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.
And, I had so much fun.
Can’t wait to do it again!
Here’s a recap of the ground we covered.
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.
Why is it important to track your net worth?
By tracking your net worth, you can quickly see if you are making good money decisions or need to make adjustments.
I recommend everybody, no matter where you are in your financial journey, track your net worth.
By the way, tracking your net worth is not a major time commitment.
It takes me less than 30 minutes each month to track and discuss what I consider to be one of the most important metrics in personal finance.
That’s all the time it takes to know if I am progressing towards my most important financial goals.
If you don’t know your net worth, now is the time to start tracking it.
For a step-by-step guide to tracking your net worth, check out my post here:
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.
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?
Do you dream about owning rental properties so you can generate semi-passive income while spending more time with your family?
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?
When my students ask me a question about how to start investing in real estate, I tend to respond with a question of my own:
“How much savings does your personal 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 real estate. They didn’t come to me to talk about something boring, like budgeting. They want to know about the exciting stuff, like becoming a real estate investor.
What I’ve noticed is that 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 personal budget.
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. 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. #thinkandtalkmoney#realestateinvesting#realestateinvestor#personalfinance
Not having a personal budget is a problem for anyone who wants to be a successful real estate investor.
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 would be much easier to simply invest in an index fund, like VTSAX. At least in that case, you don’t have to manage a business budget. You just have to do your best to constantly add money to your investment account.
It’s usually around this point when my students start nodding in understanding.
Before investing in real estate, make sure your personal finances are in order.
My goal here is not to dissuade you from investing in real estate. I am a big proponent of rental property investing.
I’ve said it before: I think every professional or lawyer can benefit from owning rental properties.
My only goal is to help you avoid the mistakes that crush so many beginner real estate investors. One of the biggest mistakes I see is people taking on a major financial commitment (and time commitment) 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.
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 real estate 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 challenge of investing in real estate just to have any profits disappear because they don’t have a strong personal finance foundation in place.
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 take a chance on investing in real estate.
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.
The key to budgeting is to eliminate disappearing dollars by creating a plan for Now Money, Life Money, and Later Money.
Your Later Money is what you’ll eventually use to accelerate your journey to financial freedom by investing in stocks or buying real estate.
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.
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.
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.
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 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 real estate, make sure that your personal finances are in order.
Owning rental properties means running a business. When the money comes in, you want to make sure it doesn’t go right out.
Otherwise, the effort, stress, and risk of owning real estate 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 real estate investors out there, did you jump in before establishing strong personal money habits first?
What advice would you have for beginners thinking about investing in real estate?
I recently posted about the major overhaul to Chase’s popular luxury credit card, the Sapphire Reserve. The change catching most people’s attention is the higher annual fee.
I wrote that even with the increased annual fee, I am keeping the Sapphire Reserve in my wallet.
I heard from a number of readers who also decided to keep the card despite the increased annual fee.
Just as good, I heard from some readers who applied for the Sapphire Reserve for the first time after reading my post.
I love hearing these types of comments from readers. Keep ’em coming!
Today, I want to share my thoughts on another question that came from multiple readers. The question goes something like this:
My spouse and I both have our own, separate Sapphire Reserve accounts from before we were married. With the higher annual fee, we are wondering if it makes sense to keep both accounts open.
If we closed one account, we could then add that person as an authorized user on the other account.
What do you think?
This is a great question because there’s lots to think and talk about.
Besides maximizing credit card value and minimizing fees, this question also touches on how couples manage their finances together.
While that is an incredibly important conversation, we’ll have to leave it for another day. Today, I’ll simply highlight some of the relevant considerations.
Finally, I love this question because it’s a good reminder that talking about money is not taboo. We all benefit when we discuss how to use money as a tool that works for us, not the other way around.
The Sapphire Reserve now comes with an annual fee of $795 (up from $550). That is the highest annual fee in the luxury credit card market.
On top of that, the fee for authorized users increased from $75 to $195.
In its press release announcing the revamped card, Chase advertised $2,700 in annual value for cardmembers.
Compared to an annual fee of $795, that sounds like a whole lot of value.
The problem is it takes effort to receive all that value. More than effort, it takes spending. This can get complicated, even with only one card. With two cards, it can be even more challenging.
For a complete description of all of the potential benefits, you can visit the Sapphire Reserve website.
Remember that with all credit cards, the more you spend, the more you earn. That’s true whether you are accumulating points or utilizing shopping or travel credits and other discounts.
This is a good place to emphasize the first rule of responsible credit card usage:
Don’t spend money just to earn rewards. That’s a recipe for financial disaster.
The Sapphire Reserve is no exception to this rule, regardless of whether you have one or two cards in your household.
Before we go further, it’s important to understand what it means to be an authorized user.
What is an authorized user on a credit card?
An authorized user is someone added to the primary account holder’s credit card account. Authorized users typically include spouses, partners or children of the primary cardholder.
The authorized user gets his own physical card, but all spending is tracked on the primary account holder’s account.
Importantly, that means that the primary account holder remains responsible for all payments.
That also means the primary account holder receives all the points earned when the authorized user makes a purchase.
With cards like the Sapphire Reserve, the authorized user gets most of the same perks and benefits as the primary cardholder. Most notably, that includes lounge access and other travel perks.
Not all credit cards offer the same perks for authorized users. Be sure to understand the rules about authorized users for any card you are considering.
Before you add an authorized user to your account, make sure you understand that you are 100% responsible for that person’s spending.
On the flip side, before you become an authorized user, understand that all of your points earned will go the primary account holder.
If either of these restrictions are enough to give you pause about adding or becoming an authorized user, there’s no need read any further.
You should continue to have separate credit card accounts.
And, you should review my post to help you decide whether the Sapphire Reserve is right for each of you on an individual basis.
If you have no problems with adding somebody as an authorized user, read on to find out whether it makes sense in your situation.
What is the actual cost difference for adding an authorized user instead of keeping our accounts separate?
Assuming you are OK with adding or becoming an authorized user, let’s look at what the actual cost is compared to keeping your accounts separate.
Here are the options for couples that currently have two Sapphire Reserve accounts:
Option 1: Keep both accounts open and pay $1,590 in annual fees.
Option 2: Close one account, add an authorized user to the open account, and pay $990 in annual fees.
Note: while you don’t have to add an authorized user to your account, I’m assuming you’re reading this post because you are considering it.
If you stopped your analysis here, you’d see that there is a $600 difference if the couple keeps both Sapphire Reserve accounts open.
That’s a lot of money and may lead you to think cancelling one of the cards is the easy decision.
However, just like we explored in my post on why I’m keeping the Sapphire Reserve, there are ways to offset and reduce the annual fee.
For today’s purposes, remember that the Sapphire Reserve offers a $300 annual travel credit. The credit gets automatically applied whenever you make a qualifying travel purchase.
It’s safe to assume that anyone willing to pay $795 for a luxury travel card is going to spend at least $300 per year on travel.
The same assumption goes for couples thinking about keeping two Sapphire Reserve cards: they are going to spend at least $600 on travel between the two of them each year.
Applying the $300 travel credit, the total cost for each scenario drops as follows:
Option 1: Keep both accounts open and pay $990 in total fees. (Each account holder receives a $300 travel credit, reducing the total cost by $600.)
Option 2: Close one account, add an authorized user, and pay $690 in annual fees.
So, the real question becomes: is it worth an extra $300 annually to keep both Sapphire Reserve accounts open?
When the extra cost of keeping both cards drops from $600 to $300, the decision gets a bit tougher.
You may still be thinking that $300 is too much money to spend each year to have two of the same cards in your household.
Personally, I agree with you.
Below, I’ll show you what my wife and I do instead of having two Sapphire Reserve cards.
However, there are some reasons why it may be beneficial for couples to keep both cards. Let’s look at those reasons now.
Why it might make sense for couples to have two Sapphire Reserve credit cards.
Here are some of the main reasons why it would make sense for a couple to keep two Sapphire Reserve cards.
Trust issues. The bottom line is some couples just don’t trust each other when it comes to spending and paying bills. There’s no shame in that. It’s just a reality.
Like we discussed above, if you find yourself in this situation, it doesn’t make sense to add or become an authorized user. The potential downsides, resentment, and arguments outweigh the $300 in annual savings.
Accounting challenges. When you add an authorized user, all purchases get tracked together on the primary cardholder’s account. If it’s important for you to know who is making each purchase, this can be an accounting nightmare.
Plus, some couples maintain separate bank accounts and pay bills separately. Having all credit card purchases appear on only one person’s account makes it more difficult to figure out who should pay for what.
Business expenses. It’s also not uncommon for lawyers and professionals to use their Sapphire Reserve cards for business purposes and then get reimbursed by their employers.
If that’s the case, it may not make sense for you to blend personal and business expenses on one card. You could use one Sapphire Reserve strictly for business purposes and the other for personal expenses.
Impact on your Credit History. You may not want to close your account because of the potential impact it will have on your credit history. This is particularly important if your Sapphire Reserve is the card you’ve had for the longest time.
While this is a valid concern, there are ways to close your account without having any impact on your credit history whatsoever.
The best thing to do before you close your account is to transfer your available credit line to one of Chase’s other credit cards, like the Freedom Unlimited.
The Freedom Unlimited is the only other credit card I keep in my wallet.
If you need help with this part, reach out to me on Instagram or LinkedIn, and I’ll walk you through the exact steps.
Sign-up Bonuses and Credits. If you are thinking about getting a Sapphire Reserve, now is the time to do it. Chase is offering its biggest sign-up bonus ever: 125,000 points for new applicants.
Combined with some of these other reasons, these bonus points might make this decision a no-brainer.
Besides the sign-up bonus, the Sapphire Reserve comes with a number of other credits and benefits valued at $2,700 annually.
For a complete description of all of the potential benefits, you can visit the Sapphire Reserve website.
If you and your spouse or partner will independently take advantage of all these perks, then it could be worth it to keep both cards.
In the end, if any one of the above applies to your situation, it may make sense to keep two Sapphire Reserve cards despite the extra $300 annual cost.
We did earn a lot of points. But, it was so stressful.
Keeping track of what card to use for every single purchase was complicated. Making sure we paid off each card every month was even harder. In the end, it wasn’t worth it.
We now keep things simple, and I recommend most people do the same.
I use the Sapphire Reserve for travel (4 points per dollar spent on airlines and hotels) and dining (3 points per dollar).
I use the Freedom Unlimited for everything else. The Freedom Unlimited earns 1.5 points across the board for every purchase. In contrast, the Sapphire Reserve only earns 1 point per dollar spent in non-bonus categories.
Same as me, my wife only carries the Sapphire Reserve and Freedom Unlimited. This way, we can combine points to maximize our rewards.
Together, we still earn plenty of points and our finances are much simpler.
I prefer to have two different cards that offer distinct but complimentary benefits.
If your household is going to keep multiple cards, I suggest having different cards instead of doubling up on the same one. That’s true whether you combine accounts or keep them separate.
That way, you can reap a more diverse set of benefits for a comparable cost.
If you go this route, it’s helpful to keep your credit cards within the same bank (i.e. stick with Chase or stick with American Express) so you can combine points and accumulate rewards faster.
Even if the Freedom Unlimited doesn’t appeal to you, I’d suggest looking at other credit cards within the Chase portfolio that earn Ultimate Rewards points.
Disclosure: This page contains affiliate links, meaning I receive a commission if you decide to apply using my links, but at no additional cost to you. Please read my Disclosure for more information.
Chase just announced a major overhaul to its popular luxury credit card, the Sapphire Reserve, including increasing its annual fee of $795 (up from $550). On top of that, the fee for authorized users is increasing from $75 to $195. I analyzed whether these changes are worth keeping the card here: https://thinkandtalkmoney.com/is-the-new-chase-sapphire-reserve-worth-the-annual-fee/ #chase#sapphirereserve#thinkandtalkmoney
What is the change to the Sapphire Reserve that’s driving most of the questions?
The Sapphire Reserve now comes with an annual fee of $795 (up from $550). That is the highest annual fee in the luxury credit card market.
On top of that, the fee for authorized users is increasing from $75 to $195.
Ouch.
Offsetting some of that pain for new cardmembers , Chase is currently offering a sign-up bonus of 125,000 points, the largest bonus ever offered.
That translates to $2,562.50 in value, according to The Points Guy.
Even with these increased fees, I am keeping the Sapphire Reserve in my wallet.
Today, I’ll walk you through my thought process as to why I’m keeping the card.
I’ll show you how I value certain benefits and ignore other potential benefits, mostly because they’re just too complicated or don’t apply to my personal situation.
Whether you are thinking about applying or are a current cardmember, this post will give you the tools to decide for yourself if the Sapphire Reserve is right for you.
Before diving in, let’s start with a little bit of context.
I used to have 10 different credit cards to maximize points.
There was a time in my life when I had 10 different credit cards because I wanted to maximize the points I earned on every purchase.
I had airline branded cards, hotel branded cards, and general travel rewards cards. I had credit cards with Chase, American Express, and CitiBank.
My wallet was thicker than my Chicago accent.
I did earn a lot of points. But, it was so stressful.
Keeping track of what card to use for every single purchase was complicated. Making sure I paid off each card every month was even harder. In the end, it wasn’t worth it.
I now keep things simple and recommend people do the same. The exception would be if you enjoy the challenge of maximizing every credit card purchase and perk.
Same as me, my wife only carries the Sapphire Reserve and Freedom Unlimited. This way, we can combine points to maximize our rewards.
Together, we still earn plenty of points and our finances are much simpler.
Before we go any further, to read more about the responsible use of credit cards, check out my series on credit here. A good place to start is my post with 10 credit card tips for lawyers and professionals.
The Sapphire Reserve’s benefits are geared towards high spenders and frequent travelers.
In its press release announcing the revamped card, Chase advertised $2,700 in annual value for cardmembers.
Compared to an annual fee of $795, that sounds like a whole lot of value.
For a complete description of all of the potential benefits, you can visit the Sapphire Reserve website.
The problem is it takes effort to receive all that value.
More than effort, it takes spending!
With all credit cards, the more you spend, the more you earn. That’s true whether you are accumulating points or utilizing shopping or travel credits and other discounts.
This is a good place to remind you of the first rule of responsible credit card usage:
Don’t spend money just to earn rewards. That’s a recipe for financial disaster.
In general, if you are a high spender and/or frequent traveler, the card likely offers more than enough benefits to make it valuable to you.
If you aren’t a high spender and/or frequent traveler, you may end up paying more than the card is worth.
Here are the Sapphire Reserve benefits that actually matter to me.
Today, I want to highlight the benefits of the Sapphire Reserve that matter most to me. The reality is that so many of the offered benefits don’t apply to my situation or are too complicated to use.
You may find value in some of the benefits that don’t matter to me. Regardless, you can go through the same thought process to determine if the Sapphire Reserve is right for you.
To begin, the Sapphire Reserve will cost my wife and I $990 per year in annual fees. To justify that cost, I’m looking for benefits that equal at least that much.
There are 3 annual credits that matter for my personal situation.
Not all of the offered credits are useful to me. Here are the three that matter for my personal situation:
1. $300 Annual Travel Credit
Each year, cardmembers earn $300 in credits for travel purchases. These credits are automatically applied when you make a qualifying travel purchase, which is broadly defined.
Put simply, the annual travel credit is not hard to earn. If you book even one flight throughout the year, you’ll qualify.
Applying the annual travel credit, the overall cost drops to $690 per year.
2. $125 credit for Apple TV+
I already subscribe to Apple TV+, so this one is a no-brainer.
I don’t currently have Apple Music, but there’s an additional $125 credit available for this subscription. Because I’m keeping my Sapphire Reserve either way, I’ll probably subscribe to Apple Music, too.
Important Note: if you’re not already spending money on Apple TV+ or Apple Music, I would not recommend using this benefit as a justification for offsetting the annual fee.
Remember the cardinal rule: never spend more money just to qualify for a benefit. Since I’m already a subscriber, this is a good benefit for me.
Applying the Apple TV+ credit, the overall cost drops to $565 per year.
3. $10 monthly credit for Peloton memberships
Like Apple TV+, I already pay for a Peloton membership. This one’s another no-brainer.
Applying the Peloton credit, the overall cost drops to $445 per year.
In total, these three credits reduce the true cost of the Sapphire Reserve for me to $445.
Cutting the true cost in half definitely helps me feel better about the initial sticker shock of the $990 annual fee.
Importantly, I do not have to change my spending habits in any way to qualify for the credits. I would be paying for these things regardless of the credits, so these are true benefits for me.
Here are some of the credits that I won’t ever use.
In contrast to the above credits, there are some other credits offered that are either too complicated or that I won’t really use.
Don’t overlook this distinction. You never want to justify having a credit card because of hypothetical perks. Only focus on the ones you’ll use.
For example, Chase advertises $300 in DoorDash promos. Here’s the offer:
DashPass members get up to $25 each month to spend on DoorDash, which includes a $5 monthly promo to spend on restaurant orders and two $10 promos each month to save on groceries, retail orders, and more.
