard part is constantly generating enough money to fuel those investments.
That’s why investing and owning real estate are “Day 2 topics.” On Day 1, we have to build the foundation.
Think about it like this:
Before we can invest, we need excess money to invest.
To have excess money to invest, we need a budget that actually works.
For a budget that actually works, we need clear motivations.
Clear motivations means a strong money mindset.
Can you spot the issue of investing without a solid foundation?
When my students ask me a question about how to start investing, I tend to respond with a question of my own:
“How much savings does your budget generate each month?”
Yes, I know. It’s so annoying to answer a question with a question.
This particular question usually leads to a double dose of annoyance from my students.
My students are first annoyed that I ignored their question about investing. They didn’t come to me to talk about something boring, like budgeting.
They want to know about the exciting stuff, like earning huge returns in the stock market.
Next, after this initial annoyance fades away, another form of annoyance sets in.
My students get annoyed because they can’t actually answer the question.
They realize they have no idea how much money they’re saving each month because they don’t have a budget.
That’s a problem.
Not having a budget is a problem for anyone who wants to consistently invest.
To be a successful investor, you need to consistently fuel your investments. There will be ups and downs in the markets. That’s to be expected.
Your job is to stay in the game and keep feeding your accounts.
For example, most of us can be successful investors by simply investing in an index fund, like VTSAX.
Once we’ve selected that investment, our job is to constantly add money to your investment account.
That means having a budget that works.
If you skip this part of the process, sure, you may be savvy enough to open and initially fund the account. But, my prediction is you won’t be fueling that account regularly.
Having a budget for your personal finances is even more important when it comes to owning real estate.
Investing in real estate means running a business. Money comes in and money goes out. To be successful, you have to make sure that more money comes in than goes out.
This is obvious stuff, right?
The same logic applies to your personal budget: if you want to get ahead in life, more money needs to come in than goes out.
The problem is most people have a hard enough time managing their personal finances. How are they going to handle managing business finances?
That’s why I ask my students, “If you haven’t mastered this idea with your personal budget, are you sure you want to take on the stress and risk of an investment property?”
It’s usually around this point when my students start nodding in understanding.
Before focusing on stocks or real estate, make sure your personal finances are in order.
My goal here is not to dissuade you from investing in stocks or real estate.
We all need to invest if we want to generate wealth.
My goal is to help you avoid the mistakes that so many of us make in the early stages of our careers.
One of the biggest mistakes I see is people wanting to jump to the final steps in the process without starting from a strong foundation.
If you’ve been following along on the blog, you likely noticed the progression in topics we’ve covered. This is the same progression that we follow in my personal finance course.
You’ll see links to each one of these topics featured on the top of the Think and Talk Money homepage:
We initially covered each of those topics in order from top to bottom. First, we talked extensively about the mental side of money. Without having your money mindset in the right place, nothing else matters.
We then spent a lot of time talking about personal finance fundamentals, like budgeting, saving, and handling credit and debt responsibly.
Only after having our personal finance foundation in place did we talk about more fun concepts like investing and real estate.
There’s a reason we’ve covered these topics in this order.
If your money mindset is not in the right place, you won’t be able to stay on budget.
If you can’t stay on budget, you’ll likely fall into debt.
When you’re falling deeper and deeper into debt, it doesn’t make a lot of sense to prioritize investing.
Why bother with investing if any profits are just going to disappear?
Let’s focus on that last point for a minute.
What sense does it make to invest if you’ve never proven to yourself that you can use those investment gains responsibly?
I never want to see people take on the risks of investing just to have any profits disappear because they don’t have a strong personal finance foundation in place.
For example, imagine someone does the work to find and sustain a good rental property that generates $1,000 per month in cash flow.
It’s not easy to earn that much. It takes time and effort, not to mention the risk involved.
If that same person blows the $1,000 he earned on things he doesn’t care about, what was the point?
Why take on the risk and do the work if the money will all be gone by the end of the month?
Unfortunately, this is how many people go through life. They work hard, make good money, and then have nothing to show for it.
I don’t want that to be your fate. I want you to have a plan for your money before you earn it.
That means sticking to a budget that consistently moves you closer to living freely on your terms.
Most of us don’t know where our next dollar is going.
The reason most people never get ahead with their finances is because they don’t have a plan for where their next dollar is going.
Their income hits their checking account, they spend it on this or that, and pretty soon that money has disappeared. They haven’t used the money to advance any of their priorities.
It’s just gone.
To me, this is one of the most important money mistakes that we need to fix right away. We definitely need to fix it before we start fantasizing about big investment returns.
If not, you’ll just be making the same mistakes, just with more money to lose.
Having a plan for our money, before we earn it, is essential if we want to reach our goals. With a plan, we can eliminate the disappearing dollars with confidence that our money is being used to serve our purposes.
How do you create a plan for your money before you earn it?
You need to have a budget.
If you don’t currently have a budget that results in excess money at the end of each month, I encourage you to start there before thinking bout real estate.
When you have strong fundamentals in place, money becomes fun.
Being good with money doesn’t have to be stressful. Once you have the fundamentals in place, you’ll start to see how each dollar you earn gets you one step closer to financial freedom.
Before you think about investing in stocks or in real estate, make sure that your personal finances are in order.
Otherwise, the effort, stress, and risk of investing is not worth it. Any dollar you earn is likely to disappear as quickly as it comes in.
To prevent that from happening, establish good money habits before you buy real estate.
In the end, you’ll be so happy that you did.
For any investors out there, did you jump in before establishing strong personal money habits first?
Did any benefits you earned from investing simply disappear because you didn’t have a plan for those dollars ahead of time?
What advice do you have for beginners thinking about investing?
I just wrapped up another personal finance seminar with a great group of law students. After two full days of leading class, my voice is hoarse and my body is sore.
If you’re interested in learning more about my personal finance course for law students and young lawyers, please reach out.
I’ve taught law students and lawyers, both in-person and virtually, and would be happy to discuss how I can help you or your group.
My favorite part of class is when my students share their Tiara Goals.
We spent the first portion of class talking about money mindset. Without the right motivations, none of the other tools matter.
Without a doubt, this is always my favorite part of class.
When I say I’m on a mission to convince you that talking money is not taboo, I think of my students sharing their goals.
I get so energized by hearing their goals. My students report the same sentiment after learning what drives their friends and peers.
Over the years, my students have shared countless impactful stories. As unique as these goals can be, it’s remarkable how most of us want the same things in life.
Year after year, I hear the same motivating forces:
Spend more time with my family.
Travel and enjoy experiences around the world.
Stay healthy and fit.
Provide for my children and my aging parents.
Work for a cause I believe in.
Have time to volunteer.
Enjoy more hobbies like baking, golf, jogging, sewing, and pickleball.
I also regularly hear one thing that my students, and the rest of us, don’t want:
I don’t want to be stressed about money.
Isn’t it telling that year after year, most of us want the same things in life?
Be specific, but not too specific, when you think about financial freedom.
When we talk about what we do with financial freedom in class, I encourage my students to get specific without being so precise that the goal becomes restrictive.
When we’re thinking about goals related to financial freedom, the idea is to focus more on big-picture, core values.
There will be a time and a place to strategize how to get there. The point here is to help define what you’re even trying to get in the first place.
For example, instead of “spending more time with family,” I would suggest something like, “never miss my child’s soccer game or dance recital because of work.”
Instead of “travel around the world,” I would suggest “at least one overseas trip of at least 2 weeks per year.”
Adding that little bit of specificity will help you visualize what you’re striving for with your money decisions.
Don’t get discouraged if you think you are not close to financial freedom.
Even when you feel like financial freedom is only a distant dream for you, it’s important to actively think about what you want out of life.
I’d even suggest that the further away you feel from financial freedom, the more important it is to think about what it would mean for you.
When you’re at your lowest point, visualizing what you would do with financial freedom is a helpful escape.
If you haven’t ever actively thought about what you would do with financial freedom, hopefully hearing about what my students shared in class will encourage you to do so.
Don’t forget to write down whatever you come up with.
I suggest you share your version of Tiara Goals with your friends and loved ones. It’s OK to keep some of your goals private.
By sharing, you will get the benefit of them cheering you on. You’ll also hopefully encourage them to share their goals with you, which can be very inspiring.
Budgeting is all about generating fuel for your ultimate goals in life.
Following our chat about money mindset, we launched into budgeting.
The essential purpose of making a budget is to generate fuel for your ultimate goals in life. This fuel is what feeds your savings, pays off debt, and grows your investments.
It’s not easy to track every penny. It’s not enjoyable to realize that your dollars are disappearing on stuff you don’t care about. But, these are crucial steps on the way to financial independence.
Learning how to create a budget that you’ll actually stick to is so important that we practiced implementing a Budget After Thinking in class.
Debt and credit are essential parts of a healthy financial life.
After focusing on the fundamentals of budgeting, we moved on to debt and credit.
Most of us have (or will have) some form of debt, whether it’s credit card debt, student loan debt, or mortgage debt.
With the right tools, we can attack that debt and eliminate it as quickly as possible.
Just as important, we can appreciate how we got into debt in the first place so we don’t make the same mistakes again.
When we talked about credit in class, we emphasized that credit impacts our largest purchases in life, like buying a home or a car. For that reason, it’s essential to understand how our credit history impacts our credit score.
From there, we explored why credit cards are a privilege.
I am a big fan of using credit cards responsibly to earn free travel. If you don’t overspend and pay your bills in full every month, credit cards can be a useful tool.
Student loans are front of mind for most law students and young lawyers.
Of course, no personal finance seminar geared towards law students and young lawyers would be complete without addressing student loans.
This year, we focused on the changes to federal student loans. We learned how to navigate paying back loans while advancing some other important financial goals, like investing.
Following our conversation on student loans, it was time to talk about building wealth through investing.
When it comes to investing, the key is to let compound interest work its magic.
With time on your side, you can concentrate on low fees, the proper asset allocation, and consistently fueling your investments.
Using an online calculator, we saw how even seemingly small contributions to our investments will make a huge difference over the long run.
This point demonstrates why we begin with budgeting before we talk about investing. Remember, one of the main purposes of your budget is to create money for your investments.
Every dollar that you invest rather than spend early in your career will lead to massive wealth if given enough time.
Finally, we discussed real estate, a topic that I am very passionate about.
We learned how to analyze when the time is right to buy a home (and when not to buy a home). We then saw how having a strong money foundation is key to qualifying for the best mortgages.
From there, we moved on to real estate investing. With real estate, investors benefit from cash flow, appreciation, debt pay down, and tax breaks.
For people pursuing financial independence, there may not be a more powerful strategy than buying a small multifamily property, living in one of the units, and renting out the others. This strategy is known in some circles as “house hacking.”
With this one decision, you can eliminate your housing costs entirely, which is traditionally the largest expense in our budgets.
That means you can repurpose the money you had been spending on housing to other goals, like paying off student loan debt.
At the same time, you have a long-term asset that you can keep for years after you decide to move out. That asset can kick off monthly cash flow, which can be saved for other investments or used to pay for current living expenses.
Money is nothing more than a tool.
In the end, I encouraged my students to recognize that money is nothing more than a tool that can be used to build a life on our terms.
When we learn how to use money in this way, we control the circumstances. The circumstances don’t control us.
Being good with money involves consistent choices. I can’t make those choices for you, but I can give you the tools to properly think through and evaluate whatever dilemma you face.
I left my students with one final request: keep the conversation going with your loved ones and friends.
Talking about money is not taboo. We can all learn so much from each other if we are just willing to share and listen.
There’s no reason to struggle with money decisions alone.
Our journeys towards financial independence should not be solo missions.
We can achieve financial wellness together.
All we need to do is think and talk about money.
If you’re interested in learning more about my personal finance course for law students and young lawyers, please reach out.
I’ve taught law students and lawyers, both in-person and virtually, and would be happy to discuss how I can help you or your group.
Have you ever asked yourself what you would do with financial freedom?
I asked myself that powerful question on a beach years ago and came up with my Tiara Goals.
Debt is a major obstacle on the way to financial freedom. To help you stay motivated to eliminate debt, write down your version of Tiara Goals.
By reminding yourself what you’re actually striving for, you’re more likely to stay on track.
Whenever we talk about good money habits, it always starts with establishing strong motivations. This is especially true when it comes to debt. There are too many temptations that can push us off track.
When you’re faced with these inevitable temptations, take a look at your Tiara Goals. I keep my Tiara Goals in my notes section on my phone. I also have a picture on my phone of the original sheet of notebook paper I scribbled on.
All it takes is a quick glance at my most important life values to overcome whatever temptation is in front of me.
Getting out of debt is not easy. Make it easier by regularly reminding yourself what you would do with financial freedom.
If you’re currently in debt, it’s crucial that you stop that debt from getting larger.
Think about it. If you’re paying off $1,000 of credit card debt each month, but you’re still spending $1,200 more than you earn, your efforts will be for nothing.
Your debt is growing faster than you’re paying it off. You’re not getting any closer to being debt-free.
Once you’ve stopped the disappearing dollars and learned where your money is going each month, you can make thoughtful decisions to pay off debt on a budget.
Then, you can be confident that any money you allocate to debt will actually lower your debt balance.
3. Prioritize Later Money funds to pay off debt.
The art of budgeting is to generate fuel for your Later Money goals. The more fuel you can generate each month, the faster you will achieve your personal finance goals.
There are lots of options on what to do with your Later Money. For example, you can invest in real estate or the stock market.
When you’re in debt, I recommend you prioritize using your Later Money to eliminate that debt. This is especially true if you have Bad Debt, like credit card debt. Your number one money focus needs to be to eliminate that debt.
This is the key to learning how to pay off debt on a budget.
There’s a good reason to focus on paying off your Bad Debt.
The interest rate on Bad Debt is generally very high. The amount you pay in interest each month will be significantly greater than what you may reasonably expect to earn through investments.
If you only have Good Debt, like student loan debt, you have some more flexibility in whether to focus on that debt or your other investment goals.
This is because Good Debt generally carries lower interest rates, so your investment returns may match or even exceed what you’re paying in interest.
In this scenario, I suggest that you consider splitting your Later Money between debt pay down, savings, and investments. This is what my wife and I are currently doing in 2025.
Seeing your savings and investments grow while focusing on how to pay off debt on a budget can provide an emotional lift.
Establishing good savings and investment habits now will also have longterm benefits that should survive your debt phase.
Our Top 10 Strategies for staying on budget will help you generate more money to allocate to debt. These tips are crucial if you’re trying to learn how to pay off debt on a budget.
For example, when you see something that you might want to buy, make a note in your phone instead of buying it right away. After a couple weeks, you probably won’t even want that thing anymore. Take that money you didn’t spend and put it towards your debt.
As another example, how about playing The $500 Challenge Game? When you come in under budget that month, use the excess funds to pay down debt.
You’ll see for yourself that the emotional high of paying down debt is better than the feeling you’d get from spending that money on things you don’t care about. It’s important not to ignore these emotional wins when learning how to pay off debt on a budget.
5. Talk to your people about how to pay off debt on a budget.
Talking money is not taboo. That includes talking about our current money goals and money challenges. Of course, it includes talking about how to pay off debt on a budget.
What are your current money priorities? If you don’t want to share with us, are you sharing with your friends or family?
I struggled with debt when I began my career as a lawyer. For years, I kept that to myself. I wish I had been more open. I’ve recently learned that many of my friends were struggling in the same way.
The problem was that none of us talked about it.
I think about how much stress we could have saved each other if we were just willing to talk about money like we talked about everything else. Instead, we hid our truths from each other.
Even worse, we likely enabled each other’s poor spending habits.
I now know that it didn’t have to be that way. I would have been better off if I was open about it.
This part still bothers me today: I also might have helped my friends facing the same challenges just by starting the conversation.
6. Track your net worth and savings rate for small wins.
Remember that your net worth grows when you reduce your liabilities, meaning debt.
When we think of net worth, it’s common to focus on growing our assets. Don’t forget that reducing your debts has the same impact on your balance sheet.
For example, when tracking your net worth, eliminating $1,000 in debt is the same as an investment that grows by $1,000.
Even when you’re focused on how to pay off debt on a budget, tracking your net worth can be very motivating. Every payment you make to reduce that debt improves your net worth.
This is especially helpful if you are focused on paying off student loans or paying down a mortgage. You may not have many appreciating assets, but you can still make a positive impact on your net worth by reducing your debt.
The same logic applies to tracking your saving rate. Measure and feel good about each additional amount you dedicate to eliminating debt.
The goal is to stay motivated while you pay off debt on a budget.
There are two common strategies to consider when you hope to pay off debt on a budget. These strategies are referred to as “Debt Snowball” and “Debt Avalanche.”
Debt Snowball means paying down your smallest debt balance first, regardless of interest rate. When you’ve paid off that loan completely, you then move to the next smallest balance, again regardless of interest rate.
Debt Snowball is ideal for people that are motivated by the emotional wins that come with eliminating a loan completely, even if it costs more money in interest in the long run.
Debt Avalanche means you pay down the debt that has the highest interest rate first, regardless of the balance. Once that debt is gone, you move to the loan with the next highest interest rate.
Debt Avalanche is for people who would prefer to pay less overall interest, even if it will take longer to pay off a single loan and receive the emotional win.
I discussed the pros and cons of each strategy here. Some people will prefer the emotional wins of the Debt Snowball method, while others will prefer the mathematical advantage of the Debt Avalanche method.
I’ve experienced firsthand that our money choices have more to do with emotions than they do math. If you prefer to play it strictly by the numbers, I completely understand.
The key is that whichever strategy you pick, stick with it. You’ll save yourself a lot of unnecessary mental gymnastics by choosing one approach and then moving on.
One word of caution: whichever method you choose, be sure to always pay the minimum on all of your loans. Otherwise, you’ll be in violation of your loan terms and face devastating penalties.
The idea with either of these methods is to allocate whatever funds remain to the single loan you have prioritized after paying the minimum on all loans first.
8. Think about loan consolidation or balance transfers.
Whether you have credit card debt, student loan debt, or even mortgage debt, you may have the option to consolidate each type of loan into a single loan.
If you do your homework, you should end up with a lower overall interest rate and have only one loan payment to make each month.
If you choose to go this route, make sure you fully understand the fine print involved.
For example, if you’re thinking about consolidating your student loans, you’ll end up sacrificing certain loan forgiveness provisions that accompany federal loans.
The same caveat applies when considering a credit card balance transfer.
A balance transfer is when you move the balance from one credit card to a different credit card with a lower interest rate. Most major credit cards accept balance transfers from other banks’ credit cards.
The main reason to consider a balance transfer is if the card you are transferring into carries a significantly lower interest rate than your current card.
In some instances, you may even qualify for a promotional rate with no interest charged for a limited period of time.
I used balance transfers when I was focused on eliminating credit card debt at the beginning of my career. I did my homework and found a card that was advertising 0% interest for 12 months with no balance transfer fees.
That meant that for an entire year, I paid no interest. Every payment I made went directly to lowering my overall debt.
If you’re considering a balance transfer, be mindful that there are usually upfront fees involved, usually around 3%. That fee may end up cancelling out any benefit from doing the transfer in the first place.
9. Get a side hustle to help pay off debt on a budget.
You’re not too busy or too important for a side hustle.
At the end of the day, there are really only two ways to more quickly pay off debt on a budget: spend less money and/or make more money.
We already talked about creating a Budget After Thinking to help on the spending side.
If you still believe that your income is the reason you have debt, there are always ways to improve your income.
Of course, if you really want to get rid of your debt faster, earning more money and the same time you’re spending less money is a dominate combination.
If you take on a side hustle, you can use every dollar you earn to pay off debt. Since this is new money you’re earning, you shouldn’t need it to fund your Now Money or Life Money.
Avoid the temptation of using that money on things you don’t really want anyways. Think about how much faster that debt will disappear if you’re able to throw additional money at it each month.
If you’re not ready for a side hustle, the same logic applies anytime you earn a bonus or commission at your primary job. Put that money to good use by paying down your debt.
10. Don’t let yourself fall backwards while you pay off debt on a budget.
When you do succeed in eliminating a debt, don’t let yourself fall back into bad habits. It’s hard to pay off a debt. It takes time. It takes patience and discipline.
Don’t let it all be for nothing.
When you pay off a loan, celebrate that accomplishment!
Be proud of yourself and let that good feeling motivate you to continue on your journey towards financial freedom.
Before you know it, debt will be part of your past life. You can shift all your attention to the opportunities that comes next for you and your family.
Top 10 Tips to Pay Off Debt for Lawyers and Professionals
To recap, here are my top 10 tips for lawyers and professionals to pay off debt:
If you have credit card debt, your immediate financial goal should be to pay off that debt as quickly and efficiently as possible. To get you started, I’ll show you exactly how to make a budget to pay off debt.
On your journey to financial freedom, getting rid of credit debt is crucial.
It is nearly impossible to get ahead financially if you are paying 20% interest or more on credit card debt. That type of drag on your money is just too strong.
Think about it: the stock market has historically averaged a 10% annual rate of return.
Does it make any sense to prioritize investing in the stock market to earn 10% per year if, at the same time, you are paying 20% in interest on your credit card debt?
Each year you follow this pattern, you are losing more and more money.
So, the first thing you should do is come up with a plan to pay off your credit card debt. Once the debt is gone, use that money for investments.
Today, we’ll look at how to make a budget to pay off debt so you can begin fueling your investments.
If you can follow these three steps, you’ll have a budgeting framework in place that will serve you well, long after you’re out of debt.
Paying off debt is the hard part. If you can do it, you’ll soon realize that it is a lot more fun to see your money grow each month instead of only seeing your debt shrink.
Let’s dive in.
Making a budget to pay off debt is about having a plan ahead of time.
The art of budgeting is to know what you want to do with your money before it hits your checking account.
Otherwise, it’s too late. Those dollars will disappear.
How do you come up with a plan, or budget, to pay off debt?
I teach my students that to create a budget to pay off debt, you need to first study your own personal situation to figure out where your dollars are currently going.
Then, you can figure out a plan for how to use your next dollar before you earn it. This applies not just to bonuses or other unexpected dollars, it applies to every dollar you earn.
When you put the time in to study your own habits, you can then create a realistic budget. When you have a realistic budget, you will have confidence that your dollars are working for you.
Some dollars will be used to pay your ordinary life expenses, some dollars will be used for all the things in life you love, and some dollars will go to your financial goals, like paying off debt.
That’s all there is to it.
If you don’t currently maintain a budget, here are three steps to follow to get you started.
Step 1: Track your spending for at least 3 months.
I recommend everyone, regardless of where you are in life, start with this first step of tracking your spending for at least three months.
Without knowing where your money is currently going, you won’t be able to make adjustments so you can pay off debt faster.
In other words, before you can reduce your debt, you have to make sure your debt is not growing each month.
That means not spending more than you can afford to pay off each month.
That’s a problem if you’re hoping to make a budget to pay off debt.
To address that problem, you need to track every penny for at least three months. Then, you’ll know exactly how much you’re spending and can begin to think about areas of improvement.
So, before you go any further in the budgeting process, you need to commit yourself to tracking every penny for three months and only charging what you can afford to pay off.
Fair warning, you probably won’t enjoy this part of the budgeting process.
Tracking your spending is important even if it’s not enjoyable.
I won’t lie to you.
This step can be hard and you probably won’t like it. This is the step that makes people think budgeting is a nasty word.
I get it and don’t blame you for having that reaction.
Still, there’s no getting around this first step. You don’t have to budget forever, just long enough to learn your own behaviors towards money.
Please know that many of us struggle with this first step. You might not like what you learn by tracking your spending.
When I first started budgeting, I learned that I was $20,000.00 in debt and was spending way more than I earned.
That wasn’t fun, but I’m happy that I put in the effort to find my blindspots and make adjustments.
I often think to myself, “Where would I be today if I didn’t go through this process 15 years ago? How much further into debt would I have fallen?”
The good news is, tracking your spending is easier today than it’s ever been. I’ve used apps, spreadsheets, and even the notes function on my phone.
Regardless of how you track your spending, be honest with yourself. If you intentionally or mistakenly leave out certain expenditures, you won’t learn where your money is actually going.
A budget, which is just a plan, is only as good as the data it’s built off of. Be honest about your data.
Last note: Budgets are usually done monthly, so you’ll want to create a separate accounting for each month you tracked.
The reason we track three months of spending is so you’ll be able to identify any patterns or inconsistencies in your spending from month-to-month.
This helps ensure you’re making decisions based off the best data possible.
Step 2: Separate your spending into three three main categories.
Great work completing the first step! That wasn’t easy, but you did it.
Now that you have tracked your spending for three months, you can assign each expense into separate categories.
Most personal finance experts agree, though we have different names for each category, that you should divide your money into three main buckets.
I refer to these buckets as:
Now Money
Life Money
Later Money
1. Now Money
Now Money is what you need to pay for basic life expenses.
These expenses include housing, transportation, groceries, utilities (like internet and electricity), household goods (like toilet paper), and insurance.
These are expenses that you can’t avoid and should be relatively fixed each month.
If you’re making a budget to pay off debt, it’s going to be hard to cut from this category, unless you are willing to make major changes. That means moving to a less expensive home or giving up your car, which are not always feasible.
That said, if you are in the position to make these kinds of big changes resulting in serious savings, you can accelerate your path towards being debt-free.
2. Life Money
Life Money is what you are going to spend every month on things and experiences in life that you love.
This bucket includes dining out, concerts, vacations, subscriptions, gifts, and anything else that brings you joy.
We can’t be afraid to spend this money. This bucket is usually what makes life fun and exciting.
The key is to think and talk so you are spending this money consistently on things that matter to you.
If you are truly dedicated to paying off debt, this is the major category to focus on. If it costs $100 to go out to eat, and $10 to eat dinner at home, that’s $90 that could potentially go towards paying off debt.
When you repeat that decision over and over, you can aggressively attack your debt.
3. Later Money
Later Money is what you are saving, investing, or using to pay off debt.
This bucket includes long term goals, such as retirement plan contributions (like a 401k or Roth IRA), college savings for your kids (like a 529 plan), emergency savings and paying off student loan or credit card debt.
This bucket also includes any shorter term goals, like saving for a wedding or a downpayment for a house.
Most fun of all, this bucket includes any investments you make to more quickly grow your wealth, like investing in real estate or the stock market.
You’ve probably guessed it already. Later Money is the key category that fuels your ultimate life goals, like financial independence.
The more you fuel this category, the faster you can reach your goals.
When your goal is to pay off credit card debt, any fuel you generate in this bucket should go to paying off that debt.
With the exception of contributing enough to receive your company’s 401(k) match and creating a small emergency savings account, all excess money should go towards paying off your credit card debt.
Don’t worry about assigning a percentage to each category.
I have intentionally not recommended target amounts or percentages to allocate to each of your three categories.
The reason is because of what I’ve learned from my students over the years. I’ll lay out my full reasoning in a separate post.
The short version is that in my experience working with law students, assigning target percentages for each category is counterproductive.
When I used to teach my students to aim for certain percentages in each category, I could tell that they would get discouraged as soon as I put the numbers on the slideshow. I completely understand why.
Each of us is starting in a different place. If you are currently spending 80% of your monthly income on Now Money, it’s not helpful to have someone tell you to create a budget that automatically drops that level to 50%.
My students would tune me out as soon as I put those numbers on the board.
Now, I teach my students to think and talk about their current personal realities and aim for steady and lasting improvements.
I want my students to create a plan that will last, not an unrealistic plan that they give up on after a few months.
So, whatever amount you’re currently spending in each bucket, that’s what we’re going to work with as we move on to step 3.
One other thing before you move on to step 3: don’t get hung up stressing about what type of expense goes into each category.
Sometimes, it gets tricky. Do clothes you buy for work count as Now Money or Life Money?
Don’t stress. It doesn’t really matter. It’s not worth the mental energy thinking about it. Just stay consistent and move on.
If you still want a target, aim for 20% of your income added to your Later Money each month.
All that said, I know that some of us operate better if we have a specific target in mind. If that’s you, the conventional wisdom is to aim for 20% of your income added to your Later Money each month.
Obviously, the more you add to Later Money, the faster you will pay off your debt. So, if you can afford more than 20% toward credit card debt each month, do it.
If you’re curious, targeting 20% savings each month was popularized in Elizabeth Warren’s book, All Your Worth: The Ultimate Lifetime Money Plan, first published in 2005 (before she was Senator Warren, she was a law professor and author).
Senator Warren advocated for a 50-30-20 budget framework with 50% going to fixed costs (what I call “Now Money”), 30% going to wants (“Life Money”), and 20% going to financial goals (“Later Money”).
Most personal finance experts agree that the 50-30-20 framework is a solid plan for your budget.
In theory, I agree.
In reality, I’ve become convinced through working with my law students that the 50-30-20 framework does not cut it in today’s environment.
While I agree the 60-30-10 framework may be more realistic, my experience has taught me that assigning rigid percentages is just not a practical framework for most people at the beginning of budgeting process.
Step 3: Make adjustments so your spending better aligns with your true motivations and desires in life.
OK, so now that you have assigned your spending to each of the three categories, the next step is to think and talk about your current habits and whether you’re spending matches your true motivations and desires in life.
If you decide that your spending does not match your life values, then it’s time to make some adjustments.
When you’re in credit card debt, the goal of these adjustments is to create more money each month to pay off your debt.
What kind of adjustments can you target?
In essence, my budgeting philosophy is to aim for steady and lasting improvements based on your current reality and your ultimate motivations.
What does that mean?
This is where we circle back to the importance of having a clear understanding of what we want out of our money. Money is just a tool.
Ask yourself:
“Is your current spending aligned with how you want to use your money to fuel your goals and ambitions?”
If not, you can make incremental adjustments as you progress towards your ideal spending alignment.
The idea will be to continuously add more fuel to your Later Money bucket so you can eliminate your debt faster.
You can make small adjustments, which are usually easier and faster to put in place. These adjustments might include dining out a bit less, cutting out a concert, or cancelling a gym membership or subscription you don’t use.
You can also make big adjustments, like moving to a cheaper part of town or getting rid of you car.
Small or big, the key is that when you make these adjustments, you repurpose that money in a thoughtful and intentional way. When you’re in debt, that means repurposing those savings to paying off debt.
Once your debt is paid off, you can put those savings towards your other financial goals.
You’ve already done the hard part. You’ve already aligned your budget with your money motivations.
With each thoughtful decision, you’re progressing towards your best money life. Most importantly, you’re learning about yourself and developing lasting habits. You won’t get discouraged and give up on budgeting.
To help you better understand how to make a budget to pay off debt, here is exactly how I did it when I was in debt in my twenties.
Here’s an example of how to make a budget to pay off debt.
In today’s budgeting example, we’ll look at how I made a budget to pay off debt in my twenties.
The dollar amounts below are what my actual income and spending looked like back then, adjusted for today’s dollars and rounded for easier math.
For some context, I was 26-years-old, living by myself in Chicago (no dependents, no pets), and working as a “slasher.” Not a joke, that was my actual job title.
I worked for a judge with the Appellate Court of Illinois, and as the junior member of the team, my responsibilities included lawyer duties and secretarial duties. I was a judicial law clerk “slash” secretary. Hence, slasher.
Lawyers are funny, huh?
In today’s dollars, I earned an annual salary of $90,000.00. That means I earned $7,500.00 per month. We did not have bonuses at the courthouse, so the $90,000.00 salary was my full compensation.
The benefit of going through an example like this is not to compare your situation to mine. Your income might be much higher or much lower. Same with your expenses.
Instead of the numbers, focus on the thought process so you can start to think about adjustments that suit your current life to help you pay off debt.
Below, you’ll see charts showing that I completed each of our three steps to make a budget to pay off debt:
Step 1: I tracked my spending for 3 months and reflected the average monthly amount for each expenditure in the column labeled “Baseline Budget.”
Step 2: I created a separate chart for each of the three main categories: Now Money, Life Money, and Later Money.
Step 3: I made thoughtful adjustments to better align my spending with my true motivations in life. I illustrated my decisions in the third column labeled “Budget After Thinking.”
Now Money
Recall that Now Money is what you need to pay for basic life expenses.
These are expenses that you can’t avoid and should be relatively fixed each month. If you have expenses for kids, pets, and other fixed life expenses, be sure to include them in your Now Money category.
Now Money
Baseline Budget
Budget After Thinking
Apartment rent
$2,200
$2,200
Renter’s Insurance
$20
$20
Parking spot
$430
$0
Gas for car
$40
$40
Car Insurance
$50
$30
Car Maintenance
$150
$150
Utilities
$120
$120
Internet
$60
$30
Cell Phone
$55
$35
Groceries
$300
$240
Personal upkeep(wardrobe, haircuts, etc.)
$100
$75
Gym Membership
$360
$360
Budget Busters
$300
$300
Now Money Total
$4,185
$3,600
What I learned tracking Now Money.
Now Money is pretty easy to track. There is not a whole lot of variance from month to month.
You’ll notice immediately that I had one major expenditure that needed immediate adjustment. That parking spot for $430? Definitely did not need that.
I lived 2 miles from work in one of the best cities for public transportation in the country. It was frustrating at times to look for street parking, but I didn’t use my car enough to justify the cost of a parking spot.
The other adjustments resulted in more minor savings, but don’t ignore these. Each adjustment took relatively no effort to make, just a little bit of thought beforehand.
When I say relatively no effort, I mean three phone calls and three reductions for car insurance, internet, and cell phone. That’s $70 saved per month, or $840 saved per year, for about 30 minutes of effort.
Otherwise, I decided to show a bit more restraint when grocery shopping and found a cheaper place to get my haircut.
All told, I reduced my Now Money Budget After Thinking by $585 per month with a little bit of thought and hardly any effort.
That meant $7,020 per year I could reallocate to paying off debt.
Life Money
This bucket, Life Money, is what you spend every month on things and experiences in life that you love.
Life Money
Baseline Budget
Budget After Thinking
Social Life (dining out, concerts, ball games, etc.)
$800
$700
Purchases (books, fun clothes, gifts, etc.)
$200
$150
Travel
$500/mo ($6,000/yr)
$400
Cubs Season Tickets
$400/mo ($4,800/yr)
$400
Budget Busters
$200
$200
Life Money Total
$2,100
$1,850
What I learned tracking Life Money.
When you’re reviewing your Life Money expenses, don’t be overly aggressive in cutting here. These are the things and experiences that make your life enjoyable. Even modest adjustments can make a big difference in the long run.
For tips on adjusting your Life Money without sacrificing the things and experiences you love, check out my post here.
As we saw with Now Money, with some thought and very little effort, I reduced my Life Money Budget After Thinking by $250 per month.
That meant another $3,000 I could use to pay off debt.
Some bonus tips for tracking Life Money
Life Money is the most annoying category to accurately track. These expenses vary month-to-month. You may buy concert tickets or have a trip planned some months, but not every month.
So, how do we get an accurate picture of our Life Money?
This is why I recommend you track your spending for at least three months.
You’ll get a more accurate picture because you can average your Life Money spending over those 3 months and balance out any inconsistencies.
Of course, if you have the patience to track your spending for even longer, you’ll get an even more accurate picture.
Fortunately, it is easier to track our spending today with the availability of apps and online banking platforms that can automatically track your spending.
Keep it simple when tracking your Life Money.
I highly recommend you keep it simple when tracking your Life Money. Many of my students give up on budgeting because they make this category more complicated than it needs to be.
I really struggled with this at first because I was so concerned about doing it right.
What I learned was that it doesn’t matter. If you go to happy hour with friends, don’t agonize over whether that goes into your “Dining Out” category or your “Drinks” category?
It doesn’t matter. Make it easy on yourself. Have one category called “Social Life” and move on.
Don’t forget that the point of budgeting is to learn your current habits so that you can make thoughtful adjustments.
Don’t let yourself become so obsessed with the details that you get stressed and give up on budgeting.
Break down large, annual expenses on a monthly basis.
One last tip, when you have large expenses, like season tickets or a big vacation, it’s helpful to break down those expenses on a monthly basis.
That way, you can see how much those individual purchases are impacting your overall monthly goals.
I’m not suggesting you actually pay for that trip over 12 months (like on a credit card), or that you can only spend that much on travel in a certain month. Think of it this way: you likely will not take a trip every month of the year.
Using my Budget After Thinking figures, let’s say I did not take a trip in January, February or March. That would mean that for my planned April trip, I would have $1,600 available that I can use, assuming I didn’t let those dollars disappear.