Uh, come again?
I think what this means is I can save $5 once per month on a restaurant delivery. Then, I can spend more money on two other deliveries per month (but not for food), and save $10 each time.
Did I get that right?
This is way too complicated. I’m ignoring this credit for my analysis.
If I regularly used DoorDash, this might be a different story. Because I don’t use DoorDash, and the credit is so complicated, this one is meaningless to me.
There are other credits like this one attached to the card that don’t do anything for me.
Other examples include credits for dining through the Sapphire Reserve Exclusive Tables and credit for stays with The Edit. In all likelihood, I won’t ever take advantage of these credits.
When reviewing the offered credits, you should do the same analysis and only count what you’ll actually use.
If you won’t currently use the credit, don’t force yourself to use it to justify the cost of the card.
I also don’t put much weight on travel benefits like lounge access and hotel status.
The Sapphire Reserve offers access to 1,300+ airport lounges worldwide through Priority Pass, plus access to Chase Sapphire Lounges.
The Chase Sapphire lounges admittedly look awesome. The problem is there is not a lounge at my primary airport, Chicago O’Hare.
There also isn’t a lounge at any airports I regularly fly to. I likely will get very little benefit from these lounges, unless one opens at O’Hare.
The same goes for the lounges offered through the Priority Pass program. I’ve found this to be a great benefit when traveling internationally but not very useful when traveling domestically.
If you are a frequent traveler and would take advantage of all these lounges, this is a major perk of the card. Personally, lounge access doesn’t do much for me.
The same goes for hotel status through IHG simply because I don’t typically stay at IHG branded hotels.
In short, these benefits may be meaningful to you but don’t provide much in terms of value for me.
If anything, I view them as a bonus. Maybe I’ll take advantage of these travel benefits a couple of times throughout the year, and that would be great.
But, they’re not a factor in my current decision to keep the card.
I am keeping my Sapphire Reserve because I will earn significantly more than $445 in points value.
By this point in my analysis, I’ve reduced the fee as much as possible for my situation. Instead of the sticker shock of $990, the real cost is $445 per year.
Now, I need to decide if I will earn enough points to justify the $445 cost of the card.
It is easier than you think to calculate how much value you’re getting in points.
I like The Points Guy for determining the value of credit card points. While it’s not an exact science, The Points Guy calculates the value of each credit card company’s points and miles every month.
The Points Guy currently values Chase Ultimate Rewards points at 2.05 cents/point. For comparison, American Express Membership Rewards are valued at 2 cents/point.
Meaningful to me, the new Sapphire Reserve offers 4 points per dollar spent on airfare and hotels. It also offers 3 points per dollar spent at restaurants. Finally, you’ll earn 1 point per dollar on everything else.
In my situation, I want to know if I will earn enough points to justify the $445 annual cost. This will require some basic math.
Here’s what the math looks like:
1 point = 2.05 cents.
$445 annual cost x 100 cents = 44,500 cents.
44,500 cents / 2.05 cents per point = 21,707 points.
So, I need to earn 21,707 points to justify keeping the card.
Now, I need to figure out how much I spend each year.
It’s easy to determine how much you spend each year.
The next step is to open your Chase app and look to see how much you normally spend in each category. This is very easy to do.
Chase, like most credit cards today, automatically categorizes your spending for you. Look for the “Spending Planner” option in your app.
Once there, you can find out exactly how much you spent on categories like travel, food, and everything else.
I recommend reviewing your spending for all of last year and so far this year. Then, you just need to do some quick math.
In my case, I use my Sapphire Reserve primarily for travel and dining out, so almost every dollar I spend earns 3 or 4 points.
I can see on the Chase app that I spend thousands of dollars in each category per year. That’s more than enough spending to earn 21,707 points.
In other words, my current spending levels make it an easy decision for me to keep the card.
To put it in perspective, if I spend $5,426.75 per year on flights and hotels, that alone would generate enough points to cover the cost of the card.
5,426.75 x 4 = 21,707 points
Or, if I spend $7,235.67 on dining, I would earn 21,707 points, enough to cover the cost of the card.
In reality, I spend in both categories so neither one has to even reach that level of spending.
That’s all there is to it.
You can follow these same steps to determine if the Sapphire Reserve is worth it to you.
The Chase Sapphire Preferred is a less expensive version of the Sapphire Reserve with less overall benefits.
I had the Sapphire Preferred for years before my spending justified switching to the Sapphire Reserve.
You can do the same analysis that we just went through to determine if the Sapphire Preferred is a better card for your personal situation.
Now you can decide if it’s worth applying for or keeping the Sapphire Reserve.
Now you know the exact process I went through when I learned the Sapphire Reserve was undergoing some major changes.
I don’t put much weight on the harder-to-quantify benefits, like lounge access and hotel status, because I don’t have the chance to use those perks very often. If I do get the chance, that’s a nice bonus.
For me, I earn enough points each year to justify the true cost of keeping the Sapphire Reserve in my wallet.
With cash flow, you can cover your immediate life expenses. For anybody hoping to reach financial freedom, it is essential to have income to pay for your present day life expenses.
For my money, cash flow from rental properties is the best way to pay for those immediate expenses.
What if you don’t need your cash flow to cover your immediate life expenses? Maybe you have a full-time job that provides more than enough.
That’s even better. There’s no rule that says you have to spend your cash flow.
If your present day expenses are already covered, you can use your cash flow to fund additional investments. That might mean buying another rental property or investing in another asset class, like stocks.
The point is cash flow gives you options. Having options is never a bad thing, right?
That’s why cash flow is the number one reason I invest in real estate.
However, cash flow is not the only reason.
I also invest in real estate to generate long-term wealth for me and my family.
I am a buy-and-hold real estate investor.
That means when I buy a property, I intend on keeping it for many years. Circumstances may change, of course, but my intention is to hold property for a minimum of ten years.
The reason I buy-and-hold for the long term leads us to the next major reason I invest in real estate:
Appreciation.
While cash flow can provide for my immediate expenses, appreciation is all about the long-term benefits. Appreciation is how I will generate long-term wealth for my family through real estate.
Today, I want to talk about what appreciation is and how it can significantly improve your net worth over time.
Let’s dive in.
What is appreciation in real estate?
Appreciation simply refers to the gradual increase in a property’s value over time.
For example, if you buy a property for $500,000, and some years later it’s valued at $750,000, your property has appreciated by $250,000.
That means through appreciation, your net worth has increased by $250,000.
Except for when you’ve forced appreciation (we’ll discuss below), you have earned that money through appreciation by doing very little. All you have to do is make your monthly mortgage payments, and let the market do the rest.
This is exactly how many Americans generate significant wealth over time.
How to target properties with a strong likelihood of appreciating is beyond the scope of this post. I’ll soon share with you my criteria, but there’s no one way to do it.
Entire websites and books have explored this topic. If I were just starting out, I would spend a lot of time on BiggerPockets.com.
For that matter, even as an experienced investor, I still spend a lot of time on BiggerPockets.
For now, remember one main point when it comes to appreciation:
Appreciation takes time.
Successful real estate investors know that appreciation takes time.
I’m not talking about speculators or gamblers. I’m talking about people who are interested in building long-term wealth for their families.
To build long-term wealth through real estate, you need to remember this main rule about appreciation.
It’s so important, it’s worth repeating:
If you can hold a property for years or even decades, you have a really good chance of that asset being worth significantly more than when you paid for it.
Your property may not appreciate at the same rate every year. Some years, your property may even lose value. That’s OK because you’re in it for the long run.
The hard part is just holding on long enough to realize the benefit of appreciation.
In this way, investing in real estate is like investing in stocks.
How is investing in real estate like investing in stocks?
Many of the same fundamentals apply to investing in real estate as to the stock market.
We just mentioned one of the biggest keys with either asset: the longer you hold that asset, the more that asset should eventually be worth.
With stocks, we’ve already spent a lot of time in the blog discussing why you need to invest early and often.
For more information on investing in stocks, you can read a variety of posts here.
When you invest in stocks early and often, you can benefit from compound interest and safely ride out down market cycles. The stock market does not always go up every year, but given enough time, it does always go up.
In large part, the same is true when you invest in real estate.
If you buy good properties in good markets, given enough time, your property should appreciate in value. Like with stocks, the key is your ability to hold on and ride out down market cycles.
Want to know the secret to riding out down markets?
Cash flow.
You saw that one coming, didn’t you?
Cash flow will help you ride out market cycles and benefit from appreciation.
When you own strong, cash flowing rental properties, the cash flow covers all the expenses.
That means you can stay patient in down markets because holding that property is not costing you any money.
To take it a step further, as long as your property is cash flowing, you can hold it for decades and generate massive wealth through appreciation.
Cash flow and appreciation working together is a powerful force. You can see why real estate investors get so excited about their investments.
When a property is performing, the cash flow allows an investor to hold that property indefinitely. During that time, the property becomes more valuable through appreciation.
It’s a beautiful partnership.
What is forced appreciation?
I mentioned earlier that there is one other form of appreciation worth talking about here: forced appreciation.
Forced appreciation is when you improve your property in such a way that it increases in value.
Common examples may include remodeling the kitchen or bathrooms or adding another bedroom. When you make these enhancements to your property, your property should increase in value.
This is what house flippers do. They buy a property in need of some work, do the improvements, and then aim to sell that property for a profit.
It’s not a strategy that I personally use, but it has worked for many people for many years.
The thing is, forced appreciation is not just for house flippers or investors hoping to realize a quick profit.
When done correctly, forced appreciation is another way to make money over the long-term for buy and hold investors, like me.
For example, in one of our rental buildings, we added in-unit washers and dryers. By doing so, our units now command a higher monthly rent, which in turn increases the value of the property.
As a final point, forced appreciation is one way investing in real estate is different from investing in stocks.
When you buy real estate, you are in control. You decide what improvements to make and not to make. Many real estate investors love having this type of control over their assets.
By contrast, when you own stock in a company, there is very little (if anything) you can do to impact how that company is run. Unless you have boatloads of stock in a particular company, you’re essentially just along for the ride until you sell your stock.
What do you think about generating long-term wealth through appreciation?
Now you know two of my favorite reasons for investing in real estate: cash flow and appreciation.
Have you invested in real estate and benefited from appreciation?
Did you force appreciation or hang tight and let the market do it’s thing?
In a recent post, I asked: If you woke up tomorrow with $10 million in your bank account, would you do anything differently?
I ask a version of this question whenever I teach my personal finance course to law students.
Asking what you would do with $10 million is just another way to ask what you would do with financial freedom.
Attaching a specific dollar amount to the question helps make financial freedom seem real. It turns the aspirational concept of financial freedom into actual numbers.
In a recent post, I asked: If you woke up tomorrow with $10 million in your bank account, would you do anything differently? I ask a version of this question whenever I teach my personal finance course to law students. Attaching a specific dollar amount to the question helps make financial freedom seem real. Many thanks to one of our blog followers, Ian, for turning the question around and asking me what I would do with $10 million! #thinkandtalkmoney
Many thanks to one of our blog followers, Ian, for turning the question around and asking me what I would do with $10 million!
It’s been some time since I put some real thought into this question. I’m happy to have gone through the thought process in crafting this post.
If you haven’t already, I encourage you to do the same and think about exactly what you would do if you woke up with $10 million.
Before I share my answer, I want to highlight some other reader responses to the question, which should shed some light on my decisions.
Let’s get to it.
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Disappearing on a beach.
The most common response to what people would do with $10 million involved some version of:
Invest the money and then disappear on a faraway beach.
In a way, the “disappear on a beach” response illustrates what many of us are striving for with financial independence. By that, I mean the goal of having enough money to then not have to work if we don’t want to.
Personally, I share the goal of becoming financially free, but I’m not looking to retire early and disappear. After all, I believe in FIPE not FIRE.
I think jetting off to the beach would be nice at first but then get old pretty fast. That said, I can certainly appreciate the desire to take some time away from life’s daily stressors.
Invest and then buy a shotgun.
One reader, Sean, shared a pretty sensible plan:
Put $9 million in the S&P 500, pay off debt with the rest and buy a nice shot gun.
It’s hard to argue with this plan. Of course, it’s never a bad idea to pay off debt or invest in the S&P 500.
I think it’s also important to treat yourself, within reason. I’m not in favor of earning financial freedom if it means being afraid to spend money on the things that make you happy.
While I don’t know the first thing about shotguns, I’m guessing they represent a hobby of Sean’s. I’m certainly in favor of spending on hobbies, experiences, and activities that bring you joy.
Well done, Sean.
The struggle between “should” and “want.”
Finally, Zach shared a sentiment that many of us struggle with when it comes to money decisions:
I know what the answer should be but I’d really like to buy a house and a couple of the cool cars I’d always ogled over growing up.
Zach’s comment stood out to me in the way he phrased it. He knows what he should do, which in his mind is different from what he wants to do.
Zach’s one sentence comment sums up a money struggle that many of us have.
We know what we should do, but we’re constantly fighting what we want to do.
I would challenge Zach, and anyone else feeling this way, to take some time thinking about what you truly want out of life. I did this when I wrote down my Tiara Goals for Financial Freedom while on a beach in Florida.
If you put some real thought into it, you might find that material possessions are actually not that important to you. Rather, buying your freedom is so much more valuable.
I would want to know more about Zach’s desire to buy a couple of cool cars. Maybe, like our previous reader wanting a shotgun, having cool cars is a hobby for him that brings much joy.
However, I have my doubts that’s what Zach meant. The way he phrased it (“cars I’d always ogled over growing up”) leads me to believe he wants these cars to show off.
Here’s the problem with that type of spending.
Buying a couple of cool cars would likely only give you a short-lived burst of happiness. Sure, it would be fun to drive them around at first. Maybe it’d also be fun to have your friends over and show off what you just bought.
But, studies routinely show that the burst of happiness from material possessions like cars only lasts for so long.
When that initial burst fades away, you’re stuck with the hassle of owning multiple cars that you probably wouldn’t even drive much. Your friends would stop caring before too long.
Add in the cost of insurance, maintenance, and garage space, and these cool cars will be a major drag on your financial freedom.
By the way, there’s nothing at all wrong with buying a house. You need to live somewhere. Just keep it reasonable.
Otherwise, you’ll end up working long hours for a lot of years just to keep the house. That might not be a trade off you want to make.
What I would do with $10 million.
Without further ado, here’s exactly what I would do if I woke up with $10 million tomorrow.
1. $50,000 to go on an African safari with my wife.
My wife and I have three kids at home ages five and under. With a newborn, even date night can feel like an epic adventure. My wife does so much for all of us, that this is the easiest decision I’ve ever made.
With the first $50,000, she and I are packing our bags for Africa and leaving the kids with Grandma. Since this would be our first big trip in six years, we’re balling out without worrying about the cost.
I am a big advocate of using money as a tool to build memories. How could I do better than taking a dream vacation with my wife?
2. Pay off my house.
My goal is to be financially free. A big part of that is not having any debt. That’s why the next chunk of the $10 million is going to pay off my house.
I could certainly make more money long-term by investing in the stock market or purchasing more rental properties. But, with $10 million at my disposal, I don’t need any more money. I know when enough is enough.
I love my house and my community and would rather know that I can stay here with my family for the long run.
3. Pay off my rental ski condo.
In 2021, my wife and I bought a ski condo in Colorado. We currently rent it out for most of the year.
If I had $10 million, I would pay off the mortgage on the ski condo, stop renting it out, and spend a lot more time out west with my family.
As I mentioned, one of my main goals in life is to create as many experiences and memories as possible with my family.
Paying off my condo would allow all of us to spend more time together doing the things we love, like skiing, hiking, biking, and swimming.
Best of all, we could do these things while sharing our condo with our extended family members.
4. $250,000 in a high yield savings account.
Everyone should have an emergency savings account. I would put $250,000 into a high yield savings account and turn to this money as my first line of defense in case of emergencies.
After eliminating my mortgage debt on my primary home and my ski condo, $250,000 would be enough to fund my life for about 2 years. That’s a lot of runway and provides peace of mind.
5. $300,000 total in my kids’ 529 college savings accounts.
Besides eliminating debt, my other major financial goal right now is to save enough to pay for my three kids’ college. To cross this goal off my list once and for all, I would put a combined $300,000 into their 529 accounts.
I landed on $300,000 by playing around with an online calculator, like this one. $300,000 should be enough to reach my goal for each kid.
6. 70% of the rest in a total stock market index fund.
I am an index fund investor, through and through. I have no interest in trying to beat the market or time the market.
I’m perfectly happy with earning around 10% per year, which is the historical annual average return of the S&P 500.
So, I would put 70% of the rest of my money in a total stock market index fund. I prefer Vanguard’s popular offering, VTSAX.
If you’re wondering why I’m not putting all my money in “safer” asset categories, like cash or bonds, it’s because I still have a long investment horizon in front of me.
I plan on investing for decades to come. I’m OK riding out the market swings that come with investing in stocks. I also want to keep up with inflation so my purchasing power remains strong in the future.
7. 30% in a total bond market index fund.