Later Money
Later Money is what you are saving, investing, or using to pay off debt.
This is the fuel for your most important goals.
When you’re in debt, this is the bucket that matters the most.
Later Money
Baseline Budget
Budget After Thinking
Student Loans
$1,100
$1,100
Credit Card Debt
$150
$900
Savings
$0
$50
Pretax Retirement (401k)
$300*
$300*
Other Investments
$0
$0
Total Later Money
$1,250
$2,050
*This was pretax money to my employer’s retirement plan. For budgeting purposes, it’s easier not to count the amount here.
This is where all your efforts in tracking your spending and making thoughtful adjustments starts to pay off, IF you have a plan for your next dollar before you earn it.
My plan was to pay off debt as quickly as possible.
In my baseline budget, I was very good about paying my student loan debt in full every month. I knew enough not to mess with student loans.
The consequence was my credit card bills were the last to get paid each month. This usually meant only paying the required minimum since I had run out of money by this point. It also meant no money for savings or investments.
In my Budget After Thinking, because of the thoughtful choices I made with my Now Money and Life Money, I created $800 of excess cash.
With that cash, I had committed myself to paying off my credit card debt as quickly as possible.
I also wanted to start the habit of saving each month. So, I added $750 of fuel to my credit card bills and $50 of fuel to my savings.
I stayed true to my plan and put that money to work. Within a few years, I had paid off all of my debt.
Some bonus tips for tracking Later Money.
Make budgeting as easy as possible for yourself.
In my example, I excluded the $300 pretax retirement savings because I am creating a plan for the $7,500.00 that hit my checking account each month. These are the dollars in jeopardy of disappearing.
The entire point of your budget is to create a plan for your next dollar before you earn it. You already wisely chose to save your pretax dollars by enrolling in your employer’s retirement plan.
Those dollars are already accounted for and working for you. They are not disappearing dollars. You did your job!
Like in my example above, you can exclude the amount you’re saving for retirement in pretax dollars from your budget calculations.
Feel good knowing that you’re saving that money. It’s icing on the cake. No need to worry about it when budgeting.
Now you know how to make a budget to pay off debt.
Let’s look at the complete picture before and after I started the budgeting process:
Baseline Budget
Budget After Thinking
Now Money
$4,185
$3,600
Life Money
$2,100
$1,850
Later Money
$1,250
$2,050
Total
$7,535*
$7,500
*Income of $7,500
With some thought and relatively little effort, I was able to stop the disappearing dollars and start making progress towards my ultimate life goals.
In my baseline budget, I was spending more than I earned each month. That meant I had no money to pay my credit card bills, which kept getting bigger because I kept spending.
In my Budget After Thinking, I broke my habit of living above my means and generated $9,600 of fuel in one year to help pay off debt faster.
Taking these first steps may seem like minor steps on the way to financial independence, but they were the most important steps I ever took on my personal financial journey.
Like I did, you can follow these three steps if you are truly motivated to make a budget to pay off debt:
Step 1: Track your spending for at least 3 months.
Step 2: Separate your spending into 3 main categories.
Step 3: Make adjustments so your spending better aligns with your true motivations and desires in life.
As you start to implement these steps, you’ll start to have a clearer picture of how your money can work for you.
When you’re in debt, that means putting your money to work for you to eliminate that debt.
The benefit to creating a Budget After Thinking is that it works whether you are in debt or you are focused on fueling other financial goals.
If you can put in the hard work now to create your budget, you’ll be in good shape no matter what you’re trying to accomplish.
Have you ever made a budget to pay off debt?
What was the key to successfully paying off that debt?
Looking at each of these explanations can help us understand and avoid common pitfalls that lead us into debt.
Of course, it’s expected that young lawyers will have student loan debt. While student loan debt may be considered good debt, the problem is that it can spiral into other forms of bad debt.
For example, student loan debt becomes the excuse for why we fall into consumer debt:
“I have to pay my loans this month, but I also want to eat out with my friends. I’ll just use my credit card.”
This is exactly what happened to me at the beginning of my career as a lawyer, and what I want to help you avoid.
If you fall into bad habits early, the problems only magnify when your income rises and your potential to spend rises.
The key is to eliminate the bad habits before they become bad habits. If it’s too late for that, now is the best time to correct those bad habits before the situation spirals.
Before we get to my theories why lawyers are in debt, realize that you’re not alone if you are a lawyer in debt.
Unfortunately, the data shows that debt is all too common in today’s world. Let’s begin with some scary stats about debt.
Here are some scary stats to help explain why lawyers are in debt.
According to the Federal Reserve Bank of New York, total household debt in the United States grew to $18.04 trillion by the end of 2024.
That’s such a big number, it’s hard to know what to do with that information.
Let’s break it down by the type of debt:
Credit card balances increased by $45 billion from the previous quarter and reached $1.21 trillion at the end of December 2024.
Auto loan balances increased by $11 billion to $1.66 trillion.
Mortgage balances also increased by $11 billion and reached $12.61 trillion.
HELOC balances increased by $9 billion to $396 billion.
Other balances, reflecting retail cards and other consumer loans, increased by $8 billion.
Student loan balances increased by $9 billion to reach $1.62 trillion.
While these numbers are still too big to comprehend, one powerful conclusion is hard to miss:
In every category, the amount of debt increased from the previous quarter.
This pattern of increasing consumer debt has been consistent for some time now.
HELOC balances have increased for eleven consecutive quarters.
Credit card balances have increased or remained the same for 10 of the last 11 quarters.
Let’s look closer at credit card debt for a moment.
According to a recent survey looking at credit card debt in 2024 by Bankrate.com:
48% of credit card holders carry a debt balance, an increaseof 9% since 2021.
53% of the people have been in credit card debt for more than a year.
The main causes of credit card debt are unexpected medical bills (15%), car repairs (9%) and home repairs (7%).
According to another Bankrate.com survey, 33% of Americans report they have more credit card debt than emergency savings.
These last couple stats help us understand why so many people fall into debt in the first place.
Some of it has to do with the failure to have emergency savings. When we don’t have savings, the first place we turn is to our credit cards.
Even more has to do with the failure to keep our spending in check, or living below our means.
Why is it so hard for lawyers to live below our means?
“Live below your means.”
“Money doesn’t grow on trees.”
“Don’t break the bank.”
We’ve all heard these common money phrases. If you were to ask someone older than you for one piece of personal finance advice, I’m betting you’ll hear one of these lessons.
Let me know if I’m right about that in the comments below.
There’s a reason these phrases are so common. They’re simple and easily reflect some of our core personal finance principles:
I didn’t have any idea how to budget or make intentional choices with my money. I had never thought about why or how to be good with money.
Like many people, I failed to create a budget and assumed that my W-2 income was plenty. I ignored emergency savings and never even thought about creating Parachute Money.
The saddest part is that I didn’t even realize that I was slipping backwards. I had no idea because I didn’t track my net worth or saving rate. I worked hard all year long and just hoped things would work out.
By the way, if this sounds familiar, you should know by now I’m not judging anyone. I’ve been very open about my money mistakes.
So, being careless with money is one common reason lawyers fall into debt. Another common reason is that bad things happen in life.
This might include medical emergencies, home repairs or car troubles. It’s not our fault that these things happen. But, it is our fault if we’re not prepared in advance.
While these events are unfortunate, and maybe even tragic, they are not unexpected. We all need to expect that bad things will happen.
Preparing for the unexpected is part of every solid organization’s planning.
In government, planning ahead means having a “rainy day fund.”
When managing properties, planning ahead for big repairs means having a “Capital Expenditures” or “Cap Ex” fund.
For our personal finances, planning ahead means having an emergency fund.
Whether it’s government, business, or personal finance, the goal is to have options other than taking on debt to get through challenging circumstances.
3. Blame the Kardashians.
Besides carelessness and emergencies, there’s another powerful force that contributes to rising debt levels across the world.
This force is nearly impossible to ignore. It’s become a part of our daily lives, whether we want to admit it or not.
What is this powerful force that contributes to our rising debt levels?
The era of social media and on-demand entertainment has made it harder than ever to avoid temptation. It’s everywhere we look.
Blaming the Kardashians realtes to another timeless, common money phrase: “Keeping up with the Joneses.”
The Kardashians are the modern day Joneses.
Once upon a time, “the Joneses” represented your neighbors, people you could observe from a distance on a regular basis.
The idea behind the phrase is that you can see what your neighbors are spending money on and are either consciously or subconsciously tempted to do the same.
If your neighbors buy a new car, you buy a new car to keep pace.
If your neighbors vacation in Australia, you research diving tours at The Great Barrier Reef.
When you notice your neighbors hosting a backyard BBQ party with lots of happy looking people, you decide to host a party the next weekend.
As humans, it can be difficult to ignore the temptation to keep up with our neighbors.
Whether we like it or not, we are concerned with our social status. Part of our self-worth gets tied to comparing ourselves to others.
Who better to measure up against than the people in our neighborhood who we probably have a lot in common with?
Keeping up with the Joneses is compounded in the professional setting.
This same idea is oftentimes compounded in the professional setting, like at law firms. It is not uncommon to compare ourselves in the same way to our colleagues at the office.
This is especially difficult for lawyers. Fair or not, society generally expects lawyers to make a lot of money and have nice things.
If a partner at your firm joins a country club, wears fancy clothes, or sends her kids to private school, you may feel pressured to do the same.
It’s easy to get caught up in expensive tastes when you’re expected to fit in, even if you don’t have the money to spare.
One of my favorite personal finance books, The Millionaire Next Door, discusses this concept in detail.
I highly recommend you read this book if you are struggling with comparing yourself to others.
Instead, the first part of the solution is to recognize when you’re making careless money decisions based on what you think other people are doing.
Making money decisions based off of your neighbors, let alone the Kardashians, is the fast road to debt.
You have no idea why or how another person is spending money. For all you know, it’s all for show and that person is barely getting by.
Do you really want to blindly follow this person’s choices? Wouldn’t it be better to confer with people you trust to help you think through money decisions?
The second part of the solution is to recognize that everywhere you look, companies are clamoring for your dollars.
Making headlines this week, the federal government shut down, resulting in hundreds of thousands of federal employees being furloughed.
When someone is furloughed, he doesn’t receive a paycheck. Even if that person eventually receives backpay, furloughs can be a huge problem for those individuals.
Why?
Because most people, even high-earners, live paycheck to paycheck.
When you’re furloughed, money stops coming in. But, money keeps flowing out.
But even federal workers who eventually receive back pay can suffer during a shutdown, as many of them live paycheck to paycheck, [Dan Koh, former chief of staff of the Labor Department] added.
“Even if you are entitled to back pay, a lot of people can’t go even a couple of days without their regularly scheduled paycheck,” he told CBS News. “If you have to pay your subway fare, for gas, if something breaks in your home, and you’re not getting paid, it places extreme stress on government employees,” he said.
So, what can we do to help protect ourselves from furloughs or any other sudden loss of income?
The first savings account you need is commonly referred to as an emergency savings account. This is your ultimate security blanket for whatever life throws at you.
For example, if you are furloughed and lose your source of income, your emergency savings will keep you afloat until you’re working again.
The idea is to use your savings so you don’t have to pull from your long-term investments.
Your emergency savings is not just for when you get furloughed or lose your job. Your emergency savings will also protect you in times of emergency (brilliant, huh?), like unexpected medical bills or expensive home repairs.
The idea remains the same: instead of pulling from your investments, you will have cash available in your savings account to cover your needs.
Aim for 3-6 months of Now Money saved for emergencies.
Aim for building up 3-6 months of your Now Money saved in a dedicated emergency savings account.
In your Budget After Thinking, Now Money represents the consistent, reoccurring expenses that you need to pay every month to take care of yourself and your family.
Since you will only be using this money in times of emergency, you can, and should, forego some of life’s luxuries until you get back on track.
The same is true for fueling your Later Money goals. Take a pause until you sort out whatever it was that caused you to spend your emergency savings in the first place.
While your emergency savings account is your first line of defense when you are furloughed, I prefer having an extra layer of protection.
Parachute Money is one of my favorite concepts in all of personal finance.
The analogy goes like this:
Pretend your life is like flying on an airplane.
For whatever reason, you decide you need to get off this airplane. Maybe conditions outside of your control have forced you to jump. Or, maybe you’ve decided that it’s time to take control and make a change.
Either way, you’re ready to jump.
All you need is a parachute.
You have a choice between the only two parachutes on the plane.
The first parachute has only one string (or line) connecting the canopy to the harness . You think to yourself, “This doesn’t seem very safe. What if that one string breaks? That would end very badly for me.”
Then, you look at the second parachute.
The second parachute has 10 strings. You say to yourself, “OK, this one looks much safer. If one string breaks, the parachute still has nine other strings to keep me safe. Even if something goes wrong with one or two strings, I would glide safely to the ground.”
It’s obvious which one of these parachutes to choose, right?
OK, cool.
But, what does a parachute have to do with money?
Each of your income sources is like a string on your parachute.
The central idea of Parachute Money is to create multiple sources of income so you are not beholden to any one source.
Picture each source of income as a string on your parachute. The more strings on the parachute, the stronger it is.
With Parachute Money, if one of your sources of income dries up, like when you are furloughed, you are more than covered with your other income sources.
Of course, the more sources of income you have, the stronger your personal finances are.
Parachute Money includes your primary job, any side hustles, any income generating assets, and your emergency savings account. It also includes the income of your significant other, if you share finances.
The key to Parachute Money: protect yourself with as many investment and income sources as you can.
That’s why in addition to my primary job as a mesothelioma attorney, I invest in the stock market, own rental properties and am an adjunct law school professor.
It is not easy to maintain an emergency savings account of 3-6 months.
Having 3-6 months of emergency savings is a wonderful achievement. It takes time and discipline to build up that level of savings.
Personally, I’ve struggled to accumulate a sufficient emergency savings account.
It’s that I’ve chosen to prioritize investing in real estate for the past seven years. Whenever I had enough money saved up for a down payment, I bought another property.
Admittedly, this was a risky strategy.
That’s why I do not recommend this approach for most people.
Instead, for just about everyone reading this, I would recommend you build up your emergency savings account before moving to other financial goals.
Did you notice that I said “just about everyone reading this”?
That’s because I think people who are protected by parachute money have earned the right to take more risks at the expense of their emergency savings.
Let me explain.
If you have parachute money, you can get away with a smaller emergency savings balance in the short run.
I was comfortable underfunding my emergency savings account in the short run because I had a strong parachute with multiple income streams.
As I mentioned, my wife and I were both working as attorneys and had various income streams. If one of our income streams dried up, such as during a furlough, we would have been protected by our other income streams.
Because of these multiple income streams, we were comfortable taking on the risk of having a low emergency savings balance.
If you are in a similar position and have multiple streams of income, you may also feel comfortable with a smaller emergency savings balance.
From where I sit, you’ve earned the right to invest your money rather than letting it sit in a savings account. If that’s your choice, I wouldn’t blame you. I made the same choice.
That said, I would not recommend you shortchange your emergency savings in the long run. While it’s OK to temporarily prioritize other investments, I still believe that an adequate emergency savings account is essential to a healthy financial life.
That’s why I am now focused on building up my emergency savings instead of acquiring more real estate. I’ve reached a good place with my investments. Now it’s time to focus on protecting my family.
I think of it like this: my parachute is otherwise very strong between my primary job, my adjunct teaching job, my rental properties, and my other investments.
The one string that I need to add is a sufficient emergency savings balance. That’s why building up my emergency savings will be my top money goal for 2026.
When you combine emergency savings and parachute money, you are as protected as possible.
The ultimate level of financial protection comes from having an emergency savings account and parachute money.
You are protected in a variety of ways if one of your income streams dries up.
If you haven’t prioritized an emergency savings account or developing parachute money, let the recent government shutdown serve as a reminder of how important these concepts are.
Whether you are in the tech industry or an attorney or a consultant, there’s no guarantee that your job will last forever.
The overall economic outlook is hazy at best right now. Ask five “experts” what the economy will look like in two years and you’re likely to get five different answers.
It’s up to each of us to build in multiple layers of protection in our financial lives to avoid disaster if our primary source of income dries up.
It’s where I’m from, where I’ve chosen to raise my family, and where I primarily invest in real estate.
Last night was a good night for Chicago sports fans.
My favorite team, the Chicago Cubs, won a playoff series for the first time since 2017.
While watching the game at home, I couldn’t help but think of how different my life is today than it was in 2017.
Back then, I had season tickets and rarely missed a game. My wife and I were just about to get married. Life was good and about as easy as can be.
From a financial perspective, we were pretty boring.
By the way, being boring with money is not a bad thing.
When it comes to money, boring is good.
Back in 2017, my wife and I each made good incomes as attorneys. More importantly, we were happy saving a lot of the money we earned.
We rented an apartment and had minimal expenses besides travel and our social lives.
At that time, we had a good amount of savings because we were planning to buy a house after the wedding.
Our only investments were in retirement accounts, like a Roth IRA and 401(k). We didn’t own any real estate.
Life’s a bit different for me now.
I don’t have season tickets anymore. We don’t travel as much.
We have three kids and different financial priorities.
Life is better than ever, but maybe not as easy as it was in 2017.
OK, what does all this have to do with baseball?
Last night at home, while watching the Cubs pull out a stressful victory, I started thinking about these things. I wasn’t in the crowd like in 2017, but I knew exactly how the fans were feeling.
Each pitch was tense. The crowd went nuts after every Cubs hit or strikeout by a Cubs pitcher. Whenever the San Diego Padres had a rally going, every Cubs fan was nervous.
In the end, the Cubs pulled out the victory and thousands of people now have memories they’ll never forget.
There’s nothing better than playoff baseball. I love it and hate it at the same time.
Watching the game, I thought of some of my favorite baseball memories. It was a good reminder of why it’s so important to think and talk about money.
We say it a lot around here: money is only a tool. When used properly, you can use money to build lifelong memories. You can create stories that you’ll remember for the rest of your life.
Stories like the ones I have from 2016 when the Cubs won the World Series.
That’s when I met Phil and April.
My nice friends, Phil and April.
Throughout that World Series run, we sat next to the nicest couple in the world, Phil and April.
Phil was a diehard Cubs fan. April was more reserved.
Both were smart and very friendly. They were enjoyable people to sit with.
We chatted baseball, mostly. Pitching changes. Send the runner. Question the manager. That sort of thing. Completely normal, unremarkable stuff.
Game 5 was played on a crisp, October evening. Jackets and beanies weather in Chicago. Phil and April were sitting next to my brother and I, as usual.
Mike Napoli was playing first base for Cleveland. Around the 3rd inning, a jerk four rows in front of us taunted Napoli with a crude, juvenile insult.
It was apparent the jerk was doing his part to keep Old Style in business for another year.
None of us liked what this jerk yelled.
Phil especially didn’t like it.
Phil was nice…and tough.
Phil did what the rest of us were thinking but were too scared to do ourselves.
Phil stood up. In so many words, Phil sternly recommended that the jerk knock it off and show some class.
The jerk turned around, aggressively scanning the crowd for the man who had publicly shamed him. The jerk had that unmistakable look in his eye that meant, “Let’s dance.”
My brother and I were a bit worried for our nice… and all of a sudden tough…friend, Phil.
Phil’s wife, April, did not look worried. She sat there like nothing strange was happening. Almost like she had seen this movie before.
When the jerk locked eyes with Phil, he immediately saw that Phil was not backing down. If anything, Phil looked a little too eager.
Well, the jerk was sloppy, but he had enough sense to recognize that he wanted no piece of Phil. He wisely turned back around and sat down quietly.
That was the last we heard from the jerk that night.
Our nice (and tough) friend, Phil had restored order.
On the day of the Cubs’ championship parade, my brother called me excitedly, “Phil’s on TV! Phil’s on TV!”
It didn’t register right away who he was talking about.
When I turned on the TV, sure enough, there was Phil, our World Series friend. I was so confused. Phil was giving an interview on set with the Cubs announcers.
Our nice (and tough) friend, Phil? On TV?
I turned up the volume and listened to Phil talk about his experience watching the Cubs win the World Series. Maybe I was hoping he’d mention his nice friend, Matt. (He didn’t.)
I still couldn’t figure out why Phil was on TV.
Why won’t they just put his name on the screen already!?
It wasn’t until the end of the interview that I learned who Phil was.
All I could do was laugh.
Our nice, and confirmed tough, friend Phil is better known as World Wresting Entertainment (WWE) champion and icon, CM Punk.
Unknowing watching the Cubs win the World Series with two celebrities with a combined 3.5 million Instagram followers?
Yup, that’s a story I’ll be telling for a while.
A memory I wouldn’t trade for anything.
As much fun as the World Series was, my favorite Cubs memory actually took place during the 2015 season, the year before they won the World Series.
It was during the 7th inning of Game 4 of the NLDS. This was the game where the Cubs knocked the rival St. Louis Cardinals out of the playoffs.
In the 7th inning, with the Cubs up 5-4, Kyle Schwarber hit one of the most epic home runs in Cubs history, landing his moonshot on top of the new right field video board.
It was such a feat, the ball is now enshrined where it landed.
The entire stadium was rocking so loud, you could feel the ground shaking beneath your feet. Every fan was jumping up and down, hugging anyone close enough to touch.
We were all dancing like nobody was watching. That moment was pure happiness.
I was there with my mom.
A lifelong Chicagoan, she too was jumping up and down and high-fiving all the other diehard fans in our section.
After the game, we met up with my wife at a restaurant and relived the victory over Champagne.
That day with my mom and my future wife is one of the best memories I have.
When I say money is a tool to create stories and memories, this is what I mean.
My brother and I still joke about our nice friends, Phil and April. I wouldn’t trade that memory with my mom for anything.
These are the types of experiences that I want more of.
These memories, and the desire for more like them, continue to motivate me today.
I want to be good with money, not so I can stash it in the bank, but so I can use that money to create joy for me and my family.
Beyond that, watching the crowd at Wrigley Field last night reminded me of why I started a personal finance blog.
It excites me to try and help people make intentional money decisions for meaningful experiences with meaningful people.
Talking money is really just talking life.
You may not be a baseball fan, but this conversation illustrates a foundational concept of Think and Talk Money.
Yes, we discuss money.
But, we’re really talking about our lives and our experiences.
Money is just a tool to help us.
And before you get cynical on me, of course money is not required for good experiences. That’s not the point.
What I’m suggesting is that if we’re all spending so much of our time each week at work, shouldn’t we spend some time thinking about the money we earn so we can maximize experiences like I had with my mom?
Think and Talk Money is all about awakening that thought process so we can use the tool of money to fuel meaningful lives.
You might not use that tool to get Cubs tickets.
But, what if you started thinking about money as just a currency that you trade to get your time back so you can do more of what you want with who you want?
Whatever it is that you’re after in life, thinking and talking about money will help get you there.
Have you used money as a tool recently to create stories and memories?
Kudos to you if you can answer that question quickly and relatively accurately.
Knowing your net worth indicates you are likely making intentional choices with your money. You likely are more concerned with how much money you keep, not how much you make.
It also likely means that you have a plan and are well on your way to financial independence.
Well done!
If you know your net worth, you might be wondering how you measure up to people your age.
That’s what we’re going to look at today.
First, let’s discuss why it’s important for all of us to track our net worth.
Think of tracking your net worth in terms of keeping score during a basketball game.
If you don’t know the score of the game, you don’t know if your strategy is working. You don’t know if you need to make adjustments before time runs out.
The same applies to tracking your next worth. The point is to educate yourself on your current financial situation so you can make adjustments while there is still time.
How do I know if I need to make adjustments based on my net worth?
Speaking of making adjustments, it can sometimes be helpful to look at datasets to see how you measure up to the rest of the population.
So today, we’ll look at two potentially helpfully net worth metrics.
First, we’ll look at the average net worth of Americans by age.
Then, we’ll look at the average net worth by age of the Top 1%.
The goal is to give you some benchmarks so you can assess where you’re currently at. Then, you can decide if you want to make any adjustments.
In other words, the point is to educate yourself so you can make intentional choices for your own situation. The point is not to start comparing yourself to your neighbors.
Below is the average and median net worth of Americans by age based on research from Empower.
Keep in mind these studies are not perfect.
It’s not an easy task to track and study net worth across a wide population. Not everyone tracks her net worth, let alone makes it easy for outsiders to track it.
Use these figures as a rough guide to help your own decision-making. Just don’t get too caught up in the exact figures.
Net Worth by Age
Age
Average Net Worth
Median Net Worth
20s
$121,004
$6,609
30s
$307,343
$24,247
40s
$743,456
$75,719
50s
$1,330,746
$191,857
60s
$1,547,378
$290,447
70s
$1,444,413
$233,085
80s
$1,342,656
$233,436
90s
$1,212,583
$205,043
High school math refresher: The average is calculated by adding up all values in a dataset and dividing by the count. The median is the middle value of a dataset with an equal number of values above and below. Averages can be skewed by extreme values, so the median can give you a more accurate picture.
Here are some observations about the average net worth of American by age:
Net worth tends to increase with age. No surprise there, right? As our careers progress, we tend to earn more and invest more money.
Net worth tends to peak in our 60s. This also makes sense. When people reach retirement age, they start to draw down their portfolio. They’ve spent decades accumulating wealth and eventually it’s time to spend that savings.
Notice the effects of compound interest. From the 20s to the 30s, we see that the median net worth nearly quadruples. That’s a 400% increase! However, it equates to a median net worth increase of only $18,000.
Compare that to the change from the 50s to 60s. We see that the median net worth increases by only 50%, but the result is an increase in nearly $100,000.
The takeaway is that when you have more money invested, smaller gains result in higher earnings. You could say, “the rich get richer.”
What is the net worth by age of the top 1%?
Next, let’s take a look at the average net worth by age of the Top 1%, thanks to an analysis of Federal Reserve data by DQYDJ.
Remember, these are only rough figures. Use this data to help you strategize based on your current financial situation.
Net Worth by Age of the Top 1%
Age
Top 1% Net Worth
18-24
$653,224
25-29
$2,121,910
30-34
$2,636,882
35-39
$4,741,320
40-44
$7,835,420
45-49
$8,701,500
50-54
$13,231,940
55-59
$15,371,684
60-64
$17,869,960
65-69
$22,102,660
70-74
$18,761,580
75-79
$19,868,894
80+
$16,229,800
Are these dollar amounts lower or higher than you expected?
If these dollar amounts seem unattainable, remember that 99% of us will never hit these marks. Don’t get discouraged. You’re doing great work if you’re anywhere close to these numbers.
Did you notice that the trends in the Top 1% net worth data are very similar to the average net worth by age data we previously looked at?
We again see the net worth of the Top 1% peaking in the 60s.
We also see the same effects of compound interest.
This data reinforces the point that investing favors people who start early, even if the results do not materialize for decades. It takes time for compound interest to work its magic.
When you reach FIPE, you are free to pivot to a new challenge, if that’s what you want.
On the other hand, maybe you looked at this data and learned that you are not as far along on your financial journey as you had hoped.
Don’t panic.
The benefit is that you can now make adjustments.
What kind of adjustments can you make after learning your net worth?
When you track and study your net worth, you can make adjustments while you still have time on your side.
For example, you may decide that it’s finally time to boost your saving rate.
After all, your saving rate is the one thing you can actually control on your way to financial independence.
Or, you might take a fresh look at your Budget After Thinking to find ways to generate more fuel for your investments.
And, it might mean saving and investing that one-time windfall instead of spending it on stuff you don’t really care about.
Whatever decisions you make, knowing the average net worth by age can help point you in the right direction.
It takes me less than 30 minutes per month to track my net worth using the TATM Net Worth Tracker™️.
It takes me less than 30 minutes each month to track and study one of the most important numbers in personal finance.
Each month, I’m only looking for progress compared to what my net worth was previously.
If my net worth increases over time, it means I am heading in the right direction.
It means that I am continuing to fuel my Later Money goals. I am paying down debt. I’m letting my investments do their thing.
If my net worth is not increasing, it means I need to figure out why and consider making adjustments.
Sometimes my net worth decreases because the markets are heading down. If that’s the case, I don’t do anything. At this stage in my life, I can afford to wait while markets tick back up.
If the issue is that my debt is increasing, or I didn’t fuel my investments that month, I know I need to make adjustments.
By studying my net worth each month, I can catch these setbacks before they become a continuous problem.
Do you track your net worth?
Are you happy with how you measure up?
If not, are you prepared to make the necessary adjustments?
At least you’ll have something to show for it come pay day.
Wait, you go through all that effort every day and you’re not saving a good portion of your paycheck?
Let’s talk about that.
When I take the train downtown, I can’t help but notice my fellow passengers.
Some people are already cranking away on their laptops. Some are even on conference calls, which always surprises me.
Why don’t they care that everyone is annoyed with them? Do the other people on the call know that they’re talking to someone on a train?
But, I digress.
Some passengers are reading books. A good portion of passengers are doomscrolling. Just about everyone has headphones in.
It’s not that people look unhappy. They just seem to want to be somewhere else.
Do you have similar observations?
Most people don’t have a plan.
It’s at times like these when I start to wonder how many of these people have a plan.
I’m not talking about a plan for lunch or for getting to the gym after work.
I mean a plan for how to spend their time and their money.
Ideally, this plan would be based upon spending time on meaningful pursuits with meaningful people.
My guess is most people have never really thought about this kind of plan.
Instead, it’s go to work. Get a paycheck. Pay the bills.
Same thing tomorrow. That’s as far as the plan goes.
This routine may be enough for some, or even most, people. If that’s enough for you, there’s no shame in it. Holding down a steady job and providing for your family are accomplishments to be proud of you.
But, let’s be real.
You’re reading a personal finance blog.
We spend a lot of time talking about financial freedom and creating options.
You wouldn’t still be reading if you didn’t feel there was more to life than the daily train ride, right?
You may not know how or when to get off the train, but you’re interested in finding out if it’s possible.
Well, it’s definitely possible. But, you need to break the cycle and commit to a plan.
Let’s say you work 2,000 hours per year to make money (40 hours per week, 50 weeks per year).
We won’t even count all the hours you spend getting dressed and riding the train.
Also, we will pretend you’re not looking at your emails in the evening, on weekends, and on family vacations.
We definitely won’t count the hours you’re staring at the ceiling fan worried about tomorrow’s challenges at work.
OK, so you’re working 2,000 hours (plus) per year to make money.
My question is:
How many hours per year do you think about what to do with that money?
Let that sink in for a moment.
You work a lot of hours. I’m guessing many of those hours are stressful.
Yes, you get paid money in exchange for those hours.
But, do you still have any of that money?
Do you care more about making money or keeping money?
Think back on how much time, energy, and sacrifice you dedicated to making that money.
Hopefully, you saved and invested a good portion of that money.
The problem is that most lawyers and professionals work incredibly hard, make good money, and don’t keep enough of it.
They somehow find 2,000 or 3,000 hours per year to work.
But, they won’t set aside even a few hours per month to think about what to do with all that money.
This is why I am passionate about money wellness.
Most people spend the vast majority of their lives worried about making money and practically no time at all thinking about what to do with that money.
No, I’m not suggesting that you need to think about money for 2,000 hours per year.
What I am suggesting is that even a little bit of time each week spent thinking and talking about money is just as important as the time you spent earning it.
That’s how you break the cycle of mindlessly riding the train to work and start progressing towards financial freedom.
It’s not how much money you make. What matters is how much you keep.
Robert Kiyosaki put it best in Rich Dad Poor Dad, “It’s not how much money you make. It’s how much money you keep.”
If you knew someone who made $1,000,000 per year, and at the end of the year, had only saved $20,000, what would your reaction be?
Sadly, this is how most people behave with their money.
They inherently know that they should be saving more, but they come up with excuses. They assure themselves that they’ll start saving more next year.
On the other hand, what if you knew someone who made $100,000 per year and saved $40,000?
Did your reaction change?
This is the kind of person who will actually achieve financial freedom and have choices in life.
It all comes down to how much you keep, not how much you make.
It’s why your personal saving rate is so important.
Don’t forget, your saving rate is the one thing you can truly control.
On your journey to financial freedom, there is only so much you can control.
The reality is, like most things in life, much of our financial journey is out of our hands.
If your gut reaction is that I’m wrong about that, that’s OK. I get it. I used to be in denial, too.
Really smart people, like Think and Talk Money readers, don’t want to acknowledge that they aren’t in complete control of their financial lives.
To illustrate my point, here are just a few things that you can’t control on your way to financial freedom:
You can’t control the returns you’re going to get in the stock market. It’s reasonable to project 10% average annual returns based on historical performance. Also, we use 10% merely as a projection for planning purposes. But, there’s no guarantee anybody will earn 10% per year.
You can’t control whether a real estate investment appreciates. We all certainly hope our properties increase in value over time. We do our best to target areas where appreciation is likely. But, once again, there’s no guarantee.
You can’t control if your employer is going to give you a raise. Of course, you can work hard. Also, you can outperform all the metrics. You can go above and beyond to deliver massive value to your company. However, when it’s time for your annual salary review, it’s not up to you how much all that is worth.
So, am I wrong about any of that?
Gee, thanks for the doom and gloom, Matt.
I know, I know. Not what you want to hear.
Don’t be discouraged. All is not lost.
There is one crucial element that you can control on your way to financial freedom.
Today, we’ll focus on the one crucial element that you actually can control on your way to financial freedom.
Your saving rate is simply the amount of money you save each month divided by the amount of money you make.
Saving rate = Money Saved / Money Earned
Just like staying on budget with two simple numbers, you can monitor your progress with this simple formula.
I find it helpful to measure your saving rate based on your monthly income and savings. This way it matches up with your Budget After Thinking.
I also find it most useful to express your saving rate as a percentage. To see your saving rate percentage, all you need to do is multiply your saving rate by 100.
Moving forward, when I refer to saving rate, I will be talking about your saving rate percentage. It’s more informative to see what percentage of your money you are saving, rather than an amount with no context.
What I mean is this: if someone asked me if saving $10,000 per year was a good target, I wouldn’t be able to comment with more context.
If that person was making $75,000 per year, I would say that seems OK. That’s a saving rate of more than 13%.
On the other hand, if someone told me they were making $750,000 per year, and only saving $10,000, I would recommend that person revisit their Budget After Thinking.
Whatever your current saving rate is, the goal is to seek personal improvement. Just like with tracking your net worth, the purpose is to see if you are making personal progress over time.
When it comes down to it, there are really only two ways to improve your saving rate.
You can spend less, and save more, of the money you’re currently making.
You can make more money and save most of that money, all while keeping your expenses the same.
Combining those two ideas is even better. Like we just said, make more money, spend about the same.
Use the excess money you make to fuel your Later Money goals.
If you can do that, your saving rate and your net worth will steadily climb. You’ll experience that your Later Money goals are closer to becoming reality than you think.
Why it’s important to focus what you can control, like your saving rate.
My point here is show you how dramatically one decision can accelerate your progress towards your goals.
Each additional amount saved is one step closer to financial freedom.
Sometimes, we all need to ask ourselves:
“Is spending more money right now on things I don’t really care about going to make me happier?”
“Do I even want to go out to more restaurants? Or fancier restaurants?”
“Do I despise my home/my car/my wardrobe so much that I must replace it immediately?”
Only you can answer these questions.
Maybe you’ll realize that your life is pretty good right now as it is.
You might just decide that you don’t need the extra money at this moment.
Here’s an example showing the importance of your saving rate.
Scott Trench, author of one of my favorite money wellness books, Set for Life, is a big advocate of improving your saving rate.
In a recent episode of his BiggerPockets Money podcast, Trench emphasized just how important your saving rate is using a simple example.
Let’s use that example to explore how improving your saving rate can accelerate your journey to financial freedom.
Assume that you earn $100,000 per year (after taxes for simplicity).
You are a pretty good saver and save 20% of your income, or $20,000. For most people, targeting a saving rate of 20% is pretty solid.
Of course, if you save 20% of your income, that means you spend 80% of your income, or $80,000 per year:
Take Home Pay: $100,000
Annual Spending: $80,000
Annual Savings: $20,000
Based on the above, we can project how long you will have to work to fund one year of your life.
Because you spend $80,000 per year and you save $20,000 per year, you would have to work four years to save enough money to fund one year of your lifestyle:
$20,000 saved x 4 years = $80,000 saved (1 year of spending)
In other words, you would need to work four years to buy one year of financial freedom.