While I would mostly be invested in stocks, I would be highly motivated to preserve more of my wealth. Like I mentioned before, enough is enough.
Investing in bonds is a good way to de-risk your portfolio, even if it means earning less each year.
For that reason, I would allocate the remaining 30% of my money to a total bond market index fund. I would choose Vanguard’s VBTLX.
I would not pay off my rental properties or quit my job.
You may have noticed I did not mention paying off my rental properties or quitting my job.
My rental properties are all on very low-rate mortgages and generate strong monthly cash flow. These properties are performing beautifully as is.
I don’t see any good reason to mess with a good thing. I could always re-visit if circumstances changed.
With $10 million, why am I not quitting my job and jetting off to a beach?
The truth is I really like my life right now. I don’t see any good reason to make sudden, major life changes.
I like the people I work with and the work that we do for our mesothelioma clients.
On top of that, I like where I live and am not really craving any major purchases. I would probably get some new furniture for the house. Maybe I’d plant another tree or two in the backyard.
Plus, because I’m still earning an income in this scenario, I can continue to use my income to fund my life. That’s why I didn’t account for daily spending in my plan for $10 million.
In fact, I’d have more income available because the $10 million is more than enough for my long-term savings and investment goals.
I could use the money I had been saving for these goals for more present day spending. I’m not sure I would, but I could spend more freely, if I wanted to.
So, there you have it. That’s exactly what I would do with $10 million right now.
You may be wondering whether it’s better to invest in real estate or the stock market.
It’s a valid question. We all have limited dollars (some more than others) and need to decide what to do with those dollars.
The debate between investing in real estate or stocks is a good one. There’s no doubt that both asset classes can provide significant long-term growth.
There are also advantages and disadvantages to both types of investments. Advocates on either side of the debate can be very passionate about their preferred asset class.
I personally invest in both asset classes. I have 10 rental apartments in Chicago and a rental ski condo in Colorado. In addition, I invest in the stock market primarily through index funds.
Both asset classes play a key role in my journey to financial freedom. From my perspective, you don’t have to choose one asset class over the other. You can invest in real estate and own stocks.
We’ve spent a lot of time in the blog already talking about the significant long-term upside of investing in the stock market. If you need a refresher, check out my post on investing early and often to benefit from the magic of compound interest.
Today, I want to discuss one of the main reasons to invest in real estate. The reason comes down to a simple term:
Cash flow.
When investing in real estate, cash flow is the money left over each month after paying all your bills.
There’s an old saying, “Cash is king.”
For me, “Cash flow is king.”
My goal is to use real estate to accelerate my journey to financial freedom. To that end, I invest in real estate primarily for the cash flow.
Let’s dive in.
Stocks and real estate will each provide incredible long-term benefit.
Both stocks and real estate can provide significant long-term upside. Besides that upside, I invest in real estate for the immediate benefits of cash flow.
In terms of your Budget After Thinking, your Later Money is for future expenses. Your Now Money and Life Money are considered immediate life expenses.
Let’s talk about the Later Money category for just a moment. We can hopefully agree that both the stock market and real estate investments can generate incredible long-term wealth.
The S&P 500 has historically provided an average annual return of 10%. While not guaranteed to continue in the future, 10% average annual returns represents a powerful wealth generator.
With real estate, the long-term prospects can be harder to sum up with one simple number. There are a lot of variables at play, not least of which are the type of real estate and the geographic market.
For example, I primarily invest in small multi-family properties in Chicago. According to Redfin, residential home prices in Chicago were up 9.1% compared to last year.
Certain neighborhoods in Chicago have fared even better. In the neighborhood I invest in, prices are up 11.1% since last year.
By the way, you can find data like this for most markets across the country so you can do your own homework on your market.
So, what’s the takeaway?
For me, it’s quite simple:
If you hold real estate for long enough (think decades, not years), it will go up in value.
Given enough time, like the stock market, real estate always goes up.
How much your real estate will increase in value is hard to predict.
My expected long-term returns in Chicago are different from somebody who invests in condos in San Francisco. Likewise, my Chicago rentals are different from my Colorado rental ski condo.
I don’t expect my Chicago properties to increase in value at a rate of 10% over the long-term. I certainly hope the value of my properties beat the historical average in Chicago, but I’m not expecting that either.
The point is, whatever happens long-term, I’m OK with it. The reason I invest in Chicago rental properties is not really about the long-term upside.
It’s about the cash flow.
For me, cash flow is king.
Cash flow is king because it can cover present day expenses.
To be truly financially free, you need to cover immediate life expenses at the same time you are saving for future life expenses.
My definition of being financially free means not being dependent on the income from a primary job to cover your life expenses.
My goal is to be truly financially free. That means I need money to pay for my life now, not just decades from now.
We just talked about how the stock market and real estate can both help with the future life expenses.
For me, the primary benefit of investing in real estate is to help with those present day, immediate expenses.
In terms of your Budget After Thinking, that means helping with your Now Money and Life Money.
This is where cash flow comes in.
I can use the cash flow from my rental properties to help cover my present day expenses. By having cash flow available in this way, I have accelerated my journey to financial freedom.
In fact, I’ve been hard-pressed to find any other asset class that provides as many benefits in the here-and-now, while also providing benefits in the future.
Let’s explore that point next.
I prefer cash flow from real estate over stock dividends for my current expenses.
Don’t get me wrong, you can certainly reach financial freedom by investing in the stock market. As we just talked about, the stock market provides significant long-term upside.
Plus, you can certainly cover your current expenses with dividends from your stock investments.
However, I think cash flow from real estate is a better option.
Here’s why.
In order to fund your current life with your stock investments, you either need to withdraw some of your earnings or even sell some of your stocks.
When your stock portfolio is growing, you can leave your principle untouched and live off of the earnings. That’s pretty nice.
But, what happens when the market drops? You still have bills to pay and a life to fund. To cover those expenses, you may need to sell some of your stock assets.
Selling assets is not a great way to sustain long-term wealth.
With real estate, you can live off of the cash flow without having to sell the asset.
While your property may go through periods where it decreases in value, if you keep it long-term, the asset will increase in value. During that time frame, you can use the cash flow to fund your life.
Let’s explore this concept a bit further with an example using the popular 4% Rule.
What’s better for monthly expenses: cash flow from real estate or dividends from stocks?
Let’s say you just received a windfall of $250,000. Pretend it’s a bonus from work or an inheritance from a distant relative.
Your goal is to achieve financial freedom as soon as possible so you are not dependent on your W-2 job.
You are considering two investment options.
Option 1: You invest the $250,000 into a total stock market index fund, such as Vanguard’s popular offering (VTSAX).
You’ve done your homework and know that based on the 4% Rule, you can safely withdraw 4% of your money in the first year and then 4% plus an adjustment for inflation in subsequent years. If you do so, your money should last 30 years.
That means you can safely withdraw $10,000 in the first year year, and a bit more each year after that. For simplicity, let’s just look at the first year when you can safely withdraw $833.33 per month ($10,000 / 12 months = $833.33).
Remember, your goal is to leave your primary job. With this investment, you can assume you’ll have $833.33 per month available to cover your monthly expenses. Not too bad.
One important note: the 4% rule contemplates that your original investment should fund your lifestyle for 30 years. Importantly, there’s a chance your portfolio may be completely depleted after 30 years.
There’s also a chance your portfolio may be worth more in 30 years than when you started withdrawing.
Your results in large part depend on the percentage of stocks you own in your portfolio. If you are interested, you can read more about the 4% Rule and successful withdrawal rates here.
One of keys to remember is that while the market does not always go up every year, you will still be making withdrawals every year.
There may be a year where the market drops by 5% on top of the withdrawals you made that year. When that happens, your account balance drops. If you are not flexible in your withdrawal rate, this could lead to problems.
True, when the market goes up, your account balance goes up. The 4% Rule attempts to factors in these up-and-down cycles over a 30 year period.
However, when you are making constant withdrawals over a long enough period, there’s a chance that your account balance will eventually drop to zero.
Keep this in mind as we consider our next option.
Option 2: You use the $250,000 for a down payment on a rental property valued at $1 million.
We will soon learn how to evaluate rental properties. Countless books have been written on the broad topic, and it’s beyond the scope of this post.
Humor me for now since this is only a hypothetical scenario.
Without getting into specifics, I am willing to bet that any decent real estate investor could generate more than $833.33 per month from a $1 million property.
Personally, if I had $250,000 to invest in Chicago, I would not settle for anything less than $2,000 per month in cash flow. And, that would be the bare minimum for me to even tour a property.
With an initial investment of $250,000, my focus would be on finding a rental property with at least $3,000 in monthly cash flow.
For now, you’ll just have to trust that cash flow like that is possible with rental properties. I’ll soon show you how to do the analysis and manage your properties to target returns like this.
To recap, with the same $250,000 investment, you should be able to earn more monthly cash flow in real estate than dividends from stocks.
It gets even better.
If you hold your property long-term, your monthly cash flow should increase over time. Over those 30 years, inflation will naturally cause your rental income to increase.
At the same time, if you have a fixed rate mortgage for 30 years, that major expense stays constant. The difference between your increased rental income and constant mortgage payment results in more cash flow.
So, if you are hoping to sustain financial freedom without a primary job, which investment gets you closer to covering your monthly expenses?
Investing in real estate offers so much more than just cash flow.
Don’t stop reading yet.
On top of the monthly cash flow, real estate provides so much more.
Here’s a sneak peak continuing our prior example:
After 30 years, you will own an asset without any debt. In our example, even without any appreciation, you would own a $1 million property debt-free. And, that debt was paid off entirely by your tenants.
Add in appreciation, another major reason to invest in real estate, and your property will likely be worth $2-$3 million debt-free after 30 years.
Compare that to the example with stocks using the 4% Rule. After 30 years of depleting your investment account, your investments may be gone.
To put a bow on this point:
With stocks, you can earn $833 in monthly dividends and possibly have no money left after 30 years.
With real estate, you should reasonably earn $2,000-$3,000 per month (improving over time), and after 30 years will own an asset worth $2 million-$3 million, debt free.
When you look at it this way, the choice is really not that hard, is it?
On your journey to financial freedom, are you convinced that cash flow is king?
I’m not saying it’s bad to invest in stocks or you should only invest in real estate. I personally invest in stocks and real estate.
I see a place for both asset classes in my future.
If you haven’t previously considered investing in real estate, maybe you’ll now think about how that monthly cash flow can fit into your overall investment portfolio.
If you’re striving for financial freedom, are you convinced that rental property cash flow can accelerate your journey?
I invest in real estate for one reason and one reason only:
To accelerate my journey to financial freedom.
Through monthly cash flow, debt pay-down, appreciation, and tax benefits, I’m convinced that owning rental properties is the fastest way to reach financial freedom.
We’ll soon discuss each of these advantages in more detail. For now, here’s a quick overview:
Cash Flow: After paying all the bills each month, whatever is left is considered cash flow. You can use this cash flow however you want.
Appreciation: Real estate tends to increase in value over the long-term. If you hold real estate long enough, you should benefit from appreciation. This also means that your net worth grows.
Debt Pay-down: If you have a mortgage on a rental property, your tenants are the ones paying down that mortgage each month. That means your net worth grows because your debt is shrinking.
Tax Benefits: The tax code favors real estate investors. Whereas W-2 income is heavily taxed, many real estate investors pay little in taxes (and sometimes nothing in taxes). Some of the biggest reasons for this are depreciation and lower tax rates for capital gains.
With these four major advantages in mind, you can hopefully start to see how investing in real estate will accelerate your journey to financial independence.
Additionally, you may have noticed that investing in real estate provides both immediate and long-term financial benefits.
Let’s focus on that point for a moment.
Investing in real estate offers immediate and long-term financial benefits.
To be truly financially free, you need to cover immediate life expenses and prepare for future life expenses.
In terms of your Budget After Thinking, your Now Money and Life Money are considered immediate life expenses. Your Later Money is for future expenses.
Rental properties can help you in each budget category. The monthly cash flow and tax benefits will cover your Now Money and Life Money needs. Debt pay-down and appreciation offer significant upside for your Later Money.
I’ve been hard-pressed to find any other asset class that provides as many benefits for both for the here-and-now and the future.
There’s another major reason I believe in the power of investing in real estate.
It has to do with one of my ultimate life goals: to create more time to spend with my family. This is one of my major life goals, in part, because of what I’ve learned in my career as an attorney.
What I’ve learned about time and family as an attorney.
I graduated law school at age 24 and spent the first couple of years of my career clerking for an appellate court judge.
To this day, I tell my students that clerking for a judge is the best job for recent graduates. I recommend that all my students apply for judicial clerkships.
When my clerkship ended, I joined my current law firm where I continue to represent people with mesothelioma, a rare and terminal cancer caused by asbestos.
If it wasn’t for what I’ve learned from my mesothelioma clients, I would have never started investing in real estate.
Let me explain what I mean.
I’ve learned invaluable life lessons from my clients with mesothelioma.
Most of my clients are in their 70s and 80s. That’s because mesothelioma is a disease that takes decades to manifest. A person can be exposed to asbestos in his 30s and not get sick until his 70s.
A significant part of my job has been meeting with my clients in their homes after they have just found out they have incurable cancer. Before we ever get around to talking about the case, we inevitably end up talking about life.
During these conversations, I do most of the listening. You can imagine what I’ve learned about life in these moments. It is not a stretch to say that many of my core beliefs have been shaped by these powerful experiences.
When I listen to my clients talk about life, certain themes continue to surface.
One major theme I hear from my clients is the importance of family. They’ve taught me the importance of creating experiences and memories with loved ones, usually involving family vacations or time spent with friends.
Like my clients, I want to create as much time as possible with my family and friends. When I look back on my life, I want to look back on all the experiences and memories I’ve created.
With rental properties, I can earn money without being physically present. And while investing in real estate is not completely passive, it provides tremendous upside without requiring all of my time.
That means I can spend more time with my wife and three kids while still making money.
Because of what I’ve learned from my clients, there’s nothing more important to me.
I started investing in real estate in my mid-30s.
By the time I reached my mid-30s, I had paid off my student loan debt. I had successfully saved up for an engagement ring and a wedding. Newly married, my focus shifted to saving up for a downpayment on a home.
At the time I started saving up for a home, I had no idea that I could use my savings to invest in real estate.
It wasn’t until I went to a Cubs game with a good friend of mine, The Professor, that I learned about real estate investing. This is when my journey to financial freedom really accelerated.
See, The Professor had a beautiful condo with an incredible rooftop deck near Wrigley Field. During the game, he told me he was selling the condo and moving into a 4-flat with his fiancee in an up-and-coming part of town.
Huh?
Why on earth would you give up your amazing condo?And move to a random neighborhood I’d maybe been to one time in my life?
I thought The Professor had lost his mind. Back then, I had no idea what a 4-flat even was. I couldn’t even point to his new neighborhood on a map of Chicago.
He walked me through the numbers. He explained that he was going from paying $3,000 per month for his condo to receiving $700 per month on top of living for free in the 4-flat. That’s a $3,700 difference per month!
I immediately thought about the experiences and memories that I could create with my wife if we had an extra $3,700 per month to spend.
I already knew what my clients would say about the opportunity to create such memories.
It almost sounded too good to be true.
I did my homework and bought my first investment property less than a year later.
During my talk with The Professor, he introduced me to BiggerPockets.
If you haven’t heard of BiggerPockets, it is a treasure trove of online resources to help real estate investors of all levels.
At BiggerPockets, you can listen to podcasts, read blog posts, and ask questions on the forums. You can also choose from a wide selection of incredible books on real estate investing.
Coach Carson’s message is right there in the title: you can use real estate to efficiently reach financial freedom. He makes a compelling argument to use real estate to build a life, not the biggest bank account.
Being introduced to BiggerPockets was a game changer for me. I believe in the motto, “Trust but verify.” With BiggerPockets, I could do my own research and decide for myself if real estate investing was for me.
Over the next few weeks, I read everything I could about investing in real estate. When I wasn’t reading about real estate, I listened to podcasts.
It didn’t take long before I was convinced that I wanted a 4-flat of my own.
I am using real estate to accelerate my journey to financial freedom.
To me, investing in real estate is all about fast-tracking my journey to financial freedom. It has not always been easy, but it’s definitely been worth it.
I’m fortunate that my career has introduced me to so many wonderful people.
I am convinced that I would not have been as motivated to act if it weren’t for my conversations with my mesothelioma clients. If nothing else, I know that talk with The Professor about real estate would not have resonated with me the same way.
Fast forward to the present day, I now own 10 apartments in Chicago and a rental ski condo in Colorado.
Coming up in the blog, I’ll share with you everything I’ve learned about investing in real estate along the way.
As always, reach out if you have any questions or leave a comment below.
I ask a version of this question whenever I teach my personal finance course to law students. I’ve also asked this question to a lot of my friends and family members.
Whether in class or with friends, this question is a great conversation starter. It’s not so much about the dollar amount as it is about the money mindset that goes along with that amount.
That’s because asking what you would do with $10 million is just another way to ask what you would do with financial freedom.