Not bad, huh?
But, look what happens when you improve your saving rate.
What happens if you double your saving rate from 20% to 40%?
Now, let’s see what happens if you double your saving rate to 40%. That means you are saving $40,000 per year and only spending $60,000 per year.
The result is that you now only need 1.5 years of work to fund one year of financial freedom:
$40,000 saved x 1.5 years = $60,000 saved (1 year of spending)
Notice that two things are happening at the same time when you increase your saving rate.
First, you are saving more money each year. That’s a good thing.
Second, you are spending less money each year. That’s another good thing.
The result is that when you spend less money, you need to accumulate less money to fund your lifestyle.
It’s a double whammy. In a good way.
Should we complete our example by taking it one step further?
Let’s say you have a 50% saving rate. That means you save $50,000 per year and spend $50,000 per year.
How long do you have to work to buy one year of financial freedom?
Only one year.
$50,000 saved x 1 year = $50,000 saved (1 year of spending).
Now, that’s cool.
It’s motivating to think of your saving rate in terms of years to financial freedom.
So, what’s the takeaway here?
It can be extremely motivating to think of your saving rate in terms of how long you have to work until financial freedom.
Each incremental amount that you save means you’re boosting your savings at the same time you’re reducing your spending.
When you pull both of those levers at the same time, you accelerate your progress towards financial freedom.
This thought process is especially helpful for people who feel that math is not their thing. It doesn’t get much simpler than viewing savings in terms of buying financial freedom.
The cool part is that once you hit a 50% saving rate, you can essentially buy a year of financial freedom for every year that year work.
Keep in mind that that this simple illustration ignores any investment returns you may get from your savings.
Don’t worry, those investment returns will generally reduce the length of time you need to work even more. Check out Mr. Money Mustache’s post for more on that point.
Setting aside investment returns, the purpose here is to drive home the point that the more you save, the faster you’ll reach financial freedom.
That’s why it’s so important to focus on your saving rate. You can’t control everything, but you can certainly work on your saving and spending.
Have you ever calculated your saving rate in terms of how quickly you can achieve financial freedom?
I know it’s not as exciting as thinking about what you would do with $1 billion, but I think it’s more important because it is actually realistic.
Yes, I said realistic.
I truly believe that if you are a high-earning professional, like a lawyer, consultant, or real estate investor, it will happen.
There will come a point in your career (hopefully multiple points) where you earn a one-time windfall of $178,000.
For example, it may come in the form of a bonus, a commission, or profits from a sale.
When that time comes in your life, you want to be ready.
The last thing you want to do is waste that golden opportunity. You may never get another chance to materially impact your life so much in one shot.
So, let’s have some fun and plan out what we would do if we wake up tomorrow with an extra $178,000 in our bank accounts.
Here’s exactly what I would do.
The first thing I would do with $178,000 is pay off high interest debt.
I think of a bonus like this as a one-time “Get Out of Jail Free” card.
With $178,000, the first thing I would do is pay off any high interest debt that I have. High interest debt includes credit card debt, personal loans, and any lines of credit.
My main financial goal this year was to pay off the rest of the HELOC we used to buy our last rental property. That’s my first move with this windfall.
Once the debt is eliminated, I’ll be free to pursue more fun life goals. And, I’ll feel better without having that debt hanging over my head.
Next, I would set aside $15,000 to $20,000 for fun money.
I would use about 10% of the money for fun right now. That comes out to approximately $15,000 to $20,000.
That is the equivalent of a really nice vacation or two. Or, it could be new furniture for the house, new gadgets or toys (like a bike or golf clubs), or anything else that brings me joy.
I’m a firm believer that we have to enjoy the journey while we’re on it. Having eliminated all high interest debt, I’ve earned the privilege to have some fun with a responsible portion of this money.
The strange thing is that for people who are dedicated to achieving financial freedom, spending money can be very difficult.
The temptation is to save and invest every possible dollar. As tempting as that may be, I encourage you to resist the urge to “live in the spreadsheet.”
This is a chance to do something for yourself that brings joy and happiness. Whatever that is for you, take advantage.
Otherwise, what’s the point in working so hard in the first place?
I refer to my ultimate life goals as my Tiara Goals. Before I save and invest the remaining $100,000, I’m going to look at my Tiara Goals for inspiration.
With my Tiara Goals in mind, my top priorities right now are to eliminate HELOC debt, pay for my three kids’ college, and build my emergency fund.
Each one of these priorities align with my Tiara Goals and help me get closer and closer to true financial independence.
Because I have been aggressively acquiring real estate for the past seven years, college savings and emergency savings have been secondary goals.
Now that I’m not presently in the market for more rental properties, I can prioritize saving for college and emergencies.
With this windfall, I can make significant headway to satisfy both of those goals.
I would then use $67,000 to fund my son’s college education.
I recently used an online calculator to figure out how much money I would need to invest right now in my son’s 529 savings account to fully fund his college.
For my calculations, I targeted the premier in-state university where I live (the University of Illinois). I assumed a 10% average annual rate of return on my investment and a 5% annual increase in tuition.
I learned that with an investment today of $67,000, I could fully fund my son’s in-state tuition.
The key is to let that money grow for the next 15 years to take advantage of compound interest.
What an accomplishment that would be to not have to worry about his future college. I could cross that item off the “to-do” list once and for all.
So, with the next $67,000 of my windfall, I would fully fund my kid’s in-state tuition.
Disclaimer: if you’re doing this math for your own three-year-old, keep in mind that I’ve already begun to fund my son’s 529 account. The $67,000 is the difference that I need to add today in order to hit my goal. If you do the calculations yourself, you might come up with a different number.
With my son’s college tuition taken care of, I would move onto my next goal, which is to fund my emergency savings account.
Before we get to that, you may be wondering why I targeted the in-state school for my projections instead of aiming for a more expensive private school.
Why did I target in-state tuition?
It’s not that I don’t want my kids to have the option to attend a more expensive private school.
It’s that I have other goals that I want to accomplish in my life at the same time I’m saving for college. I view the in-state tuition target as a reasonable, minimum goal to strive for.
And, if my kid chooses to attend a more expensive private school, I plan on having additional ways to pay for it.
For example, my overall financial plan includes owning rental properties even after my kids go to college. I can use that rental property income to help pay for college.
Additionally, I plan on still earning income through a primary job. I can use that income to help pay for their college.
Between now and then, I can invest in more rental properties, a traditional brokerage account, or any other investment vehicle of my choosing.
I’ll still have the option to use that money to pay for college. The benefit is that I’ll have more flexibility.
Plus, you never know. Maybe my kid will earn a scholarship. Maybe my kid does not end up going to college.
Having different investments besides a college savings plan means that I’ll have options.
Finally, I would take the remaining $33,000 and put it into a high-interest savings account.
I have no immediate needs for this money. I have income coming in from a variety of sources, including my primary job, my rental properties and my job as an adjunct professor.
However, it’s been a goal of mine for a few years to bump up my emergency savings. It’s been a risk not having much saved up for emergencies, and I’m taking this chance to eliminate that risk.
Because I’m not currently in the market for more real estate, I can save this money for emergencies instead of worrying about a down payment for my next acquisition.
With my emergency savings account more adequately funded, I can better protect myself should disaster strike.
That’s why I’m putting the final $33,000 in my emergency savings account.
How would you use $178,000 today?
So, that’s how I would use a $178,000 windfall today.
It’s not as fun as thinking about $1.78 billion, but it’s a more realistic thought experience.
In case you’re wondering, if I had more money to invest at this point, I would focus on my baby girl’s college. I would use the same methodology that I used to plan for my son‘s college.
No matter the amount of money, it’s good to have a plan ahead of time. As a high-earning professional, the odds are that you will earn a significant bonus like this at some point in your career.
It might not be $178,000, but the thought process will work no matter what the amount is.
The takeaway is that it’s always a good idea to have a plan before you earn the money.
That’s why I never encourage anyone to cut out spending on things and experiences that make them happy today.
Does this mean we should all go out and spend every dollar we make?
Of course not.
No matter what, you’ll always need to live within your means.
If you are spending more than you’re earning, you’ll never be financially independent.
However, if you earn decent money and invest it the right way, you will reach financial independence.
And, you don’t need to stop spending money on the way.
FIRE has taken on an unintended meaning.
One of the problems in the personal finance space is that many people first learn about financial independence in the context of FIRE (Financial Independence, Retire Early).
Unfortunately, there’s a stereotype that FIRE is only for people willing to aggressively lower their expenses.
In other words, the mistaken belief is that people who practice FIRE can only survive if they cut out most of life’s luxuries.
Even though this misconception fails to capture the true spirt of FIRE, the damage has already been done.
Too many people who I speak with get so discouraged by hearing “cut, cut, cut!” that they lose all interest in pursuing financial independence.
It’s not that these people are financially irresponsible. They mostly live within their means and save for important goals.
At the same time, they want to enjoy everything that life has to offer. And as mentioned above, I don’t mean enjoy life “years down the road.” They work hard and want to spend money to enjoy life today.
For people like this, FIRE’s perceived focus on deprivation is unappealing.
That way, you can benefit from long-term wealth generators like compound interest and appreciation.
Generating more money to invest, of course, involves making spending choices. These types of choices are the essence of the budgeting process.
However, instead of focusing on cutting your expenses to the bone, I recommend you create a reasonable Budget After Thinking that you can actually stick to.
If you eliminate all the fun stuff, no budget will last very long.
In a lot of ways, this advice is like dieting. Sure, you can lose 10 pounds in a few weeks if you eliminate every indulgence. But, how long is that diet going to work?
I recommend that you have a budget that you can stick to long term. Then, commit yourself to fighting lifestyle creep as you start making more money.
If you can do those two things, you don’t have to dramatically cut your expenses.
Yes, you have to keep your spending within reason.
No, you don’t have to cancel all your subscriptions.
Focus on earning more, not just spending less.
A good friend of ours just made $750 by doing one property showing. In total, she probably worked an hour to earn that money.
Compare that to the advice of cutting out your daily coffee ritual. If you consciously deprive yourself of coffee every day for an entire year, you could save about $1,000.
What would you rather do?
Work just a little bit more with a side hustle of your choosing, or cut out something that you enjoy each morning?
Do you really have to think that long about it?
Of course, you already know which option I’m pursuing.
I’ve had side hustles for just about my entire career as a lawyer.
My first side hustle was as an adjunct professor at a local law school, teaching just one class. I eventually turned that into teaching four classes.
In the meantime, I also launched a rental property business with my wife, now managing 11 units in Chicago and Colorado.
We’re doing this with three young kids at home. I’m not bragging. My point is that I roll my eyes whenever anyone tells me he is too busy to make extra money.
By the way, earning more money does not only apply to side hustles.
There are always ways to make more money within your primary job.
For example, can you earn a larger bonus by performing better?
Can you ask your employer for more responsibilities and a corresponding raise?
Or, can you earn additional money by generating business for your company?
Lawyers, like most professionals, have the ability to earn more money if they generate business. That means bringing in clients.
How can you find these clients?
You can make it a priority to go to more events where you might meet potential clients.
You could launch a blog or create other content to help people find you and know what you do.
Either one of these pursuits could be your side hustle.
There are endless opportunities for anyone that is motivated and is looking to earn more money.
And when you earn that additional money, you’re on your way to financial independence without having to sacrifice the things that make your daily life enjoyable.
OK, but I don’t even like coffee.
I know, I’m picking on coffee. Coffee is an easy target, but it’s just one example.
Maybe coffee is not your problem. Let’s say that you’ve cut out family vacations.
Family vacations can be expensive. There’s no doubt about it.
But instead of eliminating vacations, what if you could find a way to earn an extra $5,000? That could turn into a really nice family vacation.
For some people, this is a no-brainer. They find a way to earn more money.
Other people will simply skip the family vacation because it’s too expensive.
At this stage in my life, I’m not willing to do that. I have three young kids. I already feel like they’re growing up too fast.
A year ago, my daughter wouldn’t let go of my hand when I walked her to school. Now, she’s “too cool” to waive goodbye to Daddy.
The idea of skipping out on family vacations does not appeal to me at all. I know that there will come a day when I would really regret that choice.
Instead of eliminating family vacations, I would rather find a way to make more money.
You can have anything you want; you just can’t have everything.
Warren Buffett famously told his kids that they could have anything they wanted. They just couldn’t have everything.
That sums up my approaching to spending. If there’s something I truly want that doesn’t currently fit in my budget, I would prefer to earn more instead of giving up on having that thing or experience.
I might get there through a side hustle. I might get there through investing. If it’s something I value enough, I will get there one way or the other.
If you focus on your income, not just cutting expenses, you can continue your journey to financial independence without giving up these things that make life special.
Or, you can cut out the coffee and vacations, if that’s your preference.
I’d rather challenge myself to make more money so I don’t have to make those sacrifices.
Do you think financial independence is only for people willing to aggressively cut their spending?
Or, do you agree that financial independence is for anybody willing to work for it?
“I’m worried about today. I’ll deal with tomorrow later.”
“If I cut out vacations and saving for retirement, I can make it work.”
Have you ever heard money excuses like this before?
I recently had a couple of great talks that got me thinking about comments like this. These talks led me to think about common money mindsets we sometimes have when we’re worried about paying for things today.
For many of us, the natural inclination when money is tight is to ignore the future and focus on today.
The pattern goes something like this:
Go to work, pay the bills, keep food on the table.
Wake up and do it all over again tomorrow.
Dream about life-enriching experiences and retirement later.
The problem with this money mindset: how are you ever going to break the cycle?
How are you ever going to progress towards financial independence so your life is not stuck on auto-pilot?
My challenge to you?
When money is tight, think long and hard about the future. Think about what comes next.
Use a challenging period in your life as motivation to do things differently.
It helps to picture yourself 10 years from now. Imagine you don’t do anything differently.
Same Job. Same bills. The cycle continues.
Do you like what you see?
If you do, no need to read any further. Keep doing what you’re doing.
If you don’t like what you see, let me share another perspective with you.
Let’s use the future as motivation to make the hard decisions today.
That way, you can spend your money (and time) on the things and experiences that bring you happiness in life.
Some dollars will be used to pay your ordinary life expenses, some dollars will be used for all the things in life you love, and some dollars will go to your financial goals.
That’s all there is to it.
When it comes to budgeting, I divide my money into three primary categories:
Now Money
Life Money
Later Money
Now Money
Now Money is what you need to pay for basic life expenses.
These are expenses that you can’t avoid and should be relatively fixed each month. If you have expenses for kids, pets, and other fixed life expenses, be sure to include them in your Now Money category.
Life Money is what you are going to spend every month on things and experiences in life that you love.
This bucket includes dining out, concerts, vacations, subscriptions, gifts, and anything else that brings you joy.
We can’t be afraid to spend this money. This bucket is usually what makes life fun and exciting. The key is to think and talk so you are spending this money consistently on things that matter to you.
Later Money
Later Money is what you are saving, investing, or using to pay off debt.
This bucket includes long term goals, such as retirement plan contributions (like a 401k or Roth IRA), college savings for your kids (like a 529 plan), emergency savings and paying off student loan or credit card debt.
This bucket also includes any shorter term goals, like saving for a wedding or a downpayment for a house.
Most fun of all, this bucket includes any investments you make to more quickly grow your wealth, like investing in real estate or the stock market.
Later Money is the key category that fuels your ultimate life goals, like financial independence. The more you fuel this category, the faster you can reach your goals.
Your budget is really just about finding fuel for the best things in life.
This is where we circle back to the importance of having a clear understanding of what we want out of our money.
“Is your current spending aligned with how you want to use your money to fuel your goals and ambitions?”
If not, you can make incremental adjustments as you progress towards your ideal spending alignment.
The idea is to continuously add more fuel to our Life Money and Later Money. Why?
These are the buckets that represent the things we love the most (Life Money) and our most important life goals (Later Money).
When money is tight, resist the urge to cut these expenses from your budget. These are the expenditures that oftentimes give meaning to life and allow us to build a future on our terms.
Instead, focus on the Now Money bucket as much as possible.
You can make small adjustments, which are usually easier and faster to put in place. These adjustments might include dining out a bit less, cutting out a concert, or cancelling a gym membership or subscription you don’t use.
You can also make big adjustments, like moving to a cheaper part of town or getting rid of you car.
Small or big, the key is that when you make these adjustments, you repurpose that money in a thoughtful and intentional way. You’re now starting to align your budget with your money motivations.
These adjustments will give you options in the future.
With each thoughtful decision, you’re progressing towards your best money life. Most importantly, you’re learning about yourself and developing lasting habits. You won’t get discouraged and give up on budgeting.
Creating a Budget After Thinking is really all about one question:
What do you really want out of life?
When you prioritize Life Money (experiences) and Later Money (financial freedom), each dollar you spend or invest brings you one step closer to that ideal life.
If you are totally consumed with Now Money, you’ll struggle to build the life that you really want.
By that point in my life, I had paid off my student loan debt and was about to get married.
My soon-to-be wife and I had good money coming in, but I never truly thought about what I wanted in life. Sure, I had thought about things like having a family and being able to take vacations.
But, I never carved out time to purposefully think hard about what I actually wanted. I had never asked myself what truly motivates me.
I never allowed myself to dream about financial freedom.
The truth is, I don’t think I had ever visualized a life that wasn’t dominated by a full-time job.
Up to that point, my whole life had revolved around getting an education and then getting a job. I never pictured a world where I might not need a full-time job to provide for myself and eventually my family.
I had read about the concept of being financially free, but it always seemed like a possibility for other people, not me.
Writing this years later, I feel sad for that version of myself for having such limiting beliefs.
Whenever someone tells me she doesn’t make enough money to dream about the future, I think about those same limiting beliefs I used to have.
That’s the cycle I’m hoping to help people break.
When money is tight, think about the future.
When it comes to spending choices, resist the urge to cut the things from your budget that make life what it is. That might mean money spent today on memorable experiences, like vacations.
Or, it might mean money saved and invested to provide yourself more options down the road.
The key is to break the thoughtless spending cycle that can make your life feel like it’s stuck in place.
Create a Budget After Thinking that prioritizes what you truly value.
Money might still be tight, but you’ll know you’re spending on things that matter.
You’ll know that you’ll have options in the future.
Most lawyers and professionals have a complicated relationship with their careers. That’s a topic for another day. Suffice it to say, the relationship evolves over time.
In the beginning, we’re mostly satisfied to have a decent job. We’re proud of what we’ve accomplished to get this far. We can put our skills to use and start living like adults.
This phase typically lasts until we develop confidence and realize that we’re pretty good at our jobs. We know that we can take on more responsibility and perform more challenging work.
At this point, we begin to work harder than ever. Oftentimes (but not always), we make more money.
We tell ourselves that we’re doing important work. We even start to earn recognition and receive awards from professional groups.
The thing is: we haven’t ever questioned why we’re doing it and what we’re chasing.
Somewhere along the way, our work becomes our identities.
Is your job the most important thing in your life?
How would your spouse or kids answer that question about you?
When your job is the top priority in your life, your health, relationships, and personal interests all take a back seat.
Many of us prioritize our jobs above all else until we get around to retiring in our sixties or seventies.
We never stop to think about whether there’s another way. We’re stuck on autopilot.
Earn a paycheck, buy nice things, save for retirement.
It’s that last part that we oftentimes use as justification for working so much: saving for retirement.
Part of the problem is that we’ve been programmed to think that saving enough for retirement is a never-ending challenge.
We’ve been brainwashed to think that unless you save 10-20% of your paycheck for the rest of your life, you’ll never comfortably retire.
These fears are strong enough to push us to chase more money. To save endlessly for retirement.
Because if you don’t save enough, so we’re told, you’ll never get that lake house in Wisconsin you’ve always dreamed about. Instead, you’ll be living in your kid’s basement.
Now, don’t get me wrong. Saving for retirement is extremely important. It’s one of the bedrocks of personal finance.
But, saving enough for retirement is not an impossible goal. It is most definitely an achievable goal.
For many of us, it’s achievable earlier in life than we ever thought possible.
Once you accept the fact that you actually can save enough for retirement, you give yourself permission to ask, “When is enough is enough?”
This is where Coast FIRE comes in.
With the money mindset hack of Coast FIRE, you can tell yourself, “I have saved enough for retirement. Cross that major goal off of the list.”
Enough is enough.
With retirement taken care of, you can think about what else to do with your time and money.
That might mean staying exactly where you are: same job, same house, same vacations. If it ain’t broke, don’t fix it.
If it is broke, you can pivot.
You can start to dissect exactly what it is that you’re chasing in life.
Coast FIRE is a subset of FIRE for people who are not necessarily trying to retire early.
Instead, the idea is to aggressively fund your retirement accounts early on so you have more options as your career progresses.
The reason you’ll have options is because once you hit your projected magic retirement number, you no longer need to fund your retirement accounts.
You can sit back and let compound interest do its thing. Your retirement years are covered.
With retirement covered, you don’t need to earn as much money. You can focus more attention on your present-day self. That might mean working less hours or working the same amount but in a different job.
This is the essence of Coast FIRE: knock out retirement planning early on to create more career flexibility later.
Coast FIRE does not mean complete financial independence.
When you reach Coast FIRE, you are not financially independent because you still need money coming in to fund your current lifestyle.
But, you need less money because you no longer need to save for the important goal of retirement. That means you have earned some financial freedom, but not complete freedom.
That’s OK.
Remember, the part that separates Coast FIRE from traditional FIRE is that early retirement is not the goal.
Instead, Coast FIRE means continuing to work until normal retirement age (like age 65) but having more freedom in what you do for work.
To put a bow on it: the main money mindset benefit of Coast FIRE is that you have options once you’ve already put away enough money for retirement.
With retirement taken care of, you can:
Switch to a lower paying job or lower stress job.
Become a stay-at-home parent and live off of one spouse’s income.
Start a business.
Grow your side hustle.
Take some time off to think about what you want to do next.
With Coast FIRE, each of these options feels safer because you’ve already fully funded your retirement.
Knowing when enough is enough.
Towards the end of 2024, I had a breakthrough moment thinking about when enough is enough.
Earlier that year, we had moved into our “forever home.” I had traded in my 20-year-old car for a new one. My wife and I were expecting our third child.
As it happens, I was reading an excellent book on real estate investing written by Chad “Coach” Carson.
If anything, we’re closer to having too much on our plates. We self-manage our 10 units in Chicago and work closely with a property manager in Colorado.
With our full-time jobs and kids at home, we’ve bitten off as much as we can chew.
Our portfolio generates enough income to help fuel our current goals. If we were to continue expanding, the headaches could end up outweighing the financial benefits.
We want to build a life full of experiences and memories. That means we need more time, not more money. Acquiring and managing more properties right now would take up a lot of time.
What would you do with your time if money was not an obstacle?
Whenever I think of Coast FIRE, I’m reminded of a conversation I had with a friend earlier this year.
We were having lunch at a downtown Chicago lunch spot that’s been serving up epic burgers since the 1970’s. My friend and I are both balancing careers as lawyers in Chicago with young families at home.
In between bites of a massive BBQ-bacon-cheeseburger, I asked him a question I like asking smart people:
“What would you do with your time if money wasn’t an obstacle?”
Without hesitation, he answered that he would work with his hands.
He likes working on projects around the house. He gets immediate satisfaction from completing a repair or making an improvement.
His answer was great and very relatable. My years as a landlord has taught me the same feeling of satisfaction in completing a project.
What stood out to me the most was how quickly he answered the question. He knew exactly what he would do if money was not an obstacle.
This simple question helps illustrate what I mean by Coast FIRE.
When you achieve Coast FIRE, you can afford to take a pay cut. You can choose to work a job that you enjoy for less money.
It’s not an easy goal to accomplish, but I can’t think of a better goal to strive for.
By the way, since having that burger with my friend, he left his old job for one that better fits his life goals. I’m thrilled for him.
Coast FIRE is not about giving up.
Some critics of Coast FIRE argue that it’s just a catch phrase for quitting on your career too early. They say the consequences of having a “bad retirement” are too severe.
The way I see it: having a “bad life” now in hopes of a “good retirement” later is not a worthwhile trade off.
You can certainly prioritize making the most money in life. That might mean continuing to earn and earn so you can invest in the stock market or purchase more rental properties.
But, at some point, you don’t need any more money. At some point, you need to know when enough is enough.
Coast FIRE is about exactly that: knowing when enough is enough.
Do you even remember why you opened an account with that bank in the first place?
For many of us, we opened our first “adult” bank accounts in our 20s. We probably just picked the closest bank to our apartment. I doubt many of us (myself included) put much thought into who we banked with.
Because it’s human nature to resist change, I’m guessing many of us have never thought about whether that bank is still a good fit at the current stage of our lives.
In light of Capital One’s massive class action settlement based on allegations that it deceived its customers, now seems like as good a time as ever to revaluate who we bank with.
More on the settlement below.
First, a little personal context about why I’m thrilled that Capital One is not getting away with its deceptive scheme.
I banked with Capital One for many years.
For a long time, I used Capital One for all my savings accounts. When I started law school in 2006, there was a Capital One cafe right next to my school.
You could get a cup of coffee for $.75 and talk to a banker at the same time. It was a cool concept and convinced me to bank with Capital One.
I told everyone about how great Capital One was. I had Capital One savings accounts and a Capital One credit card. You could say I was a huge Capital One fan.
Key word: was.
In November 2023, I had been a loyal Capital one customer for 17 years. This was during the time period when interest rates on savings accounts were rising dramatically.
Many banks were advertising rates as high as 4% or 5%, which were higher than most of us had ever seen.
One day that November, for whatever reason, I logged into my Capital One account to see what rate I was earning.
I was sure it would be in the 4% range, and probably closer to 5%, since Capital One was a leader in online banking.
When my statement loaded, I was shocked.
0.30%!
Shocked probably isn’t the right word. I was disgusted.
0.30% in 2023 might as well have been 0.0%.
I refused to believe that a bank that I had banked with for 17 years could do this to a loyal customer.
What the heck happened?
Well, Capital One, unbeknownst to me, switched my savings from its high interest platform into an account with the much lower interest rate.
At the same time, Capital One was still advertising and offering top rates to new customers.
When I discovered the sneaky switch, I immediately closed all of my accounts and transferred my money to a new bank. I no longer have a Capital One credit card, either.
It wasn’t the amount of interest I lost out on that bothered me.
This all happened during that time when my wife and I were aggressively acquiring properties, so we never had a lot of money sitting in savings for an extended period.
So, my anger wasn’t just about the interest.
For me, it was about the principle. I don’t want to have any relationship with a bank that would do that to its customers, especially long-term customers like me.
I did a quick search in my inbox and found a Capital One statement from December 2022 showing a 0.30% interest rate. That means Capital One had deceived me for at least a year before I caught on.
I have to admit that writing this post is reopening old wounds. Although, learning about the settlement definitely helps.
A court hearing for final approval of the settlement has been scheduled for November 6, 2025.
If you are, or were, a Capital One 360 Savings account holder at any time from September 18, 2019, through June 16, 2025, you are automatically eligible for benefits. You do not need to fill out a claim form.
Note: if you’d like to update your mailing address or receive an electronic payment, you can do so here.
Capital One shall pay $300 million, to be used to make pro rata payments to settlement class members relative to the approximate amount of interest each settlement class member would have earned if their 360 Savings account(s) had paid the interest rate then applicable to the 360 Performance Savings account.
Translation: if you had a Capital One 360 account, you are going to be paid “some” of the interest you were owed.
The reason I say “some” is because of the word “relative” in the above paragraph from the notice.
Capital One allegedly cheated customers out of $2 billion in interest. The settlement is for $425 million. Based on that discrepancy, it does not appear we will get all of the interest we are owed.
Hopefully, I’m wrong about that and we all receive the full interest we are owed.
Disclaimer: I am not involved in the settlement negotiations and this is not legal advice.
If you remained a customer, you will receive an additional settlement amount:
The second component consists of $125 million, which will be paid by Capital One as additional interest payments to settlement class members who continue to maintain 360 Savings accounts (presently approximately 3/4 of the settlement class). In order to accomplish such additional interest payments, Capital One shall maintain an interest rate on the 360 Savings account of at least two times the national average rate for savings deposit accounts as calculated by the FDIC.
Translation: If you continue to bank with Capital One, you will receive some additional money. How much you’ll get is complicated.
By the way, I am happy to learn that customers who stayed with Capital One despite its deceptive practices will earn some additional money.
In the end, regardless of how much we receive, this news makes me very happy.
I don’t really care about the payment at this point. I’m happy that Capital One isn’t getting away with its deceptive practices.
And, I’m happy that news of the settlement serves as a good reminder for all of us to evaluate our current banking arrangements.
Even with the settlement, I still won’t bank with Capital One again. I cancelled my accounts as soon as I learned that the bank was ripping me off.
Maybe I’m being childish, but I still refuse to give my business to a company that blatantly deceives its long-time customers.
Why do stories like Capital One’s deceptive practices matter?
The lesson here is that we all need to regularly evaluate our banking relationships. There is no such thing as “set it and forget it” when it comes to our money.
The last thing any of us needs is to be tricked by our own banks. The more we talk about what’s going on, the better chance we will catch these schemes before it’s too late.
The point is: no matter how much you trust your bank, keep an eye on your accounts.
No, I am not so cynical that I think all banks are out there intentionally ripping us off.
However, massive scandals like this are not the only red flags to look out for. Banks notoriously have hidden fees and confusing rules.
If you are not paying attention to your money, you may be unknowingly paying fees or missing out on better opportunities. It’s up to each of us to regularly evaluate whether our bank is continually providing us with the services we need.
Are you a current or former Capital One customer?
If this is the first you’re hearing about Capital One’s deceptive practices, will you continue to bank with them?
No matter how far along you are on your personal finance journey, you will always need to make choices on how to spend your money.
I recently wrote about how I felt annoyed when I wanted to buy a new bike and new golf clubs.
You have to make decisions like this whether you make a lot of money or very little money.
The more money you make, the harder these choices can be. When I was in my 20s, traveling and a social life were my biggest spending challenges.
Now that I’m in my 40s, it’s making good spending choices for not only me, but my wife and three kids.
The other day, I confessed that I was annoyed because my goal to pay off debt was keeping me from buying a new bike or new golf clubs.
What I’ve realized since then is that I also felt guilty about spending money on myself when I could better spend that money on my kids.
I felt guilty because my five-year-old wants to learn how to ride a bike. I should buy her a bike and teach her to ride before I splurge on a new bike for myself, right?
With powerful feelings like annoyance and guilt, how can we make good spending decisions even as we make more money?
Don’t ignore key personal finance fundamentals even as you start to make more money.
What I’ve learned as my career and family obligations evolve is that it’s easy to forget the little things I used to focus on when money was tight.
This recent experience reminded me that I need to step back and focus on personal finance basics.
I’m not alone in needing a reminder from time to time about personal finance fundamentals, like budgeting. I talk to plenty of people who tell me that they kept a budget in their 20s but not so much in their 30s and 40s.
They share with me that even though they’re making more money, it seems like they have less and less money to spend.
I totally get it because I was the same way. I tracked every penny I made in my 20s until I learned how to stay on budget with two simple numbers. Recently, I haven’t been as diligent.
My recent dilemma with the new bike and golf clubs reminded me to go back to the fundamentals.
The benefit is that by remembering the basics, I can help myself by taking the anxiety and guilt out of these types of spending choices.
These budgeting strategies helped me realize that I can choose to spend money on what I want and shouldn’t feel guilty or annoyed.
The key is understanding how a certain purchase fits into the rest of my overall spending.
On this occasion, 3 of my top 10 budgeting tips stood out and helped me with what to do about the new bike and golf clubs.
Let’s take a look.
6. It’s OK if you occasionally exceed your spending.
What should you do if you overspend one month? Don’t get discouraged and give up. Before all your hard work goes to waste, take the next month to course correct.
If you overspent by $300 in August, make it a priority to underspend by $300 in September.
Is this easier said than done?
Well, sure. It’s always easier to say you’re going to do something. The hard part is following through. It will take discipline to get back on track. What will drive that discipline?
Once again, it’s your ultimate life motivations that we’ve talked so much about (and will always continue to talk about). Without that clear vision of your ideal life in front of you, no budget will ever last.
Don’t panic. Course correct. Stay on track.
Even though I didn’t buy the new bike or golf clubs, if I chose to do so, I could course correct the next month.
Going over budget for just one month is fixable. The key is to not blow my budget multiple months in a row.
If I did that, I would end up digging a hole so deep that it would be a major challenge to get back to good spending levels.
8. Buy it if you want it, but not right away.
Just because I didn’t buy the bike or golf clubs yet doesn’t mean I can’t buy them in the future when the time is right.
I always think of my mom when I see something that I want to buy but know I shouldn’t buy it right away.
About 10 years ago, my mom bought me a jacket for a birthday present. It was the exact jacket I wanted. How did she know, I asked her. “You mentioned it when we were downtown four months ago.” Four months ago!
I shouldn’t have been surprised. My mom has one of those steel trap memories.
If you only met her for five minutes and then saw her again two years later, don’t be surprised when she asks about your consulting gig, your trip to New Orleans, and that blue dress that she really liked.
I learned from my mom’s gift strategy and modified it to help myself resist the temptation to make impromptu purchases. I don’t have her memory, but I do have a phone with a notes function.
When I see something that I might want to buy, I do my best to resist the temptation of buying it immediately and make a note in my phone. After a couple weeks, if I still want that thing, I buy it.
More times than not, I no longer want whatever it was that tempted me in the moment.
If I still want the bike or golf clubs a few weeks from now, I can still buy them. By waiting, I also might benefit from end-of-the-season sales and can shop around for the best offers.
10. Plan ahead for budget busters.
Budget busters are any inconsistent expenditures, good or bad, that can derail your planning.
Good budget busters might include trips, weddings, and holiday/birthday gift shopping.
We can also add a new bike and golf clubs to the good budget busters category. These certainly count as irregular expenses but can wreck our budgets if we don’t properly plan for them.
Bad budget busters include unexpected car repairs, home repairs, or medical expenses.
Note, budget busters are inconsistent; they are not unexpected. These expenditures are 100% predictable every year, we just don’t always know when they will surface.
Planning ahead for budget busters is crucial to staying on track.
To do so, open up a savings account, preferably at a different bank than your checking account. This helps isolate those funds so those dollars don’t disappear.
As part of our really lost boy’s Budget After Thinking, you’ll recall that we had a separate line item for budget busters in both our Now Money (bad budget busters) and Life Money (good budget busters).
I encourage you to do the same. Each month that you don’t spend your budget buster money, transfer it to your savings account so it’s there when you need it.
One more bonus tip for dealing with budget busters.
We talked above about how to course correct when you exceed your budget in one month. On the flip side, what should you do when you’ve had a great month and underspent?
I recommend you transfer the amount you underspent to your budget busters savings account. Don’t let that hard-earned money sit in your checking account.
Those dollars will disappear. By transferring them to savings, those dollars will be at your disposal when needed.
Instead of buying the bike or golf clubs now, I can transfer some funds in my savings account and wait to go shopping until I have enough saved up.
Don’t ignore your budget even if you’re far along on your personal finance journey.
My experience with the new bike and golf clubs served as a great reminder to revisit personal finance fundamentals, like budgeting.
If you haven’t thought about your spending choices in a while, now is a good time to do it.
The 10 budgeting strategies mentioned above have worked for me in the past and continue to work for me today.
If you review those top 10 strategies, I hope you see that making good spending choices does not have to make us feel annoyed or guilty.
It just takes a little mental energy, exerted ahead of time.
When making good spending choices becomes part of your everyday life, you can eliminate the guilt and anxiety that comes with tough choices, like buying a new bike or golf clubs.
Have you been in a similar situation where you wanted to buy something but were worried about how it fit into your overall budget?
I want to hear about those dreams. What would you do with that time?
Travel?
Exercise?
Read?
It’s so motivating for me to learn what you would do with that kind of freedom.
At the same time, it’s my job to remind you to not ignore key personal finance fundamentals while you’re dreaming about the future.
When it comes to buying rental properties, this is especially true.
Let me explain.
If you’ve been keeping up with the blog, we’ve now learned how to run the numbers on potential real estate deals.
In fact, I showed you that the analysis is not actually that hard. Your job is simply to account for the fixed costs and make informed predictions for the speculative costs.