Attaching a specific dollar amount to the question helps make financial freedom seem real. That’s because it turns the aspirational concept of financial freedom into actual numbers.
With those numbers in mind, you can more realistically think about what your life could look like if you were financially free.
That’s why I love the question. I find it very interesting to talk to people about what they would do with financial freedom.
Why I love talking about financial freedom.
If you hear $10 million in the bank and think of spending it on mansions, boats, and cars… this is not the blog for you.
I want to talk about using that $10 million to buy something way more valuable than material possessions: your freedom.
When you are financially free, you can choose to do work that is meaningful to you without worrying about how much it pays. You can also choose to spend more time with people who are meaningful to you.
I am striving for both of those things on my journey to financial freedom.
By the way, $10 million is just an arbitrary number. Maybe your number is $3 million or $8 million or $15 million. For this conversation, use whatever number represents financial freedom to you.
The amount may differ based on your age, spending habits, debt level, dependents, etc.
The idea is to pick a dollar amount that is high enough that you wouldn’t have to work anymore unless you wanted to. In its simplest form, that’s what financial freedom means.
I’ve found that when I have this conversation, $10 million is a good, round number to get people thinking about what they would do with financial freedom.
So, today we’re going to ask ourselves if we would do anything differently if we woke up with $10 million in the bank.
To help get the wheels turning, let’s start with some simple math to see what having $10 million in the bank really means.
What does $10 million in the bank really mean?
Let’s do some simple math using the 4% Rule to help frame the question.
The 4% Rule suggests that you can safely withdraw 4% of your investments each year and expect your money to last for 30 years.
Without getting too technical, the 4% Rule is based off of research looking at historical investment gains, inflation, and other variables. I view the 4% Rule as a useful tool to ballpark your magic retirement number.
The 4% Rule is a great place for us to start thinking about what you could do with $10 million.
Here’s what the formula looks like using $10 million as our current savings:
Current Savings x 4% (.04) = Annual Retirement Spending
$10,000,000 x .04 =$400,000.00
This means that according to the 4% Rule, you could spend $400,000 annually and expect your money to last 30 years.
This is a useful calculation that puts into perspective how much money $10 million really is. You can essentially view having $10 million in the bank as the same as having a job that pays you $400,000 per year.
The major difference is you don’t have to get out of bed in the morning to receive this $400,000.
Note for simplicity’s sake, we’ll set aside the tax implications of investment income v. W-2 income for this hypothetical.
One other note: if you had $10 million in the bank, you don’t have to spend $400,000 per year. Rather, the 4% Rule suggests you could spend up to that amount and not run out of money for 30 years. If you spend less than 4% each year, your $10 million will last longer.
How much can you spend each month with $10 million in the bank?
To help you picture your life with $10 million in the bank, we can break down that $400,000 annual spending amount even more.
I like to know how much I could safely spend on a monthly basis if I had $10 million in the bank. Knowing the amount I could spend monthly helps make the $10 million more digestible.
That requires just a bit more very simple math:
$400,000 annually / 12 months = $33,333.33
So, if you have $10 million in the bank, you should be able to safely spend about $33,000 per month.
Now, you can view that number in the context of your Budget After Thinking. You might learn that you’re spending way less than $33,000 per month. Or, you may be spending way more.
Either way, it puts that $10 million into smaller, more digestible numbers.
To recap, we now know that $10 million in the bank means we can spend roughly $33,000 per month and not run out of money for 30 years. The important question then becomes:
Would you make any changes to your current life if you started each month with $33,000 in the bank without having to work?
Let’s explore what your answer may say about your current work situation.
Would you still work your current job if you had $10 million in the bank?
If you had $10 million in the bank, would you continue to work your current job?
If your answer is “Yes,” that’s a great sign that you enjoy your work and the people you work with. You also most likely have motivations for working that go beyond earning money. That’s a really nice position to be in.
By the way, I know a good amount of people in this boat. Even with $10 million, they wouldn’t change a thing about their work situation.
If your answer is “No,” it’s worth thinking about why you wouldn’t keep working your job. Is it the people? The hours? The lack of stimulation? Overall stress?
$10 million in the bank should be enough to leave your job for new pursuits. You can start to ask yourself what you would do for work if you didn’t have to work for money.
I also know a lot of people in this boat. If they had $10 million, they would be out the door tomorrow.
Why am I talking about new pursuits instead of shutting it down completely?
With $10 million in the bank, your initial thought might be to just shut it down completely. For people of a certain age or people with health considerations, that certainly could be the right choice.
Setting those reasons aside, I do not believe in retiring early. I’m convinced that humans are meant to be productive. We are social creatures who at our core want to be contributing.
I think this especially holds true for high achievers who have put in the work and made sacrifices to become financially free in the first place.
That’s why I don’t believe financial independence has to mean retiring. It’s also why I don’t like the popular acronym, FIRE: Financial Independence, Retire Early.
The problem for me is that the FIRE end game is suggested right there in the name: become financially independent so you can retire.
I don’t like what the word “retire” implies.
If you look it up, you’ll see that the word “retire“means to withdraw, to retreat, to recede.
None of those things sound appealing to me at all.
Each word implies moving backwards. I’m not working so hard to achieve financial freedom so I can move backwards in life.
Instead, I like to view my financial freedom journey as FIPE:
Financial Independence, Pivot Early.
I believe in FIPE not FIRE.
When you have financial independence, you have options. You can make decisions based on your core values instead of making decisions based on money. You can pivot, if you want.
One of the ways you can pivot is by taking more control of what you do with your working hours. It’s not about quitting work entirely and wasting away on a beach. As nice as that might sound right now, it will get old fast.
That’s why I believe in FIPE not FIRE.
I encourage you to think about how you might use $10 million to pivot instead of to retire. Could you use that money to buy yourself the freedom to pursue more meaningful work?
So, what would you do with $10 million in the bank?
The point in asking about $10 million is to help you think about your current choices and whether it’s time to make some adjustments.
Having this conversation with your friends and family will teach you a lot about your current situation. Remember, talking about money is not taboo.
In these conversations, pay attention to what you learn about yourself and how you presently spend your time.
Even though $10 million may seem like a distant dream, you don’t need to have that much money to start your own financial freedom journey.
You can start making choices today to put yourself in a better position to pivot, if you so choose.
Maybe you wouldn’t change a single thing about your career choices. Or, maybe you would be out your employer’s door tomorrow.
In the end, thinking about what you could do with $10 million in the bank will help you lead a more intentional life.
These are questions that commonly come up when I’m teaching law students and young lawyers. Of course, these questions are best answered when we consider both the emotions and the math of money.
Today, we’ll look at a third question that comes up regularly:
How should you prioritize certain investment account types, especially if you’re still paying off debt?
Airport walks ✈️💭 401k? Roth IRA? Savings? Debt? Don’t know how to prioritize where to put your money first? I break it down here: https://thinkandtalkmoney.com/how-to-prioritize-investment-account-types-while-in-debt/ #thinkandtalkmoney#401k#rothira#savings#debt#financialfreedom
If you’re wondering what I mean by different investment account types, you can read about my four favorite account types here.
Below are my thoughts on how I would choose between different investment account types while paying off debt.
Let me know if you agree or would prioritize a different order in the comments below.
1. Invest just enough to qualify for your employer match.
Your first goal should be to invest enough in your 401(k) plan to qualify for the employer match.
Many employers today offer a match to incentive employees to contribute to their 401(k) plans. To qualify for the match, you must be participating in your company’s plan and make contributions yourself.
The match is usually a percentage of your overall salary, usually between 3% and 6%.
For example, let’s say your salary is $100,000 and your employer offers to match your contributions up to 5% of your salary.
That means if you contribute $5,000 (5% of your salary), your employer will contribute an additional $5,000 (5% match) to your account.
In other words, your $5,000 automatically turns into $10,000.
Think about that for a moment.
That’s a guaranteed 100% return on your contribution. You put in $5,000 and you automatically get another $5,000. You won’t find a guaranteed return like that anywhere else.
That’s why if your company offers a match, it’s a no-brainer to take advantage of that match.
For this reason, an employer match is often described as “free money.”
I don’t like the term “free money” because it implies that you have not earned that money as an employee for your company. I prefer to refer to the company match as a bonus you’ve rightfully earned.
The key is to accept that earned bonus by ensuring you are meeting the minimum requirements to qualify.
Whether you think of it as free money or as a bonus you’ve earned, make sure you contribute enough to your 401(k) plan to qualify for the employer match.
2. Pay off all credit card debt.
After you hit the employer match, and before you think about further investments, you should pay off all credit card debt.
Note that credit card debt is in a category of its own because of the extremely high interest rates that accompany credit cards.
Currently, the average credit card interest rate is 20.12%.
The S&P 500 has historically averaged a 10% annual return.
That gap is so large that it’s a good idea to pay off your credit card debt before turning to further investments.
Think about it like this: with credit card debt, you are guaranteed to pay a penalty of around 20% until you pay off that debt. When investing, you can reasonably hope to earn around 10% interest.
Because the penalty you’re paying is twice the rate you’re hoping to earn, the smart move is to eliminate that penalty.
For help on paying off your credit card debt, check out my top 10 tips here.
Why not pay off your credit card debt entirely before investing in your 401(k)?
You may be wondering why I recommend qualifying for your employer match before paying off credit card.
Even with such high credit card interest rates, there’s a good reason to prioritize qualifying for your employer match. We touched on that reason above.
Let’s revisit our example. With an employer match, if you contribute $5,000, your employer will also contribute $5,000.
As we said, that’s like earning a 100% guaranteed return on your money. A 100% guaranteed return is too good to pass up.
No other reasonable investment option offers a 100% guaranteed rate of return. You can’t even reasonably hope to match the 20% penalty that credit card companies charge.
That’s why eliminating your credit card debt should be your next priority after receiving your employer match.
3. Allocate 75% of available funds to other loans and 25% to investments.
Once you have paid off your credit card debt, I recommend putting 75% of your available funds to loans and 25% to other investments.
When I say loans, I am referring to student loans, personal loans, lines of credit, and HELOCs. Note, I am not referring to primary mortgage debt.
It’s not uncommon for law students to have hundreds of thousands of dollars in debt. The same is true for students in medical school and business school.
It’s not just people with student loan debt who face this question. As one example, perhaps you’ve used a HELOC to buy investment property, like I have.
There’s a reason credit card debt is in a separate category from other loans, like student loans and HELOCs.
Unlike credit card debt, student loan debt and HELOC debt typically come with lower interest rates.
The current lowest federal student loan interest rate is 6.53%.
Your loans may have even lower interest rates. Regardless, the odds are that your interest rate is below the historical 10% average annual return of the S&P 500.
While it’s never a bad idea to eliminate debt, there are some good reasons why you should invest even though you’re in debt.
We explored these reasons and why I recommend a 75/25 ratio in my recent post on investing while in debt:
If you’re on board with investing while paying off debt, the question becomes: where should you invest that money?
That brings us to my next suggestion.
4. Max out your 401(k) plan.
Once you reach this step, you should have no credit card debt. You should also be applying either the 75/25 ratio to invest while you’re in debt, or have no other debt to pay off.
At this point, I suggest maxing out your 401(k) with your remaining available funds.
The reason I suggest maxing out your 401(k) is because these contributions are made with pre-tax dollars. In other words, you get a tax break today by investing in your 401(k).
To put it another way, you will save money on taxes every year you contribute to your 401(k) plan.
Don’t sleep on the impact of taxes on our money decisions. Over the long term, taxes can be hard to predict, but they should not be ignored.
Nobody really knows what taxes are going to be like in the future. Yes, it’s a safe assumption that taxes will keep going up.
But, taxes have always been complicated. I’m guessing they will always be complicated. Even if taxes generally go up, there’s no telling the exact impact taxes will have on your personal situation.
That’s why I prefer to take the guaranteed tax savings now. I’m ok with the possibility of paying more in taxes decades from now. That’s especially true because I have plenty of good uses for those tax savings right now.
That’s why I recommend maxing out your 401(k) before moving on to my final suggestion.
5. Max out your HSA, Roth IRA and 529 plan.
Once you reach this step, you’re in great shape. Reaching this point means you have maxed out your 401(k) plan, which means you’re receiving an employer match.
It means you have no credit card debt. On top of that, you are paying down your other loans with a 75/25 ratio or have eliminated those loans entirely.
Now, you have options. You’ve earned the right to choose the best investment account type for your situation.
Besides a 401(k), my other favorite account types are a Roth IRA, a Health Savings Account (HSA), and a 529 account.
You can read all about my favorite investment account types in this recent post:
It’s a choice many people struggle with because we know debt can be bad and investing can be good.
The desire to tackle both goals raises the question: should we focus on eliminating the bad thing or doing more of the good thing?
In that post, we explored the four main reasons why I think it’s a good idea to invest while in debt. You can read more here.
Today, we’ll talk about another challenging question that many of us face:
Should we prioritize investing for retirement or investing for our children’s college?
Like the question of whether to invest while in debt, this question presents a difficult choice because two things are true at once:
Investing for retirement is a good thing.
Helping our kids is a good thing.
So, what should we do?
This is a question I think about a lot now that I have three young kids.
There are powerful emotional reasons on both sides of the question. And while money decisions are certainly emotional, using simple math can help you choose the right balance between retirement and college.
Let’s start by looking at some of the emotional reasons and then explore how simple math can help us with this difficult choice.
As a parent, I want to help my kids as much as I can.
On the one hand, as a parent, I want to help my kids as much as I can. College is expensive and is only getting more expensive.
I have personally felt the heavy burden of debt. It’s not a good feeling. If I can help my children avoid that feeling by paying for college, I will.
I want to be free to retire on my terms.
On the other hand, I want to be free to retire on my terms. To do so, I know that I need to start investing early and often. Just like college is expensive, retirement can also be very expensive.
I don’t want to be in a position where I’m forced to work longer than I otherwise would because I don’t have enough saved up.
If I skip out on investing for retirement to pay for college, I may end up in that situation.
With powerful emotions on both sides of the question, is it possible to come up with a plan that helps accomplish both goals?
Yes, I think we can. In this instance, it helps to remember that money decisions are both emotional and mathematical.
Let’s revisit some of the math we’ve previously looked at to help us get closer to a decision.
While nobody can say for certain how much college will cost or how your investments will perform, you can make reasonable estimates and use an online calculator to help form your strategy.
I like the calculator available on Illinois Bright Start 529 website. What’s nice about this website is you can look up the future estimated cost of attending specific schools around the country.
I also like using calculator.net. They have a College Cost Calculator where you can see how much college costs on average today and how much it is estimated to cost when your child starts college.
Whatever online calculator you use, you’ll have to make some assumptions when you start plugging in numbers, like an investment return rate.
The S&P 500 has historically provided a 10% average annual return. So, 10% seems like a reasonable return rate to me for your estimations.
Besides the estimated return rate, you’ll also need to account for the rising costs of college. Most of the online calculators recommend you assume the cost of college will increase by 5% each year. That also sounds reasonable to me.
With these assumptions in mind, let’s look at an example using a current kindergarten student.
Since I live in the Chicago-area, we’ll assume in this example that the kindergarten student is going to the largest in-state college, the University of Illinois Urbana-Champaign (U of I).
Illinois’ Bright Start 529 calculator estimates that the cost of a current kindergarten student attending U of I will be $264,735.
Assuming you don’t have any current savings and you estimate a 10% annual rate of return, the Bright Start 529 calculator indicates you should save $10,796 per year.
That comes out to $900 per month.
By doing the math, you now have a reasonable estimate as to how much you should be saving for college.
You do not have to rely exclusively on long-term savings to pay for college.
If $900 per month seems like a lot of money, keep in mind that you don’t have to depend exclusively on these savings to pay for college.
There are two key reasons for that:
1. Your child can take out student loans.
While it may not be your plan right now, don’t forget that your child always has the option of using student loans to help pay for college. Your child may also earn scholarships or qualify for other financial assistance.
On top of that, there are hundreds of good colleges at varying price points around the globe. It is not the end of the world if your child ends up going to a lower-ranked but less expensive school.
The bottom line is that there are options when it comes to paying for college. It is not exclusively up to your savings to ensure your child gets a good college education.
In other words, don’t convince yourself that your student will be prohibited from attending college if you don’t save enough right now.
2. You will likely still be earning income when your child starts school.
Besides the availability of other options to pay for college, also keep in mind that you will likely still be working when your child starts school. There is no reason that you can’t use some of that income to help pay for school.
If you continue to make intentional, solid money decisions, you should have extra funds available in your budget when your kid starts college.
One way make sure that happens is to keep your expenses constant as your career progresses and you make more money. As an example, let’s say you bought a home while your kids were young. Of course, this is a common path for a lot of professionals who are starting a family.
If you stay in that home long-term, your housing costs should be relatively fixed. As you earn more money, instead of upgrading your home, you can use that excess money to help pay for college.
Once again, the point is that there are options to help your children pay for college even when your investments fall short.
Now, let’s look at the math to figure out how much we should be saving for retirement.