Then, we did the math together on an actual property in my target zone. By using a real example in Chicago, my goal was to further convince you that running the numbers should be easy.
Finally, we talked about how to evaluate a rental property when the initial math looks bad. The truth is most rental properties are not going to immediately look like great investments. It’s our job as investors to negotiate and look for potential.
By this point, you may be thinking that buying a rental property sounds great, except for one big problem:
How are you supposed to come up with the money for a downpayment?
Great question.
It’s such a great question that it requires us to take a step back.
Before evaluating rental properties, you need to evaluate your personal finances.
It’s no secret that in order to buy a rental property, you first need available money for the downpayment.
Unless you plan on taking on partners or getting the money from family, coming up with a sufficient downpayment is a major challenge.
Yes, there are loan options available that require a smaller downpayment. We’ll soon talk about some of those options. I’ve used loans like this in the past.
Still, a “smaller downpayment” does not mean “no downpayment.”
So, how can you come up with a downpayment?
For a downpayment, you need to have available money.
Each one of these categories builds upon the previous categories.
It all starts with money mindset.
A strong money mindset is the foundation of the personal finance journey. Maintaining a strong money mindset requires constant and intentional thought.
It may seem overly simplistic, but money mindset is what separates people who reach financial freedom from those who struggle to get ahead in life.
Don’t believe me?
Budgeting is really not that hard. We all understand the basic concept: spend less money than you earn. Still, most of us can’t do it.
The same applies to debt and credit. We all know to avoid debt. We know to use credit responsibly. So, why don’t we do it?
Investing can seem complicated at first. Is it really that hard? Entire books and websites have been created to show you how to create massive wealth through simple index funds.
What about buying rental properties? We did the math together. Analyzing deals is not that hard. The impediment for most people is coming up with the money for a downpayment.
You may be in a similar boat right now. You want to buy a rental property but you’re discouraged because you don’t have the downpayment saved up.
It’s not just about how much money you make.
Buying rental properties is not just about how much money you make. Plenty of lawyers and professionals make a lot of money and struggle to come up with any excess money to invest.
Sadly, the struggles don’t just relate to coming up with money for investments.
Being a lawyer is a hard way to make a living. When you work as a lawyer, the hours are intense and stress levels are consistently high.
In 2023, the Washington Post analyzed data from the U.S. Bureau of Labor to determine what the most stressful jobs are. The study confirmed that lawyers are the most stressed.
Of course, lawyers are not alone in struggling in this regard due to long, stressful hours.
The same study showed that people working in the finance and insurance industries were right up there with lawyers as being highly stressed.
Well, what can we do about it?
How can we address these struggles?
Where can we find money for a downpayment?
I have some thoughts.
How motivated are you to truly get ahead in life?
Are you truly motivated to get ahead in life?
Have you worked on your money mindset and found the motivation to actually create a budget that generates savings?
If you’ve successfully created a budget and still need to generate more fuel, have you thought about a side hustle?
When I mention side hustle, is your initial reaction that you’re too busy or important?
Some lawyers and professionals reading this won’t even allow themselves to consider a side hustle. They automatically think, “I’m way too skilled or busy to even think about another job.”
In my personal finance class, we spend a lot of time challenging that notion.
Very few people- and I mean very few- are too important or too busy to take on a side hustle.
For most of us, it’s an excuse.
You may think you’re one of those “too important” people.
I would challenge you to assess whether you’re confusing “too important” with “too stressed” or “too tired” or “too cool.”
Is continuing to worry about money really better than spending a few hours a week earning extra money doing something you love?
Setting that conversation aside, the ideal side hustle is something you enjoy doing that can earn you extra money at the same time.
Some examples of side hustles my students have come up with in class include:
Bartending. Entice your friends to come to your bar by offering cheap drinks. You get to hang out with them and get paid at the same time.
Fitness instructor. Instead of paying $48 for the spin class you love, become the instructor and get paid to lead the class.
Dog Walker. If you love dogs and don’t currently have one of your own, what better way to fill that void in your life while making money. The same applies to babysitting.
Home Baker. Make homemade treats with your kids and sell them to parents who don’t have the time.
How about this idea for aspiring real estate investors: part-time property manager?
My wife and I recently needed some help with apartment showings. We reached out to one of our favorite young people in the world to see if she’d be interested.
A chance to make some money on the side and learn a new skill?
She jumped on board without hesitation.
We’ve known her for years and were not the least bit surprised. She’s exactly the type of person who will no doubt be successful in whatever she chooses to do.
Too many lawyers and professionals come to me and primarily want to talk about investing or buying real estate.
They want to skip the foundation and jump right to the more exciting stuff.
Most of the time, these are people who have never kept a budget. Or, they have massive student loan debt with no real plan to pay it off. Maybe they have a good W-2 job but no other sources of income.
When I start exploring their situations with them, it’s clear they haven’t thought much about the personal finance building blocks.
When they mention how hard it is to save for a downpayment, they haven’t considered looking for a new job that pays more or starting a side hustle.
Before jumping right to owning rental properties, these are the personal finance obstacles that need to be addressed.
If this sounds like the situation you are in, your ongoing mission is to generate more cash to fuel investments.
The fun part is once you’ve discovered your motivations and established strong habits, you will consistently have money available so you can invest month after month for the rest of your life.
My wife and I would not own five properties today if we didn’t first learn personal money wellness.
My wife and I would not own five properties (11 rental units) today if we had not first learned money wellness fundamentals.
I don’t just mean we wouldn’t have had money available to invest, although that is certainly true.
I also mean we wouldn’t have the skills and knowledge to successfully run our real estate business.
If you’ve ever wanted to be a business owner or investor, working on personal finance skills now is critical.
Robert Kiyosaki put it best in Rich Dad Poor Dad, “It’s not how much money you make. It’s how much money you keep.”
If you knew someone that made $1,000,000 per year, and at the end of the year, had only invested $20,000, what would your reaction be?
What if you knew someone who made $100,000 per year and invested $20,000? Did your reaction change?
How often do you think about your money mindset?
Do you tend to think more about the “fun stuff” (investing, real estate) than the fundamentals (money mindset, budgeting, debt, etc.)?
Let us know about your money mindset in the comments below.
Most rental properties that you evaluate are not going to immediately look like great investments.
Does that mean you should just give up?
No way.
It’s up to us as real estate investors to research, negotiate and buy properties only at the right prices. Or, to buy properties that have untapped potential.
Ideally, we can do both.
The other day, we ran the numbers on an example property in Chicago that had caught my eye in.
Through that example, we learned what costs to include in our initial analysis to quickly determine if a property was worth pursuing further.
Today, we’ll look at the next step of the evaluation process.
Specifically, we’ll focus on what we can do when the initial math on a potential property doesn’t look very attractive.
Now, let’s get to it.
Our example property is a small multifamily building in Chicago.
Our example property is a five-unit apartment building listed for $1,800,000 and located directly in my target zone in Chicago.
Remember, this analysis is for educational purposes only. You are responsible for running your own numbers on any potential deal.
Here’s the listing description from my preferred listing site, Redfin:
Fully Gut Renovated 5-unit building, a prime turnkey investment opportunity in the best Logan Square Location Possible. Double Vanities, Fully built out walk in closets, in unit W/D, tankless hot water heaters, thin shaker kitchens and full height quartz backsplashes are just a few of the features that make this building feel more like condo living. Perfectly situated just steps from the Logan Square Farmers’ Market, residents can enjoy an eclectic mix of trendy bars, restaurants, cafes, and shops right at their doorstep. Renovation done with full plans and permits, include a new roof, windows, insulation, drain tile system with sump pump, back deck, and still warrantied appliances!
This property passed my initial screening, so we ran the numbers to see if it would be a good investment.
Here’s what the initial numbers looked like:
Asking Price: $1,800,000
Monthly Rent: $13,840
Mortgage Payment (Principal and Interest)
$8,982
Taxes
$1,429
Insurance
$400
Utility Bills
$350
Property Upkeep
$200
Preventative Maintenance
$200
Vacancy Rate (5%)
$692
Unexpected Repairs (5%)
$692
Property Improvements (5%)
$692
Total Monthly Cost
$13,637
Monthly Cash Flow (Rent – Costs): $203
It took me less than five minutes to do this initial evaluation.
A few notes on the above numbers:
For the mortgage payment, I estimated a 25% downpayment, which is common for investment property loans, and a 7% interest rate.
Taxes are a major cost that can make or break any deal. Make sure you are familiar with how taxes are assessed in your market. For example, in Chicago, property taxes are reassessed every three years. That means taxes go up every three years.
Many property listings will indicate the prior year’s taxes because they are lower. This particular listing has the prior year’s taxes, which I know are soon going to change for the worse. For now, I’ll run the numbers with the current taxes but would definitely account for higher taxes before moving forward with this deal.
Property insurance is a real wildcard these days. Insurance costs are going up everywhere. You’ll need to talk to a good insurance broker for an accurate estimate. I used my experience in the neighborhood with similar properties to make a reasonable estimate.
The initial math on this property did not look great.
In the end, I concluded that this is a beautiful property in a great location but would not be a good investment for me.
The reason is simple: I invest for cash flow. For me, this property is way too expensive for only a couple hundred dollars of monthly cash flow.
More specifically, I am not interested in shelling out a down payment of $450,000 (not to mention more for closing costs) to earn $2,400/year in cash flow.
At a price point of $1.8 million, I would only be interested if this property had a monthly cash flow of at least $4,000 per month.
For another investor, it’s possible that this would still be a good investment based on appreciation and debt pay-down. For me, that’s a big risk I’m not willing to take with that kind of money.
What to do if you don’t like the results of your initial evaluation.
Most of the time that you evaluate properties you won’t love the initial results.
You should expect that to be the case.
Think about it from the seller’s perspective. Ask yourself: why is the seller putting this property on the market?
Obviously, the seller is trying to make a profit. Maybe the seller is a developer or flipper who just completed an expensive rehab. He might even have investors who paid for the project that now expect to be paid back, at a profit.
The seller wouldn’t be doing is job if he didn’t try to find a buyer at a high asking price. He can always lower the price later on.
Also, you can think of it another way.
If a seller owns a wonderful property that is making tons of money every month, how motivated is he to actually sell?
He may list the property at a high price just to see if anyone will bite.
In our example, if the seller was cash flowing $4,000/mo, he’d probably just keep it.
And, if he had that kind of cash flow coming in, he may just list it at an astronomical price because he doesn’t really need to sell it.
Sure, there are exceptions. Some sellers don’t want to be landlords and others might just want to cash out. But, I don’t see very many of these situations.
When these situations do pop up, you need to act fast because other investors will take notice.
The point is these are just a few reasons why you will rarely find great investment properties based on your initial evaluation.
Don’t give up.
Your job is to figure out if a property has untapped potential that would make it a good investment.
Now, let’s return to our example to see what I mean.
Is the property overpriced?
The listing price is only the start of the negotiation.
The listing price may just be too high. In recent years, the listing price has oftentimes been too low, leading to bidding wars because of high demand and limited supply.
Your job is to find a price that works for your cash flow needs. The seller may not accept your price, and that’s OK. You may need to move on.
Let’s explore putting a price on our example property where it would be attractive for me.
Keep in mind that I would want a monthly cash flow of $4,000 to move forward on this property.
With that target in mind, I can return to the online calculator on Redfin to see at what price this property might make sense for me.
Playing around with the calculator, I learned that I would need the price to drop to $1,100,000 to get around $4,000 in monthly cash flow (holding all other costs constant).
That’s about a 40% price reduction.
Do you think the seller would go for that?
Not a chance.
Depending on your market, sellers may be willing to negotiate the price. But, if you come in too low, they won’t take you seriously.
If I were to move forward with this property, I would need to find ways to improve the math besides just the price. Still, I might be able to get it for below the asking price.
For our example, let’s assume the seller would agree to knock 10% off the purchase price.
Here’s what the numbers look like at 10% reduced purchase price.
Offer Price: $1,620,000
Mortgage Payment (Principal and Interest)
$8,083
Taxes
$1,429
Insurance
$400
Utility Bills
$350
Property Upkeep
$200
Preventative Maintenance
$200
Vacancy Rate (5%)
$692
Unexpected Repairs (5%)
$692
Property Improvements (5%)
$692
Total Monthly Cost
$12,738
With monthly rents of $13,840, that means this property is now cash flowing $1,002/mo.
We’re heading in the right direction, but I think we can do better.
Besides negotiating the purchase price, what if we can shop around and improve our mortgage?
Start with the purchase price but see if you can further to reduce the overall cost.
For example, can you shop around for a better mortgage?
Let’s assume you can find a loan with a 6.75% interest rate instead of 7%.
With a 6.75% interest rate, your mortgage payment drops from $8,083 to $7,880.
Now, your cash flow increases to $1,211/mo.
You can start to see how this part of the analysis works.
The point is to reduce the costs of owning this property to improve your cash flow.
What other ways can you reduce the costs?
You should go through this process with each cost associated with the property.
Maybe you can find insurance for less than $400/mo.
Or, maybe you are willing and able to handle more of the maintenance responsibilities yourself.
The idea is that each time you reduce your monthly costs, your cash flow goes up.
If you can reduce the costs enough, a property may start looking appealing to you.
On top of reducing the costs, can you can earn more income from this property?
At the same time you look to reduce the costs, you should look to see if you can earn more income from a property.
In other words, can you earn more rent per month than the current rate?
This is where you’ll need to study the neighborhood to see what similar apartments are renting for. Your broker should be able to help you with this.
In our example, let’s assume that you do your research and determine that the apartments are under-rented.
In fact, you learn that each of the 5 apartments could earn $200 more per month.
Adding that additional $1,000 per month brings our total cash flow to $2,211/mo.
Now, this property is starting to look more enticing.
You might be surprised how many sellers under-rent their properties.
Over the years, my wife and I have been successful in finding properties that have been severely under-rented by the previous owners.
We don’t renovate properties ourselves because we are busy professionals with full-time jobs and a family. We try to find properties that have bee nicely rehabbed but are currently under-rented.
You may be surprised to learn that a property flipper doesn’t always know the local market as well as you. It could be that he is just in a hurry to get a property rented out so he can sell it and move on to the next job.
If you become an expert on market rents in your local area, you can be the one who benefits.
A few years ago, my wife and I purchased a three-flat in our local area. It was about a half-mile from where we lived at the time and was on our regular walking route. We took an interest in the rehab and followed its progression closely.
When the property was completed, I saw the rental listings online. It was a beautiful property in a great location. I was shocked when I saw the units were listed for only $1,700/mo.
This was my local area and I knew these units could easily go for $2,500/mo, if not more.
When the property hit the market a few months later, we pounced and had it under contract the next day.
When the original tenants chose to move out at the end of their leases, we quickly found new tenants happy to pay $3,100/mo.
Sometimes sellers just don’t know what they have.
Don’t fool yourself into thinking a property is a great investment by unrealistically changing the numbers.
After reading this post, you can hopefully start to see how to run the numbers to make a potential property more attractive.
In our example, we tweaked the purchase price, mortgage rate, and rental income to improve the cash flow enough to make this deal potentially attractive.
After going through an analysis like this, you may be ready to make an offer. Just don’t get your hopes up too high.
Sellers won’t always negotiate.
Properties won’t always be under-rented.
Many of your offers will end up getting rejected.
Don’t quit.
There will always be another property out there.
If you can’t get a property with numbers that work for you, it’s time to move on to the next one.
No matter how much you love a property, don’t fool yourself into thinking it’s a great investment if it’s not.
Readers, have you made offers on properties that you knew were undervalued? Did you successfully cash flow on a deal that did not look great on paper at first?
What we need to know is whether a property is going to put more money in our pockets than it takes out.
Today, we’ll look at a real example of how I quickly and easily evaluate potential deals in my primary market.
If you haven’t already, check out my previous post on evaluating real estate deals for a detailed explanation on why I focus on the below elements.
As a quick refresher, let’s first look at the fixed costs and speculative costs involved in evaluating rental properties.
There are fixed costs and speculative costs involved in evaluating a rental property.
Whenever you evaluate a rental property, there are some fixed costs and some speculative costs involved. This holds true whether you are a beginner or an experienced investor.
It’s helpful to differentiate between the fixed costs and the speculative costs. In a lot of ways, we can control the fixed costs, but we cannot control the speculative costs.
Fixed costs generally include reoccurring monthly bills that are relatively constant.
The main fixed costs you’ll want to know when evaluating a rental property include:
Mortgage payment (Principal and Interest)
Taxes
Insurance
Utility Bills
Property Upkeep
Preventive Maintenance
Speculative costs include those unpredictable, irregular costs that do not occur every month and maybe don’t even occur every year.
I separate the speculative costs into three main categories:
Vacancy Rate
Unexpected Repairs
Property Improvements
Vacancy rate refers to the percentage of available units that are unoccupied at a particular time. When running the numbers on a prospective rental property, I recommend adding in the cost of 5% vacancy.
When you own rental properties, things are going to break and require money to fix. If you target properties in decent condition, I recommend saving 5% of the monthly rent for unexpected maintenance.
If you don’t improve your property over time, you risk your unit becoming unattractive. Again, if you target decent properties to begin with, I recommend saving another 5% per month for property improvements.
With these costs in mind, we can now quickly and effectively run the numbers on any available property.
Let’s take a look at a property that recently became available in my target market of Chicago.
I regularly check available properties in my target area in Chicago.
I have a searched saved on the Redfin app for multifamily properties within a certain price range in my target areas of Chicago.
That makes it easy to scroll through the listings a few times every week to keep myself educated on my local market.
I do this for a few reasons, regardless of whether I’m actively shopping for a property.
First, I want to know what new properties come on the market. I’m interested to see if developers and rehabbers are still drawn to my area.
I also check to see how much properties have sold for recently so I can stay on top of market conditions. For example, I’m curious if sellers are accepting below-asking-price offers and how long properties are staying on the market.
I’m also looking to see if there have been any price reductions on properties that previously caught my eye.
All of this simple research helps me move quickly when an attractive property becomes available.
This research has also helped me develop a list of basic requirements I look for in a rental property.
Before running the numbers, a property has to match my initial requirements.