Just like we can use an online calculator to estimate the cost of college, we can also use a calculator to estimate how much we need to save for retirement.
The 4% Rule suggests that you can safely withdraw 4% of your investments each year and expect your money to last for 30 years.
Without getting too technical, the 4% Rule is based off of research looking at historical investment gains, inflation, and other variables.
For simplicity, let’s say you have $1 million in your portfolio. According to the 4% Rule, you can safely withdraw $40,000 per year (4% of your portfolio) and not run out of money for 30 years.
Current Savings x 4% (.04) = Annual Retirement Spending
$1,000,000 x .04 =$40,000.00
The 4% Rule also works in reverse.
By that, I mean you can use the 4% Rule to ballpark how much money you’ll need in retirement to maintain your current lifestyle.
Let’s say that you reviewed your Budget After Thinking and learned that you spend $6,000 per month in Now Money and $4,000 per month in Life Money.
Combined, that means your lifestyle costs you $10,000 per month, or $120,000 per year.
To figure out how much you would need in investments to cover your current lifestyle for 30 years, divide $120,000 by .04.
Current Spending / 4% (.04) = Magic Retirement Number
$120,000 / .04 =$3,000,000.00.
That means to maintain your current lifestyle of spending $120,000 per year for 30 years, you would need $3 million in investments.
In other words, your magic retirement number is $3 million.
Now that you know you will need $3 million in retirement, you can figure out how much you need to be investing today to hit that number.
I like the calculator available on investor.gov for this part.
With this calculator, you can plug in your investment goal, initial investment, years until retirement, and interest rate to figure out how much you need to save each month.
Let’s continue our example assuming your magic retirement number is $3 million.
We will also assume that you currently have $100,000 saved for retirement and you plan to retire in 30 years. We’ll also use the same 10% annual rate of return we used before.
Based on these assumptions, you would need to save $635.82 each month to hit your magic retirement number of $3 million.
With this information, you can now plan accordingly to make sure you are saving enough for retirement each month before you start worrying about college.
Aim to hit your monthly retirement target before saving for college.
By using these simple online calculators, you can estimate exactly how much you need to save for college and to save for retirement.
I recommend that you aim to hit your monthly retirement target first before funding your college savings accounts.
As we mentioned above, you and your child will have other options to help pay for college, like loans, scholarships, and concurrent income.
By contrast, these options are not readily available to fund your retirement. You’re more-or-less on your own to sustain yourself.
Think about it: by definition, retirement means ceasing to work. That means no income coming in besides your retirement savings. There are not any loans (at least reasonable ones) or scholarships to bail you out in retirement.
Sure, you could try to work part-time during retirement. But, that means you’re really only partially retired. Plus, it would be nice to have the choice to work in retirement because you want to work instead of being forced to do so.
It’s for these reasons why you should prioritize saving for retirement over saving for college.
In an ideal world, you can do both. If you control your expenses as your income grows, you give yourself the best chance to do both.
How are you balancing investing for retirement with investing for college?
While money decisions are certainly emotional, using simple math can help you choose the right balance between retirement and college.
My recommendation is to prioritize retirement over college because of the additional options available to help pay for college. You’re essentially on your own when it comes to retirement.
Once you’ve calculated your magic retirement number, you can then calculate exactly how much to save each month.
When you can comfortably hit that number, you can then figure out how much to be saving for college.
Are you currently saving for retirement and for college?
How do you balance doing both?
Have you thought about other ways to help pay for college besides the options we discussed?
As an investor, what should you do during a bear market?
Nothing!
Easier said than done, right?
Human instinct is to act. Our natural instinct tells us to do something when confronted with danger. We’ve all heard the saying, “fight or flight.” It’s our body’s way of protecting us from potential harm.
For example, if you encounter a bear in the woods, despite what survival experts may tell you, I’m betting you’re running for your life in the opposite direction.
That’s exactly what my wife and I did when we saw a black bear in Colorado a couple summers ago.
Even though we were at least 100 yards away when we saw the bear, and the bear was walking away from us, we ran in the opposite direction as fast as we could.
Survival experts, we are not.
If you zoom in (and squint), you can see the ferocious beast in this picture.
When it comes to investing, the saying should be modified to include a third option: “fight or flight or do nothing.”
And as JL points out, doing nothing is usually the best decision.
When the market drops, you have the chance to buy stocks at a discount. Whenever the market bounces back, you will benefit from all those discounted stocks you purchased.
Of course, nobody knows when the market will bounce back. For that matter, nobody knows when it’s going to drop, either. However, history has shown us that the market has always recovered.
What if the market doesn’t recover?
Then, we all have bigger problems to worry about than our money.
It may take a long time for the market to recover. That’s OK. When you invest early and often, time is on your side.
By combining time and the courage to do nothing, you will benefit immensely in the long run.
In his post on middle class multi-millionaires, Financial Samurai raises a great point:
How come people are so enthralled by high incomes instead of high net worths?
Like me, have you wondered why people tend to be more interested in someone’s salary rather than his net worth?
I have one theory for why society continues to value income more than net worth: income can be more easily measured and more easily used for marketing purposes.
To put it another way: income is sexier than net worth.
One example I thought of: remember when you applied to college, grad school, law school, etc.?
Did you notice how schools commonly advertise the average or median income of their graduates. Schools love to show off that if you go to their school, you’ll make a certain amount of money upon graduating.
However, you’ll never see data on the net worth of its graduates.
Why is that?
Because an impressive net worths can take decades of discipline to manifest. That type of slow progress doesn’t make for sexy marketing for schools.
Plus, a top flight education may help you earn a high income but doesn’t guarantee a high net worth. Many high earners are also high spenders. You’d be surprised how many people are good at making money but not keeping it.
It’s up to each of us to turn that income into a high net worth. Again, that’s harder for schools to market.
If you are a personal finance enthusiast, you know to value net worth more than income. In fact, the most impressive feat of all is when you have a high net worth on just a standard income.
For my kids, I’d be way more impressed to see what schools crank out students with high net worths 20-30 years after graduation instead of the median income upon graduation.
To learn how and why to track your net worth, you can read my post here.
Does early retirement negatively impact your life expectancy?
I read a fascinating post on Early Retirement Now that looked at the potential consequences of someone’s life expectancy based on when that person retires.
There has been a lot of academic research done on the topic. Somewhat surprisingly, there are studies that indicate retiring early may negatively impact your life expectancy.
Check out the post on Early Retirement Now for a closer look at some of these studies.
I’m not too worried about the conclusions about life expectancy based on when someone retires. At best, there are conflicting studies on that question.
Rather, what I found most interesting about the post was that I’ve rarely thought about the potential health consequences about retiring early.
I regularly think about the mental side of retiring early. Specifically, how does someone keep his mind sharp in early retirement?
However, I’ve never really thought about the physical effects of retiring early.
Does retiring early negatively impact your physical health?
I may have mistakenly assumed that someone’s physical health would automatically peak in early retirement. I’ve based that assumption on the idea that you’ll have so much time to exercise and eat right when you don’t have to worry about a job.
In other words, if you’re not spending 50+ hours per week sitting at a desk, there would be no excuse to skip out on exercising regularly and preparing healthy meals at home.
This post has me thinking about other factors I’ve failed to consider.
For one, your body may trend towards lethargy if you’re not forced to wake up, get dressed and work 50+ hours per week. Plus, as much as people may not like commuting, at least it gets you out of the house and moving around.
My takeaway is that if you’re considering retiring early, be sure to plan ahead for physical activity as much as mental activity.
Your body may not want to exercise every day. You may need a motivational boost from group exercise classes or clubs. Maybe you’ll need a personal trainer or coach.
If you don’t currently have any hobbies tied to physical activity, I would suggest exploring different options before you leave full-time employment. It may take some time to find your groove with an activity or two that interests you.
Let us know what you think about these posts.
What do you think about these posts from popular personal finance writers?
Are you brave enough to do nothing in the face of a bear?
Have you been tricked into thinking a high income is more impressive than a high net worth?
What are your thoughts about the physical side of retiring early?
One of the most difficult money decisions people have to make is whether to invest while in debt. That’s because it can be challenging to plan for the future while worrying about past debts.
It’s also a tough decision because we know two things to be true at once:
Debt can be bad.
Investing can be good.
So, should we focus on eliminating the bad thing or doing more of the good thing?
You can see why it’s a tricky question.
The way I see it?
You don’t have to choose only one door to walk through.
You can invest while in debt.
I regularly get questions like this from law students who take my personal finance class. People just starting out in their careers are rightfully thinking about whether they should invest while paying off student loan debt.
It’s not uncommon for law students to have hundreds of thousands of dollars in debt. The same is true for students in medical school and business school. The question about investing or paying off debt makes perfect sense.
It’s not just people with student loan debt who face this question. Perhaps you’ve used a HELOC to buy investment property like I have. Maybe you have mortgage debt, medical debt, or consumer debt.
The choice to pay down debt or invest for the future is tricky.
Whatever the case may be, the choice to pay down debt faster or invest for the future is tricky.
For people feeling the heavy burden of debt, the idea of investing for some future goal can seem a little bit comical. I completely understand.
If you’re facing monthly debt payments for the next 10 years, you may not be ready to think about retirement 50 years from now.
Trust me, I get it.
I know firsthand how heavy debt can feel.
In my 20s, I had both student loan debt and credit card debt. It was not fun to carry that debt burden. I’ll never forget the incredible feeling of accomplishment when I paid off those debts. I felt so much lighter.
I now have HELOC debt that I’m focused on paying off. That HELOC debt stems from buying five properties in seven years. My real estate portfolio is now exactly where I want it to be, so I’ve shifted from acquisition mode to debt-reduction mode.
Just about every day, I think about how good it’s going to feel to have that HELOC debt paid off.
The point is: you don’t have to convince me why you may want to focus on paying off debt. I understand completely.
However, I think it’s worth considering the advantages of investing at the same time you’re paying off debt. You don’t have to go all-in on paying off debt or all-in on investing. You can strike a balance.
In today’s post, I’ll share my perspective to help you think about the right balance between debt reduction and investing.
Four main reasons to invest while in debt.
There are four main reasons to consider when thinking about whether you should invest even though you’re in debt. If you’re not investing at all because you’re focused on debt, these four reasons should give you something to think about.
1. Invest while in debt because of the emotions of money.
It feels good to see your investment accounts grow. This is especially true when you are accustomed to looking at huge debt balances on your laptop or phone screen.
Yes, it feels good to see those debt balances shrink. It also feels really good to see your investment accounts grow.
As a professional, you work hard for your money. You spend a lot of hours away from home so you can work and make a living. You deserve to experience the fruits of your labor.
When your career is stressing you out, it can be very uplifting to observe a growing investment account balance month-to-month.
2. Invest while in debt to develop the habit.
It’s important to get in the habit of investing as early as possible in your careers. Once you start investing, even if it’s only $25 per month, you are creating a habit. This is the type of habit that will pay off immensely in the long run.
Humans have a tendency to resist change. That’s why it’s difficult to break bad habits. This tendency also works in our favor when we have established good habits, like investing. We tend to just keep doing what we’ve always done.
When you’ve established the good habit of investing, it’s easy to increase your contributions as you earn more money. The same is true when you’ve eliminated all your debt. You can easily use the money you had been putting towards debt for your already-established investments.
That’s because your accounts will already be set up. All you need to do is increase your monthly investment contributions.
This makes it easier to solidify and benefit from the good habit you’ve cultivated.
3. Invest while in debt because of compound interest.
Compound interest is the most powerful force in all of personal finance. The earlier you start investing, the more benefit you’ll get from compound interest.
You can check out more about the power of compound interest in my post on investing early and often.
Even investing a small amount of money while paying off debt will lead to massive gains over the long term because of compound interest.
4. Invest while in debt because of the math.
Even though money decisions are closely connected to our emotions, the math of investing can be hard to ignore. If you prefer to make money decisions primarily based on the math, here’s what you can do.
We’ve talked before about how the S&P 500 has historically earned an average annual return of 10%. Of course, there’s no guarantee that you will earn 10% if you invest. You may earn less or you may earn more. Still, based on the historical data, it’s a reasonable estimate.
You can then compare that 10% return to the amount you’re paying in debt interest.
For example, let’s say you have student loan debt. In this example, let’s also assume you’ve created an extra $200 in your monthly budget to allocate towards either debt or retirement.
You’ll next want to look up your current student loan interest rates. For illustration purposes, the current interest rate for undergraduate federal loans is 6.53%. The current interest rate for graduate and professional students is 8.08%.
Then, you can use an online calculator to help make your decision about whether to invest the $200 or put that money to debt.
If you put the money to debt, you’ll obviously pay off that debt faster. You can read more about how to easily do these calculations in my post on Debt Snowball vs. Avalanche.
Likewise, you can use an investment calculator to see how much that $200 will grow in an investment account over the long run. You can see how to do these calculations in my post on risk as the cost to invest.
Armed with the math, you can then make a decision that makes the most sense to you.
You may value getting out of debt faster. Or, you may be motivated by the larger balance in your retirement account.
It may come down to how high the interest rate is on your student loans. The higher your interest rate is, the more sense it makes to prioritize paying off that loan.
The point is that there are mathematical reasons to start investing even while paying off debt.
One final note about the math: your student loan interest rate is effectively locked in (unless you have a variable rate). On the other hand, your investment return rate is only a projection. That makes a difference.
It means that when you are in debt, you are guaranteed to be charged interest every month. In contrast, there are no guarantees you will make money when you invest. As you make your decisions, don’t ignore this key difference.
I prefer to allocate 75% to debt and 25% to investments.
When you consider these four main reasons, you may be convinced that it makes sense to invest even while paying off debt.
So, the obvious next question becomes: how much money should you put towards debt and how much should you invest?
The ratio that works for me is 75% towards debt and 25% towards investment goals. In other words, if I had $1,000 to allocate in my budget for debt and investments, I would use $750 for debt and $250 for investments.
I used this ratio when I had student loan debt and continue to use it to eliminate my HELOC debt.
You can read more about my primary goal of paying off HELOC debt in 2025 in my post on money and cheeseburgers:
This 75-25 ratio gives me the dual benefit of paying off my debt faster while also seeing my investment accounts grow over time. Once my debts are paid off, I will have already established the good habit of investing. In the meantime, I’m currently benefitting from compound interest and the math of investment returns.
The reason I lean more towards debt is because I don’t like the feeling of being weighed down by debt. It’s hard to feel completely free when you are carrying the burden of debt. That’s why I am currently prioritizing paying off HELOC debt.
That said, I’m not willing to entirely delay investing for the future. The 75-25 ratio is a good balance for me and helps me accomplish multiple goals.
75-25 has worked well for me. Having reached my 40s, I’m very happy that I did not neglect my investments entirely while dealing with debt.
Don’t agonize about finding the perfect ratio between debt and investments.
Whatever balance works for you, keep one important tip in mind:
Don’t agonize about finding the perfect balance between debt reduction and investing for the future.
Take a step back and think about it for a moment:
Paying off debt is great.
Investing for the future is also great.
If you’re doing both of these things in some fashion, you’re already making great money choices!
If you’re able to pay off debt and invest at the same time, you most likely have already created a successful Budget After Thinking. You have proven that you can stay disciplined enough to allocate funds to your Later Money goals each month.
You have already done the hardest part.
I consider this whole conversation of putting money towards debt or investments a win-win decision. There’s no reason to stress yourself out in search of the perfect balance. You’re already winning.
Find a balance between debt and investments that works for you and stick to it. You really can’t go wrong. Either way, you are making progress on your money goals.
Some day in the future your debt will be paid off.
The bottom line is, one way or the other, you are going to pay off your debt. That’s assuming you are a reasonably responsible person on a typical career trajectory.
If you have student loans, it might feel like you will never get out of debt. I assure you that you will.
To put it in perspective, if you are on a standard repayment plan, you’ll be debt-free in 10 years. For most students, that equates to being debt-free sometime in your 30s.
My guess is that by the time you retire, you won’t even remember how much debt you had or exactly when you paid it off. The only reason I remember when I paid off my debt is because I’ve been keeping a money journal since 2011.
On the other hand, towards the end of your career, you will very much be aware of how much money you have saved for retirement. You will be counting on that money to allow you to step away from full-time employment.
If you’ve figured out your magic retirement number, you’ll know how long you can sustain yourself on your retirement savings.
As hard as it is to do when you’re in debt, try and picture that older version of yourself who is nearing retirement. That older version of yourself will be very grateful that you had the discipline to start investing even while paying off debt.
That’s why I allocate 75% of my available funds to debt and 25% to investments. When my debt is gone, I’ll put the full 100% to investments.
So, what do you think?
Are you currently investing while paying off debt?
What other factors went into your decision besides the four main reasons discussed above?
In today’s post, I’ll show you my nine favorite money mindset books. These books share a common theme: they will inspire you to use money to build a life that you’re proud of.
One of the ways these books do that is by exploring the emotional side of money. In other words, they 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.
See, 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.
As a personal finance teacher, I can also share these lessons with my students.