Before I run the numbers on any property, it has to satisfy some basic requirements. This is not an exhaustive list, but here are some of the most important factors my wife and I evaluate when considering rental properties in Chicago:
Location, location, location. In Chicago, proximity to the L and social life (coffee shops, restaurants, bars, etc.) are crucial. Most of the young professionals we rent to are still in the “going out” phase of life. They want to live in fun neighborhoods so they can enjoy themselves when they’re not working. They typically stay in our apartments for 2-3 years, oftentimes before buying a place of their own and “settling down.”
Taxes. Property taxes can eat away your cash flow. We have high property taxes in Chicago across the board, but taxes vary widely from neighborhood to neighborhood. I look for properties in areas that have more attractive taxes.
Big bedrooms. One of the most common questions I get when I do apartment showings is, “Can I fit a king size bed in here?” People love big beds these days. This can be a challenge considering Chicago’s standard 25-foot wide lot. I look for properties with a minimum bedroom size of 10 x 10.
Outdoor space. Young professionals want to have outdoor space, even if they never use it. When I was a renter, I always wanted an apartment with a balcony for my grill. It didn’t matter to me that I only used it a handful of times each year. Maybe having outdoor space made me feel more grown up?
Parking. Even though Chicago is a very public transit-friendly city, people still like having cars. Because most young professionals aren’t using their cars every day, they want to keep it safe in a dedicated parking space.
If a property becomes available that meets these requirements, I’ll then run the numbers.
Only after confirming that a potential property meets these requirements do I actually run the numbers.
There’s no reason to waste time on a property that may project well in a spreadsheet but will cause me nothing but headaches as a landlord.
It’s a five-unit apartment building listed for $1,800,000 and located directly in my target zone.
Here’s the listing description from Redfin:
Fully Gut Renovated 5-unit building, a prime turnkey investment opportunity in the best Logan Square Location Possible. Double Vanities, Fully built out walk in closets, in unit W/D, tankless hot water heaters, thin shaker kitchens and full height quartz backsplashes are just a few of the features that make this building feel more like condo living. Perfectly situated just steps from the Logan Square Farmers’ Market, residents can enjoy an eclectic mix of trendy bars, restaurants, cafes, and shops right at their doorstep. Renovation done with full plans and permits, include a new roof, windows, insulation, drain tile system with sump pump, back deck, and still warrantied appliances!
It’s not always the case, but in this instance, the pictures seemingly match the description of a beautifully renovated property. Of course, we can confirm the quality of the work when we tour the property.
So, this property passed my initial screening. Now, I can run the numbers to see if it would be a good investment.
By the way, I target gut-renovated properties because I have a full-time job as a lawyer and don’t have the time to dedicate to a major renovation project.
Let’s plug in the numbers to see if this would potentially be a good investment property.
Just because a property looks nice and is in a great location does not mean it’s a great investment. As investors, it’s our job to make sure the numbers work out so more money comes in than goes out.
Using the cost categories above, we can pull most of the information we need directly from the listing.
For example, Redfin (like most sites) provides a useful payment calculator where you can adjust the downpayment, interest rate, taxes, etc. for any property based on your personal situation.
It’s a good idea to talk to your mortgage broker ahead of time to learn what mortgage rate you will likely qualify for and what downpayment you’ll need.
Remember, this is an initial evaluation. Before you make your final decision on a property, you’ll need to confirm these numbers with your real estate team during the due diligence period.
Try to be conservative with your projections. When you otherwise like a property, the temptation is real to modify the numbers so it looks better on paper.
You’ll notice listing agents may try to enhance a property’s value by suggesting “potential rent” or “market rent” instead of the actual rent. Don’t fall into this trap and end up with a nice-looking property that makes no money.
OK, let’s look at the numbers on this property for educational purposes only. You are responsible for running your own numbers on any potential deal.
2501 N Sacramento Asking Price: $1,800,000
Monthly Rent: $13,840
Mortgage Payment (Principal and Interest)
$8,982
Taxes
$1,429
Insurance
$400
Utility Bills
$350
Property Upkeep
$200
Preventative Maintenance
$200
Vacancy Rate (5%)
$692
Unexpected Repairs (5%)
$692
Property Improvements (5%)
$692
Total Monthly Cost
$13,637
Monthly Cash Flow (Rent – Costs): $203
It took me less than five minutes to do this initial evaluation.
I can see that based on these numbers, the monthly cash flow is $203. We’ll talk about what that means in a moment.
A few notes on the above numbers:
For the mortgage payment, I estimated a 25% downpayment, which is common for investment property loans, and a 7% interest rate.
Taxes are a major cost that can make or break any deal. Make sure you are familiar with how taxes are assessed in your market. For example, in Chicago, property taxes are reassessed every three years. That means taxes go up every three years.
Many property listings will indicate the prior year’s taxes because they are lower. This particular listing has the prior year’s taxes, which I know are soon going to change for the worse. For now, I’ll run the numbers with the current taxes but would definitely account for higher taxes before moving forward with this deal.
Property insurance is a real wildcard these days. Insurance costs are going up everywhere. You’ll need to talk to a good insurance broker for an accurate estimate. I used my experience in the neighborhood with similar properties to make a reasonable estimate.
So, what have I learned from running the numbers on this property?
First, this is a beautiful property in a great location. If I made my decision based only on the pictures and the location, this would be a winner.
Unfortunately, the numbers tell a different story.
This property would not be a good investment for me. I invest for cash flow. For me, this property is way too expensive for only a couple hundred dollars of monthly cash flow.
At a price point of $1.8 million, I would only be interested if this property had a monthly cash flow of at least $4,000 per month.
Now, your preferences and goals may be different. Maybe you’re more focused on the other benefits of investing in real estate, like appreciation and debt pay-down. In that case, you may view this deal differently.
So, is that it?
Cross this property off the list and move on for good?
Not necessarily.
In our next post, we’ll explore ways to make this property a more attractive investment.
We’ll take a look at how the numbers change if we can successfully negotiate the purchase price, find a better loan option, and improve the monthly rent.
Real estate investors: let us know what you think of this property as a potential investment.
Would you be interested in moving forward at these numbers?
Have you ever been called a “greedy dragon” before?
I hadn’t either before this week.
I recently posted a video on socials talking about how lawyers and professionals should not let leaky toilets prevent them from investing in rental properties.
Apparently, this video struck a nerve with the trolls.
I was called a “bottom dweller”, a “demon”, and my personal favorite, a “greedy dragon.”
I like dragons. So, that last one actually felt like a compliment.
Why does being good with money wake up the trolls?
There’s no shortage of internet trolls out there. And, there’s nothing special about me that caught the attention of the trolls this week.
Haters are going to hate. Trolls are going to troll.
But, there’s an important money lesson to be learned here thanks to the trolls.
You see, these are the types of comments you get from people with limiting money beliefs. They’ve never thought about how money can be used as a tool to build a life of purpose.
Instead, they only think of money as a dangerous weapon to be wielded for evil purposes. They automatically think that people with money are greedy.
The saddest part is that these people would rather exert their energy attacking people than improving their own situations. These are the type of people who are likely to always be controlled by money, instead of the other way around.
Now, I’ll give credit to the internet trolls where credit is due. At least these trolls are not hiding their limiting money beliefs.
That’s a good first step that many of us can benefit from.
You don’t need to stoop to the level of internet troll to have limiting money beliefs. These kinds of attitudes towards money are way more common than you think.
One of my main goals in starting Think and Talk Money is for all of us to confront our limiting money beliefs so we can take control of our lives.
If your relationship with money up to this point has held you back, you’re in the right place by reading this blog.
A good money mindset book with help you think of your Money Why.
Money mindset books can help you because they explore the emotional side of money. They will force you to think about money in a way you never have before.
The best money mindset books don’t just talk about the numbers and math of personal finance. That not only makes the books more interesting to read, it also makes them so much more practical in the real world.
Personally, I am striving to build the best life possible for my family. To do that, I need to learn more than just the numbers.
That means I need to be good at not only making money, but also using that money to build a life on my terms. That requires finding a balance, which can be tricky.
To help strike that balance, I’ve studied how others have done it. Then, I can take what I learn and implement those lessons into my own life.
Here are my favorite money mindset books, in no particular order:
Being on vacation with family gives you plenty of chances to think about your Money Why.
I highly doubt the average internet troll spends much time thinking about his Money Why.
I’ve been on vacation recently and have had a lot of reminders of my Money Why. Of course, I’ve known my Money Why since I wrote down my Tiara Goals for Financial Freedom on a beach in 2017.
My number one goal is to be with my wife and kids as much as I want. The weird part is I wrote down that goal before I was even married or had kids.
Yes, I want to provide for my family financially. But my Money Why is more than that. I don’t want to just provide money, I want to provide time. I want to be present and share experiences.
If I’m good with my money, I can achieve financial freedom.
With financial freedom, I can choose how to spend my time. That means I can choose who to spend my time with.
To the Internet trolls, these goals make you a greedy dragon.
What do you think?
Is traveling with three young kids a vacation or just “parenting in a new location?”
Anyone who’s vacationed with young kids knows that it comes with all sorts of challenges. I’ve heard vacationing with young kids described before as “just parenting in a new location.”
There’s some truth to that. Figuring out sleeping arrangements, meals, and activities to keep the kids entertained can be a headache. It’s hard not to think that it would have been easier to just stay at home.
Between the occasional meltdown and the tears, it’s fair to wonder why go through the hassle?
I’ve had these thoughts creep into my head recently while on vacation with my family.
Then, I realized why us parents do it.
It’s to see your five-year-old try over and over again before finally reaching the Little Mermaid diving toy on the bottom of the pool for the first time.
The pure joy on her face when she popped out of the water with the toy in hand is an image I hope I never forget.
It’s to watch your three-year-old play with grandma and grandpa and hearing, “Grandpa, close your eyes!” as he completes his next prank to earn an eruption of laughter.
It’s observing your wife at the playground as she manages a baby in a stroller while simultaneously encouraging her daughter on the swings and helping her son as he climbs too high.
How she does it, and keeps a smile on her face, I’ll never know.
It’s the little moments like this that make it all worth it.
Is being good with money a requirement for these types of memories?
Nah. But, if being good with money gets me more of these memories, I’m all in.
It’s important to think about your Money Why regularly.
Saying that I want to be good with money is not the same thing as saying that I want to be rich.
Funny enough, people who are good with money oftentimes feel rich regardless of what their net worth is.
On the flip side, people who make a lot of money but are not good with money often feel like they’re struggling to get by. As CNBC explained after talking with financial psychologists:
Whether you’re aiming to save more cash or boost your overall earnings, it’s important to ask yourself what you hope to achieve by obtaining more money, Chaffin says. Otherwise, if you don’t change your internal money beliefs, you may still feel anxious about money even if you hit millionaire status.
The takeaway is that it is pointless to make money without stopping to think why you want that money and what you’re going to do with it.
If you’ve never thought about money that way before, here are three powerful reasons to get you started:
Money can give you choices.
Money can give you personal power.
Most importantly, money can give you time.
Money is nothing but a tool that you can manipulate to get what you truly want out of life. The thing is, you have to actually think about what you want if you are going to use that tool effectively.
Being good with money does not make you greedy.
Being good with money does not make you a greedy dragon.
Money is nothing but a tool. You can use that tool to build a life on your terms for you and your family.
For my money, there’s no better pursuit than that.
Having taught personal finance to law students and young lawyers since 2021, I’ve picked up on a common theme.
At the conclusion of class, my students tend to be motivated and excited to get good with money.
This makes sense because we spend a lot of time thinking and talking about what our ideal lives look like. Then, we learn how to use money as a tool to build those lives.
In the weeks following class, I usually hear from several students who want to follow-up about topics we cover in class, like side hustles or investing in real estate.
I’ll meet each student for coffee downtown and give them some feedback on their ideas. I love these money talks over coffee.
My students’ excitement to take control of their money and their lives is contagious.
Their excitement rubs off on me. I leave these conversations motivated to check in on my own money strategies and goals.
When our chat is wrapping up, I always encourage my students to keep me posted on their journeys. I invite them to check-in every few months so I can help keep them accountable and to adjust any plans we’ve put in place.
Unfortunately, less than 10% of my students ever follow-up after these initial meetings.
After a while, I figured out what was going on.
See, every now and then, I’ll run into one of these former students at a lawyer event or hanging around the courthouse. I’ll ask them about work and life and eventually about the money plan we talked about.
That’s when I usually hear something like, “I’m still thinking about that side hustle. I just put it on the back burner for now. I’m going to do it someday.”
Do you see the problem?
As a wise man once taught me, “someday” means “no day.”
Financial freedom is about consistent, intentional choices.
Ask anyone who has reached true financial freedom how they did it, and you’ll pick up on something right away.
You’ll quickly realize that people who reach financial freedom got there by making consistent, intentional choices with their money.
They came up with a plan and they stuck with it.
They didn’t say “some day.”
Achieving financial freedom is not about being the highest earner or the best investor.
It’s about consistency.
There are endless ways to make money. The same goes for investing that money.
You can reach financial freedom as a lawyer who invests in index funds.
Just the same, you can be a consultant who owns rental properties.
Or, an engineer who buys laundromats.
The point is the avenue you choose to build wealth is less important than the consistency of your choices.
For example, if you commit yourself to investing 20% of your salary in index funds, you will be well on your way to financial freedom.
But, if you can’t follow through on your plan for more than a few months, you’re never going to get there.
Of course, we’ve all experienced this tendency in various areas of life. The easiest examples to think of relate to fitness and healthy eating.
How many of us have said we’re going to commit to working out five days a week or eating vegetables every meal, only to give up after a couple months?
It’s not that we want to give up, just that the rest of life gets in the way. We tell ourselves that we’ll return to healthy living someday, which actually means no day.
When it comes to your money choices, don’t let the rest of life get in the way. Money is such a powerful tool when wielded properly and consistently.
Don’t waste this powerful tool.
To help make consistent choices, think about why money matters.
To help you make consistent money choices, the first step is to think about a simple and powerful question: why does money matter?
For me and many others, money is about financial independence, which translates to the power to choose.
When we have the power to choose, we have the power to live a life that conforms to our personal values. That means we can live on purpose, not on auto-pilot.
What does it mean to live on purpose?
It means that we can choose to spend our working hours doing what is meaningful to us. It means we can choose to spend more time with the people who are meaningful to us.
My favorite part during my personal finance for lawyers class is when my students share their motivations with each other. We all learn so much from these honest conversations.
It’s why I believe talking about money is so important. We all benefit from knowing that we’re not alone in our money worries. We can be inspired by hearing what our friends want from their money and their lives.
The more you think and talk about why you want to be good with money, the clearer your motivations will become.
To help you get started, here are three powerful reasons why I want to be good with money:
1. Money can give you choices.
This may seem obvious, but when you have money, you have choices.
You can choose where to live. You can choose who you work for or can work for yourself. On a daily level, you can choose how you eat, exercise, relax, and travel.
This holds true whether you make $50,000 or $250,000. Of course, your options may be different. The point is that when you’ve made good money choices, you’ll at least have options.
2. Money can give you personal power.
This is another way to say that money gives you control of your life situation.
If you are in a bad relationship, a bad job, or just need a change, money gives you the personal power to do something about it. When you don’t have money, you may be stuck.
3. Money can give you time.
When you have enough money to be truly financially independent, you have earned the freedom to do whatever you want with your time.
As I mentioned earlier, you can spend your working hours at a job that is meaningful to you. And, you can spend more time with people who are meaningful to you.
It’s been said many times, “time is our most precious resource.”
Years ago, I asked myself this important question. I wrote down my answer and called it my Tiara Goals.
If you haven’t ever actively thought about what you would do with financial freedom, now’s the time to do so. It is extremely motivating.
Even when you feel like financial freedom is only a distant dream for you, it’s important to actively think about what you want out of life.
I’d even suggest that the further away you feel from financial freedom, the more important it is to think about what it would mean for you.
When you’re at your lowest point, visualizing what you would do with financial freedom is a helpful escape.
Don’t forget to write down whatever you come up with.
Here are my 7 Tiara Goals for Financial Freedom:
Be with my wife and kids as much as I want. Dad never missed a game. Mom never missed a game. Nana never missed a game.
Not be forced to commute to work on Friday or Tuesday or whatever day, if I need that day for myself.
Choose how to spend my working hours (representing clients, teaching, volunteering, building a business, etc.).
Continue to study and learn constantly.
Take at least one big trip every year.
Never turn down an exciting or smart opportunity because I can’t afford it.
Work alongside people that value my contributions.
Keep in mind that I wrote these goals before I had kids and before I was even married. This was also years before the pandemic when working from home was a foreign concept to most of us.
I think it says a lot that I was thinking about these things way back then.
Being consistent means thinking just a little bit about money every week.
My goal is to help you think even a little bit about your money choices every week. That way, your money life remains in balance with the rest of your life, and you can continually evolve and adapt your choices as your life changes.
I want to encourage you to think, and to talk, and to choose. If all I do is help you and your loved ones think more purposefully about your money, Think and Talk Money will be a success.
Maybe your goal is also financial independence, or the power to choose and to live on purpose.
Maybe it’s something else entirely. Whatever it is, discovering your motivation is the crucial first step.
It’s so important that I’ll encourage you to think about that motivation every week.
I’ve learned that money is something that we all need to think about as a regular part of our lives. Not that we should only think about money. Or that we need to obsess over money. Simply that we can’t ignore money.
How sad is it when we realize our hard earned money has just vanished? That at the end of each month, we have less money?
You don’t have to struggle with making continuous money choices alone.
Most of us could use someone to talk to or something to read to help us learn about personal finance.
I hope Think and Talk Money can be that place for you.
I can’t, and won’t, tell you what to do with your money. It’s your life, after all. But, I will strive to help you think and talk with purpose about your money.
The basic money concepts are easy enough to understand. Consistently making good choices is hard.
Most of us could ace a quiz that asked, “Is it a good idea to spend more money than you earn every month and plummet deeper and deeper into debt?”
Knowing what to do is not the same as actually doing it. Remember, someday is no day.
That’s why it helps to not be afraid to talk about money. For some reason, most of us choose to deal with money on our own. I’d like to change that.
There’s a stigma that we shouldn’t talk about money. I’d like to change that, too.
That way, we all have a better chance of making intentional, consistent choices with our money.
Have you been excited about money in the past only to lose that excitement not long after?
Have you tried talking about money with your friends and family to help you stay motivated? If not, what is holding you back?