And, that brings us to my favorite money mindset books.
Each one of these books has helped me develop my core life philosophies. Importantly, these books have helped me acquire and use money in alignment with those core beliefs.
Of course, when I review my Tiara Goals for Financial Freedom, I can feel the influence of each of these books on my most important values.
I recommend that you check out each of these money mindset books. You will learn not just how to acquire money, but also how to use that money to live your best life.
Let’s take a look at my favorites, in no particular order.
There’s a reason Rich Dad Poor Dad is the best selling personal finance book of all time. Its message is so powerful and simple that I’ve been recommending this money mindset book for years.
If you read Rich Dad Poor Dad, your entire money mindset will be changed. Kiyosaki brilliantly shares the stories he learned about money while growing up in Hawaii.
His Rich Dad was really his best friend’s dad, who was a very successful real estate investor and business owner. His Poor Dad was his actual dad, a highly educated and hardworking man who followed a traditional career path.
Using these two role models in his life, he makes a very compelling case that most of us go about life and money all wrong.
This is the money mindset book you want to start with.
Read Rich Dad Poor Dad. It’s the money mindset book that will light a fire under you like no other book I’ve read.
In The Psychology of Money, Housel writes about how people make decisions with their money in the real world. Housel agrees with one of our main themes at Think and Talk Money:
Money is emotional.
We can all be shown data and spreadsheets and understand what we should do. But, that’s usually not enough to change our behavior.
Housel is here to help with that. In The Psychology of Money, he takes core personal finance lessons and translates those lessons into regular life concepts.
Additionally, Housel teaches us the different ways people think about money. Then, he offers his perspective on how we can make better sense of money through our own life experiences.
Read The Psychology of Money. This money mindset book will help you understand the relationship between money and happiness.
Think and Grow Rich is another classic money mindset book that will shift your entire viewpoint on earning a living.
I first read this money mindset book in college when I learned my friend’s dad offered him $50 if he read this book.
$50 to read a book?
I needed to see what this book was all about.
At the time, I didn’t appreciate how much this money mindset book would change my life.
Originally published in 1937 and later updated, Think and Grow Rich, will convince you that you can be successful.
Initially, Hill studied innovators like Henry Ford and Thomas Edison. In the updated version, you’ll learn about modern figures like Bill Gates and Mary Kay Ash.
The Richest Man in Babylon is a third classic money mindset book originally published nearly 100 years ago.
This book is a quick read. It’s ideal for anyone still not convinced that they have to pay attention to their personal finances.
Clason wrote a simple collection of fables set in the ancient city of Babylon. Each fable illustrates the importance of a key money habit, like saving and investing.
Through his stories, you’ll see how you can get ahead in life by practicing strong financial habits.
It’s not enough to just be good at making money. You need to be good at keeping that money, too.
Read The Richest Man in Babylon. This money mindset book will introduce you to the building blocks of a healthy financial life.
Spoiler alert: when it comes to life and money, most of us are doing it all wrong. We chase money at the cost of our precious time.
First, you’ll learn to think of money as nothing more than a tool to build your ideal life. Next, you’ll learn how to specifically use that tool to achieve financial independence.
Read Your Money or Your Life. This money mindset book will motivate you to start valuing your time for what it’s really worth.
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.
One of my favorite money mindset books, The Millionaire Next Door, discusses this concept in detail.
To start, you need to adjust your perception of how real life millionaires behave.
You may be surprised to learn how most millionaires have made their fortunes. Also, you may be surprised to learn about their modest lifestyles.
Read The Millionaire Next Door. This money mindset book will help you if you’re struggling with comparing yourself to others.
No money mindset book has led to more passionate conversations with my friends and family members than Die with Zero.
First, Perkins encourages us to think about whether we are working too many hours. In Perkins’ view, the problem is that we are sacrificing the best years of our lives. Instead, we could be creating lifelong memories.
In that same vein, Perkins makes a strong case that many of us are saving too much for retirement.
Also, Perkins questions the conventional wisdom of waiting until we die to pass money onto our kids. Instead, he suggests helping our kids earlier in life when the money will be more meaningful.
Read Die With Zero. This money mindset book will motivate you to book that vacation you’ve been putting off.
In Millionaire Milestones, Dogen covers his journey from finance bro in New York in his 20s to present day life as a writer, investor, and husband and father.
What separates Millionaire Milestones from other personal finance books is that Dogen’s still on his journey.
He’s not a newbie, and he’s not preaching from the rocking chair on his patio.
Dogen’s presently raising kids. He’s focused on his website and his investments. Like you and me, he can relate to the present day challenges of personal finance because he’s still on his journey.
It is a must-read for anyone trying to figure out why and how to invest in the stock market.
If you’re a new investor and don’t understand how to invest in the stock market, Collins will set you on your way.
If you’re a seasoned investor unsure what to do in times of economic uncertainty, Collins is here to help.
Maybe you just need a bit of motivation or a reminder of how simple it is to build long-term wealth. There’s no one better than Collins to provide that pep talk.
Collins is sometimes described as “the Godfather of Financial Independence” in the personal finance community. He has a popular blog where you can read more about his story.
The short version is that he wrote a series of letters to his then teenage daughter about money, investing, and life. He wanted to impart the wisdom he had accumulated during his lifetime and help her avoid the mistakes he had made.
Those letters eventually led to his blog, which then led to his bestselling book, The Simple Path to Wealth, first released in 2015.
Since then, Collins has been a thought-leaders in the financial independence community. He has inspired thousands, if not millions, of people around the world to accumulate massive wealth by following a few simple rules.
What makes Collins so transformative is his ability to make seemingly complex topics (like investing) into easily digestible and actionable information.
If you have any intention of becoming financially independent and haven’t read The Simple Path to Wealth, now is the time to do so.
I’ve read his book cover-to-cover twice and constantly refer back to his lessons.
Each time I read his book, I’m reminded how simple it is to reach financial independence if I can just follow a few simple tips.
Read The Simple Path to Wealth. It is quite simply the best money mindset book on investing I’ve ever read.
What is your favorite money mindset book?
So, these are the money mindset books that I recommend most often.
Wherever you are on your personal finance journey, there is something for everyone in one of these books.
If you have read some of these money mindset books in the past, I suggest you read them again. As our lives and priorities change, so does our relationship with money.
You’ll get something new and different from reading these books again. Personally, I didn’t fully appreciate these money mindset books until I was years into my career and knew what it felt like to work for money.
Don’t be fooled. The easiest option can also be the best option.
You already know I’m a big fan of making things easy, especially investing.
And, there is no better example of making things easy than investing in target date funds.
Maybe we’ve been brainwashed into thinking that the harder something is, the better it is. Of course, there’s that often-repeated phrase, “If it were easy, everybody would do it.”
We’ve been programmed into thinking that “hard work” automatically means “better results.”
I certainly agree that hard work pays off when it comes to things like career and exercise.
As another example, baking cinnamon rolls comes to mind. With cinnamon rolls, the harder way is probably also the better way.
My daughter and I bake pre-made cinnamon rolls every week. We have fun with it and it’s quick and easy.
She loves how they taste, so that’s all that really matters. But, they don’t come close to tasting as good as homemade cinnamon rolls, which are certainly harder to make.
So in the context of cinnamon rolls, I think “harder” does mean “better.”
On the other hand, I don’t agree that investing has to be hard. I don’t believe that just because something is easy, it must not be that good.
And, that brings us to target date funds.
There’s nothing easier than investing in target date funds.
My wife and I have been investing in target date funds for years. Target date funds have been both easy and effective for us.
That’s important because we’re also at the stage in our lives where we are trying to make things easier, not harder.
The idea behind target date funds is that your portfolio automatically rebalances as you move closer to your predetermined life event, like retirement or your kid’s college start date.
That means over time, your target date fund will gradually become more conservative to protect all the money you had saved and earned over the years. It typically does so by reducing exposure to stocks and increasing exposure to safer assets, like bonds.
You do not have to do a thing.
It simply cannot get any easier than this.
Today, we’ll take a closer look at how target date funds work. The goal is to help you make an informed decision on whether they are the best option for your situation.
Before we jump in, if you need a refresher on some key investment terminology, check out my post on the language of investing:
Target date funds are a form of mutual fund. When you invest in target date funds, you are essentially getting a complete portfolio in a single fund.
Target date funds are typically comprised of broad stock index funds and bond index funds.
That is one of the keys to remember about target date funds. They automatically provide investors with strong diversification and optimal asset allocation based on their chosen time horizon.
Target date funds are ideal for long-term investment goals. They are designed to help you manage risk as you move closer to your pre-determined goal.
Typically, target date funds invest more heavily in stocks in the early years in an effort to earn greater returns. As you move closer to your pre-determined goal, the fund will automatically shift to buying safer assets, like bonds.
What types of investments are typically in target date funds?
Most target date funds are made up of index funds. That means that when you buy a target date fund, you are getting exposure to a wide variety of stocks and bonds through index funds.
An index fund is a type of mutual fund that seeks to track the returns of a market index, like the S&P 500 Index.
An index mutual fund or ETF (exchange-traded fund) tracks the performance of a specific market benchmark—or “index,” like the popular S&P 500 Index—as closely as possible. That’s why you may hear people refer to indexing as a “passive” investment strategy.
Instead of hand-selecting which stocks or bonds the fund will hold, the fund’s manager buys all (or a representative sample) of the stocks or bonds in the index it tracks.
It’s very hard, even for professionals, to beat the returns of the S&P 500. Historically, the S&P 500 has averaged an annual return of 10%.
I Invest in target date funds because they give me a great chance to match those historical average returns without any effort on my part.
What are the advantages of investing in target date funds?
Target date funds share the same benefits as investing in index funds. That’s because, as we just discussed, most target date funds are comprised of index funds.
In addition to the benefits of index funds, target date funds offer one additional major benefit we’ll discuss below.
In addition to sharing the 7 benefits of index funds, target date funds offer one additional, major benefit:
automatic rebalancing
Importantly, target date funds automatically rebalance to continuously maintain your optimal mix of stocks and bonds.
That means as time goes on, you don’t have to worry about rebalancing on your own. That’s one less stressor on your plate.
What do I mean by rebalancing?
Let’s say an investor’s optimal asset allocation is 50% stocks and 50% bonds. After a year of impressive stock market growth, this investor’s portfolio now consists of 60% stocks and 40% bonds. That’s because his stocks increased in value at a greater rate than his bonds.
As a result, he’s now weighted more heavily in stocks than his optimal asset allocation. To rebalance his portfolio, he could take a variety of steps. He could sell some stocks or purchase more bonds to get back to where he wants to be.
With target date funds, he would not have to worry about this situation. That’s because target date funds automatically rebalance for you.
That’s a big load off an investor’s plate. It’s the main reason why I like investing in target date funds.
Target date fund or build your own?
After you open an investment account, you can select a combination of index funds on your own or choose a target date fund.
There’s nothing wrong with buying index funds on your own instead of through a target date fund.
You will actually save money on fees if you go that route, but not very much.
Just remember to rebalance your portfolio from time-to-time to stay within your preferred asset allocation.
If you don’t want that added responsibility, you can invest in a target date fund that automatically chooses the index funds for you.
Then, the target date fund will automatically rebalance your portfolio over time to maintain an optimal balance of stocks and bonds.
As you saw above, you will pay slightly more in fees for the added convenience. To me, that extra .04% in fees is absolutely worth it.
In the end, both options are good ones.
Investing with target date funds is the easiest choice.
How can you invest in a target date fund?
Most employer-sponsored retirement plans, like 401(k) plans, now offer target date funds. In fact, target date funds are usually the default investment option for new plan participants.
You can also invest in a target date fund outside of your employer-sponsored plan. Most major investment companies offer target date funds in a variety of account types.
In addition to retirement accounts and traditional brokerage accounts, 529 college savings plan providers usually offer target date funds based on when your child will start college.
If you’re curious about my favorite investment account types, you can read more here:
Regardless of the account type, the process for selecting the right target date fund is the same.
Generally, you’ll see various target date fund options based on your personal time horizon.
For example, if you are currently 25-years-old and plan to retire in 40 years, you would select the target date fund corresponding to 2065. This fund will automatically rebalance as your career progresses towards that retirement date.
Typically, there are target date funds offered in 5-year intervals. Choose the one closest to your preferred retirement year, even if there isn’t one that matches your exact year.
The same concept applies to a 529 college savings plan. If you have a newborn, like I do, you would select the plan that corresponds with your child starting college around 2043.
After you make this one decision, there’s nothing more to do it.
Your focus should be on adding as much money to that account as possible without worrying about things like rebalancing.
I personally invest in target date funds.
My wife and I invest in multiple target date funds. We have various target date funds for our retirement savings and for our kids’ college education.
At this stage in our lives, we’ve placed a premium on doing things the easy way.
We have full-time jobs as attorneys, manage our own rental properties, and have three kids at home. The last thing we need is to add more complication to our lives.
Our personal accounts are with Vanguard, which has long been known as an investor-friendly company that prioritizes low fees.
Why target date funds?
Just because something is easy doesn’t make it wrong.
Investing in target date funds is as easy as it gets. By taking the easy option, you can have exposure to a broad range of index funds that automatically rebalances over time.
Are you doing things the easy way?
If you’re a busy professional like I am, don’t sleep on target date funds.
You’ll always have people that look down upon target date funds as too basic. Ignore them. Let them stress about picking the next hot stock, rebalancing, and timing the market.
So, are you doing things the easy way? Are you a target date fund investor?
Do you agree that target date funds are an easy and effective way to invest for the long term?
Has anyone ever looked down on you for investing in target date funds?
More important, than my money, for my sanity, there’s no beating index funds.
In today’s post, I want to highlight 7 things I love about index funds.
My 7 reasons range from the low costs and automatic diversification to the minimal mental effort required for long-term wealth.
If you’ve been a consistent reader of the blog, you know that money is as much emotional as it is rational. I don’t want to be worried about my money any more than you do.
That’s why the reasons I love index funds take into account both the numbers and the emotions of investing.
And, when I say investing is actually the easy part, I’m talking mostly about investing in index funds.
You don’t need an MBA or a financial background. You don’t need to read the Wall Street Journal.
All you need to do is consistently fuel your investment account and to let compound interest work its magic.
Oh wait, one more thing:
You also need to read Think and Talk Money. I post three times every week.
Oh, and tell your friends about Think and Talk Money!
2. No wasted mental energy
It goes without saying that most professionals are busy people. On top of working our day jobs, we’re also doing our best to stay healthy, be good family members, and have some semblance of a social life.
Some of us even have side hustles that occupy our time and mental energy.
The last thing we need is another stressor in our lives, like actively trading stocks.
I invest in index funds to take this stressor out of my life.
Yes, I could pay someone a lot of money to manage my money for me.
Or, I could invest in index funds and rest comfortably knowing that I’m going to be in great financial shape down the road.
Why am I confident I’m going to be in great financial shape?
For three main reasons, discussed next.
3. Low fees
Because index fund are passively managed, the fees are significantly lower than actively managed mutual funds.
My favorite index fund is Vanguard’s popular fund called the Vanguard Total Stock Market Index Fund (VTSAX). This fund currently charges .04%, which is just about the lowest fee you will ever see.
Compare that to the 1% fee commonly charged by investment advisors. Also, don’t forget it’s very difficult for even the professionals to beat the returns consistently generated by the S&P 500.
If you don’t think that difference in fees matters, check out my post on what a 1% fee really costs you:
While I can’t control what returns I may earn, I can control the fees I pay.
I’d rather pay .04% than 1%.
That’s especially true when there’s no guarantee that an advisor can perform better than the returns I earn through index funds.
4. Automatic diversification
By investing in an index fund, like an S&P 500 index fund or a total stock market index fund, my stock portfolio is by definition diversified.
For example, when I invest in an S&P 500 index fund, I essentially own a piece of 500 large companies.
Some companies may go up in value, others may go down. I’ll never know which ones are going to make money or lose money. By investing in an S&P 500 index fund, it doesn’t matter. I’m covered either way.
That’s the point of diversification: smooth out the ride so I’m less susceptible to the fortunes of one particular company.
As another example, I also invest in Vanguard’s total stock market index fund (VTSAX). This fund offers exposure to nearly the entire U.S. stock market, which consists of 3,598 companies.
By investing in an index fund that tracks the S&P 500, like I do in my 401(k), I have a pretty good chance of earning consistent returns in the long run.
Sure, there may be ups and downs.
But, check this out:
Since 1996, the S&P 500 has ended the year in positive territory 23 times and negative territory only 7 times.
In other words, the S&P 500 has generated positive returns three times more frequently than it generates negative returns.
And even with those 7 negative years, with the exception of 2000-2002, the S&P 500 returned to positive territory the following year.
What this all means is that while the S&P 500 will drop occasionally, the down periods are historically short-lived.
Because of this historical consistency, index funds give me the best shot at predictability.
Note that predictable returns does not mean guaranteed returns. There are no guarantees in the stock market. That’s why my preference is predictability.
I’m very happy with consistent returns and a smoother ride.
6. I don’t have stock FOMO
Depending on the index fund you choose, you may own pieces of a handful of companies or as many as 3,598 companies.
I invest in S&P 500 index funds and total stock market funds. That means I own pieces of lots of companies.
It also means I never have stock FOMO.
You know what stock FOMO is, right?
Stock FOMO is when you find yourself in a conversation talking about something fun like your favorite new show. Then out of nowhere, someone volunteers the hot stock he bought that’s up 20%.
If you have stock FOMO, you feel like you’re missing out by not owning that stock. You think to yourself, “Oh man, that guy’s going to be so rich and I missed the boat!”
You might even run back to your desk so you can buy that hot stock, not realizing that you’ve probably already missed the train.
Stock FOMO can cause a lot of stress. I don’t want that stress.
So, I invest in index funds.
When a stock jumps 20%, I feel good because I already own every company in the U.S. stock market.
No stock FOMO here.
7. Good enough for Buffett, good enough for me
In 2013, Buffett famously instructed that after he dies, his wife’s cash should be split 10% in short-term government bonds and “90% in a very low-cost S&P 500 index fund.”
Good enough for Buffett, good enough for me.
It’s not just Buffett, though. One of my favorite authors on investing, J.L. Collins, wrote about the advantages of investing in a total stock market index fund in his seminal book, The Simple Path to Wealth.
In fact, Collins makes a compelling argument that the Vanguard Total Stock Market Index Fund (VTSAX) we discussed above may be the only stock fund that you’ll ever need.
Buffett and Collins are smart guys. Taking advice from smart guys seems like a good idea to me.
We recently talked about that to start investing, there are really only two main steps:
Step 1: Open an account.
Step 2: Pick the investments for inside that account.
Today, we’ll discuss my four favorite investment accounts. These accounts are all tax-advantaged and match my evolving priorities, like saving for retirement and paying for college.
To help explain why you may want different investment accounts, I’ll show you how I went from a single account in my 20s to 14 investment accounts today.
Even if you’re just starting out in your career or new to investing, it’s likely that you’ll eventually have multiple types of investment accounts.
You’ll almost certainly have different goals and priorities as life moves on.
Before you do anything else, you’ll need to decide what type of investment account matches your investment goals. As we’ll see, investing is about more than just saving for retirement.
By understanding the type of accounts to use that match your evolving priorities, you’ll have a better chance of reaching your goals.
Let’s begin by looking at how my investment accounts have changed from the time I started investing in my 20s to the present day.
My investment accounts in my 20s.
When I started working in my 20s, I had one investment account:
My 401(k).
In my 20s, I was just starting my career and was proud to be investing in a 401(k). Back then, tracking my net worth was pretty easy.
Part of the reason I only had one investment account was because I didn’t really know there were other types of accounts.
It wasn’t until I prioritized learning about personal finance that I realized what else was out there.
Quick side note: during law school, I did have a traditional brokerage account with a financial advisor. But, I closed that account when I learned we had set $93,000 on fire.
There were two other main reasons I only had one investment account back then.
First, I had student loan debt to pay off. I didn’t exactly have the means to invest in other accounts.
If you’re in a similar boat and have student loan debt, be sure to check out my post:
Second, in addition to student loan debt, I also had credit card debt.
It was only after a year of working and seeing my credit card debt grow each month that I decided to do something about it. In a lot of ways, my experience with credit card debt is what led me to start Think and Talk Money.
If you’re likewise dealing with credit card debt, check out my post:
As time went on, a few things happened that led me to opening more investment accounts.
First, I educated myself and learned that there were other investment accounts I could take advantage of.
Then, as my career progressed, I started making more money. Because I had paid off my student loan debt and credit card debt, I had money leftover to invest.
Finally, I got married and had kids. That meant my investment goals evolved.
To match my evolving goals, it was beneficial to open different types of investment accounts.
My investment accounts at age 40.
Fast forward about 15 years, and my family’s balance sheet looks a little bit different than it did in my 20s.
Between my wife, our three kids, and me, we now have 14 investment accounts:
The point in sharing my various account types with you is to give you an idea of how your investment priorities will change over time.
The most savvy investors know how to match their investment accounts to those changing priorities.
With this context in mind, let’s now take a closer look at my four favorite investment account types that help me maximize tax benefits.
With these tax-advantaged accounts, I have a better chance of reaching financial freedom.
Favorite Account No. 1: 401(k)
A 401(k) is likely the first investment account most people will have.
401(k) plans are employer-sponsored retirement plans. Employees can elect to participate in their company’s 401(k) plan and choose from a variety of investment options, usually mutual funds and index funds.
There are four major reasons to invest in a 401(k) plan.
1. You can invest with pre-tax dollars.
That means more of your money gets invested rather than going towards your taxes. When you have more money invested, you can earn more in returns.
2. Your contributions are automatic.
Once enrolled, your employer will automatically deduct money from your paycheck and invest it directly into your investment selections.
Because the money never hits your checking account, you won’t be tempted to spend it on things you don’t really care about. You’ll be used to living without this money because it never hits your account.
You also don’t have to worry about consistently making transfers into your account because it will happen automatically.
3. Your earnings grow tax-free.
In addition to not being taxed on your contributions, you also won’t be taxed on your earnings. That’s a double tax advantage that acts to magnify the power of compound interest. You will be taxed when you make withdrawals.
4. Your employer may offer a match.
Many employers today offer a match to incentive employees to contribute to their 401(k) plans. To qualify for the match, you must be participating in your company’s plan and make contributions yourself. The match is usually a percentage of your overall salary, usually between 3-6%.
For example, if you contribute 5% of your salary, your company may match you with an additional 5% contribution.
If your company offers a match, it’s a no-brainer to take advantage of that match. It’s often described as “free money.”
I don’t like the term “free money” because it implies that you have not earned that money as an employee for your company. I prefer to refer to the company match as a bonus you’ve rightfully earned.
The key is to accept that earned bonus by ensuring you are meeting the minimum requirements to qualify.
401(k) Contribution Limits and Penalties
Keep in mind there are annual limits to how much you can contribute to your 401(k) plan. The IRS regularly increases the contribution limits. In 2025, you may contribute up to $23,500.
If you are between the ages of 50 and 59, or 64 or older, you may contribute an extra $7,500 per year. If you are between the ages of 60 and 63, you may be eligible to contribute up to $11,250.
Also, remember that 401(k) plans are intended for retirement savings. To discourage early withdrawals, a 10% penalty on top of regular income taxes apply to people under the age of 59 ½.
Because of these contribution limits, early withdrawal penalties, or other strategic reasons, you may benefit from another type of investment account.
Let’s look at our next popular type of investment account called a Roth IRA.
Favorite Account No. 2: Roth IRA.
A Roth IRA is another type of retirement investment account that also provides double tax benefits.
Unlike a 401(k), you make after-tax contributions to your Roth IRA. Your earnings then grow-tax free, and your withdrawals are tax-free.
Another major advantage is that you can withdraw your contributions tax-free and penalty-free at any time.
There are penalties if you make withdrawals from your earnings before the age of 59 1/2.
Roth IRA Contribution and Income Limits.
Because of the amazing tax advantages associated with Roth IRAs, there are income limits that apply. In 2025, individuals must have a Modified Adjusted Gross Income (MAGI) of less than $150,000, and joint filers less than $236,000.
On top of the income limits, there are annual contribution limits, as well. In 2025, the contribution limits are $7,000 if you’re under age 50, and $8,000 if you’re over age 50.
Why think about opening a Roth IRA?
For many investors, it’s not a bad idea to consider opening a Roth IRA in addition to your 401(k).
For starters, we mentioned the contribution limits to each account. You may need more money in retirement than just what your 401(k) plan will provide.
For another reason, 401(k) plans and Roth IRAs are treated differently from a tax perspective. It may be wise to have some tax-free income in retirement from a Roth IRA to go along with your taxable income from a 401(k).
One of the trade-offs to having an HSA is that you’ll need to enroll in a high deductible insurance plan. You are still covered by insurance, but you’ll pay more out-of-pocket each year for medical treatment.
But, if you’re relatively healthy and/or have the means to pay for your present day medical care, you stand to benefit immensely down the road.
That’s because you can choose to invest your HSA contributions just like you might invest in a 401(k) plan.
If you do so, your contributions, earnings, and withdrawals are all tax-free if you follow some basic rules.
Because of these triple tax benefits, HSAs are my absolute favorite investment account.
Remember, 401(k) plans and Roth IRAs only offer double tax benefits. HSAs are even better because they offer triple tax benefits.
What are the key rules to follow with HSAs?
To get the triple tax benefits, you need to follow some basic rules.
One of the key rules is that you must use your withdrawals for eligible medical expenses. The good news is that “eligible medical expenses” is a very broadly defined term.
You can take a look here for a comprehensive list of eligible medical expenses. Some examples include prescriptions, contact lenses, and flu shots.
Another key rule to know is that there are no time limits for when you have to use your HSA funds. As long as you keep your receipts, you can reimburse yourself for eligible medical expenses years, or even decades, later.
If you put these two rules together, you’ll see why HSAs are so beneficial.
As long as you have the means to pay out-of-pocket for your current medical expenses, you can allow your pre-tax HSA investments to grow tax free for years.
That means you can take advantage of the magic of compound interest for decades, tax-free.
Then, years later, you can withdraw those funds to reimburse yourself for eligible medical expenses you paid for years prior.
HSA contribution limits.
Like 401(k) plans and Roth IRAs, there are annual contribution limits for HSAs.
In 2025, the contribution limit for an individual with self-coverage is $4,300 and $8,550 for family coverage.
Favorite Account No. 4: 529 College Savings Plan
529 college savings plans are state-sponsored, tax-advantaged investment accounts.
While there are certainly other ways to save for college, 529 plans are hard to beat because they typically offer triple tax benefits.
What do you think of my 4 favorite investment accounts?
There are certainly others, but these are my 4 favorite investment account types. Each comes with tax advantages that will help me reach financial freedom sooner.
As your life and priorities change, you may also benefit from opening multiple investment account types.
So, what do you think of my four favorite investment accounts?
When you first hear that retirement number of $1.26M, does that sound impossibly high? Does it sound way too low?
Or, maybe your reaction was like what my five-year-old says when questioned about who made the mess:
“No clue.”
I think it’s safe to say that, at some point, most professionals accept that they need to save for retirement. Hopefully, you are in that group and have been investing early and often.
However, I suspect most people have never thought about how much they’ll actually need to retire comfortably. That’s understandable since retirement can seem like such a far-off goal.
Still, it’s a good idea to start thinking about how much you’ll need to retire comfortably. We’ll refer to that amount as your magic retirement number.
That way, you can start taking the necessary steps today to reach that magic retirement number.
Today, we’ll learn how to calculate your magic retirement number.
So, how do I figure out my magic retirement number?
To answer that question, let’s turn to the “4% Rule.”
The 4% Rule is one of the most popular ways in the personal finance community to ballpark how much money you’ll need in retirement.
Of course, your personal answer depends on a variety of factors, like when you want to retire and how much you expect to spend in retirement.
Your answer may also change after reading a book like Die with Zero, where author Bill Perkins brilliantly argues that most of us are actually saving too much for retirement.
In any event, the 4% Rule can give you a good idea of where you currently are. Then, you can decide what changes you may want to make to ensure you hit your magic number.
Let’s dive in.
What is the 4% Rule?
The 4% Rule suggests that you can safely withdraw 4% of your investments each year, adjusted for inflation, and expect your money to last for 30 years.
Without getting too technical, the 4% Rule is based off of research looking at historical investment gains, inflation, and other variables.
For simplicity, let’s say you have $1 million in your portfolio. According to the 4% Rule, you can safely withdraw $40,000 per year (4% of your portfolio) and not run out of money for 30 years.
Using the magic retirement number of $1.26 million, you could safely withdraw $50,400 and not run out of money for 30 years.
These simple examples show how you can take your current retirement savings and project how much you can safely spend so your money lasts 30 years.
The 4% Rule also works in reverse.
By that, I mean you can use the 4% Rule to ballpark how much money you’ll need in retirement to maintain your current lifestyle. We’ll look at exactly how to do that below.
In either case, the 4% Rule is an effective and easy way to start thinking about a magic retirement number.
Use the 4% Rule as an easy projection tool, not an actual withdrawal rate.
I view the 4% Rule as a tool to ballpark your magic number, as opposed to a strict withdrawal rate once you actually retire.
I point that out because there’s some debate in the personal finance community as to whether 4% is still a safe withdrawal rate in today’s economic environment.
For our purposes, I’m not too concerned about that debate.
Once you get to retirement, your actual withdrawal rate may be higher or lower than 4% depending on a variety of factors.
Regardless, the 4% Rule is a great way to start thinking about how much you’ll need in retirement.
So, let’s practice using the 4% Rule.
Our goal is to help you project a magic retirement number based on your current spending habits.
How to use the 4% Rule based on your current savings.
We mentioned above that the 4% Rule works two ways.
First, you can take your current retirement savings and calculate how much you can safely spend so your money lasts 30 years.
If you have $1 million invested, the 4% Rule says you can safely spend $40,000 annually and expect your money to last 30 years.
Current Savings x 4% (.04) = Annual Retirement Spending
$1,000,000 x .04 =$40,000.00
That’s a useful calculation, especially if you’re nearing retirement age and just want to know how much you can spend each year.
But, what if you don’t exactly know when you want to retire?
Your main priority may not be to retire by a certain age. Instead, your aim may be to retire with enough money to maintain your current lifestyle. You’re determined to continue working for as long as it takes.
To calculate that magic retirement number, you can once again use the 4% Rule.
How to use the 4% Rule based on your current spending habits.
The second way to use the 4% Rule is to start with your current spending habits to project how much money you’ll need to maintain that level of spending in retirement.
This may seem obvious, but to do so, you’ll first need to know your current spending habits.
If you don’t know how much you’re currently spending on a monthly basis, take a look at our budgeting series here.
The good news is that once you’ve created a Budget After Thinking, this next part is easy.
To calculate your magic retirement number based on current spending, simply follow these steps:
Add up the amount your’re spending each month in Now Money and Life Money.
Take that number and multiply it by 12 to see how much your lifestyle costs per year.
Divide that yearly spending by .04
That’s your magic retirement number.
Current Spending / 4% (.04) = Magic Retirement Number
One note related to your Budget After Thinking: for this exercise, ignore your Later Money (with one caveat). Only use your Now Money and Life Money totals.
The reason is that since you’re retiring, you likely won’t be focused on saving for future goals anymore. Presumably, you’ve already reached your goals. If you include your Later Money in your monthly spending, you’re magic retirement number will be artificially inflated.
The caveat is for those people pursuing FIPE. In that case, you should include your Later Money in your calculations. That way, you have a buffer in place to cover you over a longer retirement period.
Now, let’s use some real numbers to help illustrate how to use the 4% Rule to project your magic retirement number.
Here’s how to use the 4% Rule to forecast your magic retirement number.
Let’s look at an example using the 4% Rule to forecast your magic retirement number.
Let’s say that you reviewed your Budget After Thinking and learned that you spend $6,000 per month in Now Money and $4,000 per month in Life Money.
Combined, that means your lifestyle costs you $10,000 per month, or $120,000 per year.
To figure out how much you would need in investments to cover your current lifestyle for 30 years, divide $120,000 by .04.
Current Spending / 4% (.04) = Magic Retirement Number
$120,000 / .04 =$3,000,000.00.
That means to maintain your current lifestyle of spending $120,000 per year for 30 years, you would need $3 million in investments.
In other words, your magic retirement number is $3 million.
If that number seems impossibly high to you, you now know to make some adjustments to your current spending.
Let’s look at how your magic number changes with some tweaks to your spending habits.
Assume you’re open to cutting some expenses in retirement to reduce your magic number. That might mean spending less money on transportation, meals out, your wardrobe, and whatever else.
Let’s assume that by making those cuts, you shaved $1,000 off your Now Money expenses.
As a result, you only need $9,000 to cover your retirement lifestyle each month. That’s $108,000 per year.
Using the 4% Rule, your magic retirement number has now shrunk to $2.7 million.
$108,000 / .04 =$2,700,000.00.
That means that by reducing your spending by $1,000 per month, you have reduced your magic retirement number by $300,000.
It also means you have just sped up your timeline to retirement by reducing your lifestyle expenses.
A surprising note about people’s magic retirement number in 2025.
At the beginning of this post, we learned that according to a recent study by Northwestern Mutual, Americans expect they will need $1.26 million to retire comfortably.
What’s most interesting to me is that this year’s magic retirement number dropped from $1.46 million reported in the same study just last year.
Think about that for a minute.
Because of inflation (and now tariffs), things are only getting more expensive year over year. If anything, you would think that people would say they need more money to retire comfortably in today’s enviornment.
Except, the study found the opposite happened. Instead of wanting more money to pay for all these more expensive things, people think they can retire comfortably on nearly 14% less money.
How does that make any sense?
For starters, I doubt many of these respondents used the 4% Rule to project their magic retirement number based on their current spending habits.
If they had, they would have seen that their spending has likely gone up this year, unless they’ve made big cutbacks. Then, they would have seen that their magic retirement number also went up to account for those higher expenses.
Besides ignoring the 4% Rule, my other takeaway relates to one of our major themes at Think and Talk Money:
Money is emotional.
If our money thoughts were strictly rational, there would be no way that someone could say he needs less money to survive when everything is more expensive.
The reality is that our decisions don’t always make rational sense.
And, that’s OK.
Recognizing that our money decisions are not always rational, what can we do about it?
We can think and talk about money.
Talking to our people about our money decisions, like we would anything else, is the best way to find a balance between our emotional side and our rational side.
So, what is your magic retirement number?
Now you know how to use the 4% Rule to calculate your magic retirement number.
Be sure to use the 4% Rule as a tool to help you think about making adjustments to your current spending or savings habits.
Knowing how to use the 4% Rule, does a magic number of $1.26 million seem too high, too low, or maybe just right?
By now, I hope I’ve begun to convince you that investing is actually the easy part. The more challenging part is consistently coming up with money for your investments.
If you’ve been worried about the risks associated with investing, we covered that, too. At the end of the day, reasonable risk is the cost to invest.
Because of inflation, the reality is that it’s more risky to not invest than it is to invest. Take a look at what happened to our pretend friend Terry who chose to play it safe.
At a bare minimum, investing is a way to play offense and defense. Investing to do fun things later on is playing offense. Investing to counteract inflation is playing defense.
We’ve also previously covered three great ways to minimize investment risk:
Invest early and often. Take advantage of the power of compound interest by starting early and being consistent. Over time, compound interest will lead to wealth.
Minimize fees. One of the few things we can control when we invest is what we choose to pay in fees. Keep fees to a minimum to maximize your long term gains. Even a fee of only 1% can do significant damage to your future prosperity.
Learn the language. Investing can seem intimidating when you hear phrases like “asset allocation” and “diversification.” Once you learn the language, you’ll realize that practicing asset allocation and diversification is actually not that hard.
With this backdrop in mind, there should be no more excuses for why you can’t start investing.
So today, we’re going to talk about the two main steps to get started investing.
How to start investing in 2 steps.
If you’ve never invested before, are you nervous about how complicated the process is going to be?
Don’t be.
To start investing, there are really only two main steps involved.
Step 1: Open an account.
Step 2: Pick the investments for inside that account.
There really isn’t much more to it.
But, don’t forget to complete both steps.
Step 1: Open an account.
The first step to investing is simply to open an account.
There are endless investment companies available where you can easily open an account online. Some of the more popular companies are Vanguard, Fidelity, and Charles Schwab.
I personally use Vanguard.
Once you’ve chosen an investment company, you’ll next select the type of investment account to open.
There are two main types of investment accounts and some other popular accounts I’ll highlight below.
Before you do anything else, you’ll need to decide what type of account matches your investment goals. Once you know the type of account that best suits you, you will need to open that account before moving on to step 2.
You don’t need a financial advisor or a broker to open an account. Like most things these days, as I mentioned above, you can easily open an account on-line by yourself.
In fact, most of us begin investing in employer-sponsored retirement accounts, like 401(k) plans. When you start a new job, your HR department will provide you detailed instructions on how to enroll.
So, what are the main types of investment accounts to choose from?
Tax-advantaged retirement accounts.
The most common tax-advantaged retirement accounts include 401(k) plans, Roth IRAs, and traditional IRAs. “IRA” stands for Individual Retirement Account.
We’ll soon take a deep dive into the advantages and disadvantages of each type of account.
As a whole, the primary difference between tax-advantaged retirement accounts and traditional brokerage accounts relates to taxes.
The government wants us to save for retirement. To encourage us to do so, retirement accounts come with major tax advantages. That’s why most investors begin investing in these types of retirement accounts.
Traditional brokerage accounts do not have the same tax advantages.
In addition, tax-advantaged retirement accounts, like a 401(k) plan, are commonly offered by employers. That makes it easy for employees to invest.
You may be wondering: with these great tax advantages, why would someone open a traditional brokerage account?
Let’s take a look.
Traditional brokerage (non-retirement) accounts.
There are two main reasons to open a traditional brokerage account.
First, tax-advantaged retirement accounts have caps in place for how much someone can invest per year.
While the government is happy to encourage investing for retirement, its generosity only goes so far. Uncle Sam still depends on tax revenue and can’t afford to give us an unlimited free pass.
Once you reach those caps, and still have money that you want to invest, you’ll need to open a traditional brokerage account.
Most investors try to max out their retirement accounts to receive the full tax advantages before moving on to investing in traditional brokerage accounts.
The second reason is that tax-advantaged retirement accounts are intended for long-term retirement planning.
If you withdraw from your account before reaching a certain age, typically 59 1/2, you’ll be subject to penalties and taxes.
Of course, Think and Talk Money readers know that there are other reasons to save and invest besides retirement.
You may be investing to buy a home in 10 years. Maybe you have reached financial independence and rely on your investment income to fund your life.
Whatever the case, traditional brokerage accounts provide flexibility for people to withdraw their money when they want to.
Other types of investment accounts.
Besides tax-advantaged retirement accounts and traditional brokerage accounts, there are two other popular investment accounts to highlight.
529 Savings Plans for College: 529 college savings plans are state-sponsored, tax-advantaged investment accounts. While there are certainly other ways to save for college, 529 plans are hard to beat because they typically offer triple tax benefits.
Health Savings Accounts (HSA): An HSA is a tax-advantaged account that you can use to pay for eligible medical expenses.
These accounts are typically linked to employer-sponsored health insurance plans. You can choose to invest your HSA contributions, similar to how you might invest in a 401(k) plan.
Like with 529 plans, the reason to invest in an HSA is to receive triple tax benefits that are hard to beat. Your contributions, earnings, and withdrawals are all tax-free if you follow some basic rules.
We’ll explore this further in a future post.
You are not limited to just one type of account.
To recap, the first step to investing is simply to open an account.
There are two main types of investment accounts to consider: tax-advantaged retirement accounts and traditional brokerage accounts.
There are also other investment accounts intended to help with specific goals, like saving for college or medical expenses.
For almost all investors, it makes sense to first open a tax-advantaged retirement account before considering the other types of accounts. For many of us, that means participating in our employer-sponsored 401(k) plan.
Keep in mind, you are not limited to just one investment account. Many investors have various accounts for different goals. My wife and I have multiple retirement accounts, 529 plans for each of our kids, an HSA, and others.
Once you’ve opened an account, you’re ready to move onto step 2. The next step is choose what investments you want inside that account.
Step 2: Pick the investments for inside that account.
Now that you have an account opened up, the next step is to pick what investments you want inside that account. By that, I mean selecting what mutual funds, index funds, individual stocks, or bonds you want to buy.
Each major investment company offers a variety of investments to choose from, including target retirement date funds that are as easy as it gets.
Picture the account you just opened as a bucket. Now, you need to fill that bucket with something.
What you fill that bucket with are your investments.
This second step is crucial. It’s also easily overlooked.
More often than you might think, when people new to investing complete step 1 by opening an account, they mistakenly believe that their job is done. That’s not the case.
When you first open an account (other than employer-sponsored plans), you will need to fund that account with a minimum required deposit.
The key to remember is that once you make that transfer, your money will sit in your new investment account, not earning much or any interest, until you choose how to invest it.
Until you complete this second step, your money sits in your account and you don’t reap the benefits of investing.
As a side note, you’ll likely need to complete this second step every time you make a transfer into your investment account. You can link your checking account to your new investment account to make transfers easier.
One other side note, I mentioned that employer-sponsored plans, like 401(k) plans, operate a little differently. That’s because when you first enroll in your 401(k) plan, you will make your investment selections right then and there.
Because your contributions are automatically deducted from your paycheck, they will automatically be invested in your preselected investment choices.
Don’t laugh about people forgetting to choose their investments.
When I first taught my financial wellness course to law students, I thoughtlessly made a joke about people who forget to complete this second step. At the time, it seemed obvious to me that once an account was opened, the next step was to select the investments.
Boy, was I wrong.
In that first class, a student raised her hand and said she had made that mistake before. Her money sat in her investment account, without earning any interest, for more than a year before she realized her mistake.
She was not laughing at my joke.
Nor was she the only person in my class who had made that mistake. It turned out nobody was really laughing.
Since that first class, I’ve realized that it’s actually a common mistake.
That’s why I now emphasize there are two steps to start investing. The first step is to open an account. The second step is to pick investments for that account.
My HSA had been with one provider for years before that provider changed. My money was automatically transferred over to the new provider.
However, somehow I missed the announcement that my money would not be invested until I chose the investments for that new account.
It took me about six months of earning no interest to realize what was going on.
That’s what I get for making a joke about step 2!
How do I pick the right investments to fill my account?
We recently discussed the importance of learning the language of investing. In that post, we talked about stocks, bonds, mutual funds, and index funds. When you’re selecting investments, you’re choosing between these types of options.
We also talked about the importance of asset allocation and diversification. These terms make investing seem more complicated than it really is.
Ultimately, you’ll need to do your homework or pay an advisor to do it for you. Before you make your decision, be sure to check out my previous posts on investing so you have a good understanding of your options.
Personally, I invest in index funds to keep my costs down and to ensure a certain level of diversification. If I don’t have the option to invest in a total stock market index fund, I invest in an S&P 500 index fund.
I also invest in target date retirement funds since these funds automatically rebalance for me as time goes on. It doesn’t get any easier than this.
Now you know how easy it is to start investing.
If you were ever hesitant to start investing in the past, now you should be feeling more confident in how to get the process started.
There are really only two steps:
Open an account.
Pick investments for that account.
It doesn’t have to be any more complicated than that.
As always, leave a comment below if I can answer any questions as you get started.
I pre-ordered my copy of Millionaire Milestones and read it cover-to-cover in three days. You may have noticed my posts this week have been slightly delayed. Now, you know why.
You can find a breakdown of my favorite money mindset books here. I recently added Millionaire Milestonesto my list. It was that good.
If you’re serious about becoming financially independent, I highly recommend you read Millionaire Milestones.
Who is Sam Dogen aka The Financial Samurai?
Dogen has been a leader in the personal finance space since he launched Financial Samurai in 2009. Since then, he’s shared his experience and knowledge for free with three posts per week. I do my best to read every post.
As many of you know, I’ve been on my journey to financial independence since 2010 when I was drowning in credit card debt. Since then, I’ve read every personal finance book I can get my hands on.
Allow me to over-generalize and separate the books I’ve read into two broad categories.
The first category of books are written by authors who are at a very early stage in their personal finance journeys. These authors tend to be in their 20s and early 30s. They are intelligent people, good writers, and have a lot of valuable advice to share. I certainly gained a lot of insight from these books.
The second category of books are written by authors who had not only achieved, but also sustained, financial independence. Contrary to the first category, these authors are typically in their 60s and 70s. They have decades and decades of experiences and knowledge to draw upon. They are absolute legends in the financial wellness space.
Yup, Dogen is part samurai and part golden-haired girl.
Let me explain.
Dogen is in his mid-40s. He’s not too young. He’s not too old. His book hits just right.
In Millionaire Milestones, Dogen covers his journey from finance bro in New York in his 20s to present day life as a writer, investor, and husband and father.
What separates Millionaire Milestonesfrom other personal finance books is that Dogen’s still on his journey. Don’t get me wrong, he’s been financially independent for more than a decade. He certainly has accumulated decades of knowledge since his time working on Wall Street.
But, Dogen’s still in the thick of things. He’s not preaching from the rocking chair on his patio overlooking his immaculate yard.
Dogen’s presently raising kids. He’s focused on his website and his investments. Like you and me, he can relate to the present day challenges of personal finance because he’s still on his journey.
To recap, Dogen’s not wet behind the ears. You don’t have to question his credentials.
At the same time, he’s not so far removed from his peak earning years that his advice is outdated.
If you read Millionaire Milestones, Dogen will tell it to you straight. He’s not going to sugarcoat anything for you. The journey to financial independence is hard. Most people don’t have it in them to make the sacrifices that Dogen recommends.
The fact that Dogen doesn’t run away from that reality is what separates his book from others I’ve read.
If you want the truth about what it takes to become a millionaire, Dogen will give it to you.
Throughout his multiple decades studying and teaching personal finance, Dogen has seen many ups and downs. He’s not shy about sharing his mistakes in hopes that we can learn from those mistakes.
He opens up about his relationship with his wife and his young kids. This is key because it helps understand why money even matters to him in the first place.
Dogen has felt the pain.
Importantly, Dogen has felt the pain. I’ve previously expressed my opinion that personal finance education is best suited for people that have already begun their careers or are just about to start.
This is why I teach personal finance to law students and launched Think and Talk Money for lawyers and professionals.
I know that personal finance education didn’t matter to me until I felt the pain. By feeling the pain, I’m talking about that struggle that comes with balancing rent, debt, and a social life for the first time with your own money.
I don’t know Dogen, and I wouldn’t presume to put words in his mouth. But, my impression after reading Millionaire Milestones is that he would agree that personal finance education is best suited for people that have felt the pain.
Dogen is not shy about sharing how he’s felt the pain at various stages of his life.
In fact, he will tell you that if you want to be truly independent, you’re going to have to feel the pain, too. And, it won’t come easy.
But, he’ll also convince you that it’s well worth it.
Reaching financial independence is hard. If you make excuses, Dogen will be the first to tell you that you aren’t going to get there.
But, if you take responsibility for educating yourself about money, Dogen will also be the first to tell you that it’s all worth it.
Read Millionaire Milestones to the very end. If you think you might not be cut out for the journey, seeing what it looks like at the finish line may persuade you otherwise.
Dogen does an excellent job of not only showing you how to amass wealth, but also what you can do with that wealth you’ve worked so hard for.
That was my favorite part of the book.
At this point in my personal finance journey, I know the steps I need to take to become financially independent.
What I’m still sorting out is what to do with myself once I’m there.
Reading Dogen’s perspective on what is possible once you’ve amassed enough wealth was fascinating.
I found his conversation about how much to spend each year once you’ve left full-time employment especially valuable. As he puts it, there’s a sweet spot between spending too much and spending too little. He gives you the tools to find that sweet spot.
Dogen also talks about spending money in ways that boost your happiness. That could mean something as small as leaving a generous tip or as large as a once-in-a-lifetime trip for your friends.
Most of all, his conversation about helping others through the knowledge he’s acquired really resonated with me.
I started teaching personal finance and launched Think and Talk Money because of all the knowledge I have acquired from people like Dogen. My life has been greatly enhanced through this education.
I’ll be nothing short of thrilled if I can carry the torch and share my personal finance journey in order to help others like Dogen has helped me.
I thought of this question the other day as I sat in the yard. It’s such a simple but important question.
You should be able to easily feel money well spent. If nothing comes to mind, that might be an indication that the money you are spending has not been well spent.
This one purchase gave me an extended, triple happiness boost.
Buying this tree for my backyard gave me a triple happiness boost.
First, I enjoyed the process of learning about and choosing the right tree.
I liked talking trees with the experts at the nursery and my family members. My kids and I would walk around the neighborhood and take pictures of any trees that we liked. It was infectious how excited they were to hunt for beautiful trees.
Even though my daughter’s first choice was this Easter egg tree, she eventually relented and agreed the Baby Blue was the way to go .
My second happiness boost came from buying and then planting the tree.
The day I bought the tree, I walked around the nursery in the rain with my father-in-law and picked the actual tree we wanted. I’ve never picked out a tree before, but it was fun. I learned from the experts and enjoyed pretending I knew what I was doing.
The next day, the landscaping crew came over to plant the tree. It was fun to strategize exactly where to put it and then watch the experts execute the plan.
My third happiness boost came the next day with the tree in the ground and my kids running around the back yard.
My son played with his toys at the base of the tree. He and his sister played hide-and-seek and took advantage of the new hiding spot.
The whole time I watched them, I sat with a smile on my face. I expect that feeling will continue every time I look at Baby Blue in my yard.
So, yeah, Baby Blue was money well spent.
And yeah, I know. I’m old.
Baby Blue brought me joy before, during, and after the purchase.
Baby Blue is an example of the trifecta of happiness. It brought me joy before, during and after.
The same happiness effect has been well-documented when it comes to traveling. People get a happiness boost in planning the trip, then taking the trip, and finally remembering all the fun things they did on the trip.
That’s why so many people “love to travel.” It brings them happiness before, during, and after.
Baby Blue taught me that I can spend money to get that same triple happiness boost even when not traveling.
I recently met up with an old friend for a great talk about money.
I experienced the same trifecta recently when I met up with an old friend for a great talk about money.
Funny enough, we reconnected after he learned from a mutual friend that I had launched Think and Talk Money. I had no idea that he’s as fascinated about personal finance as I am.
I had been looking forward to our “date” since we planned it a couple weeks ago.
The conversation was great. We talked about money, careers, kids, and shared friends. We hadn’t seen each other for years, but you would never know it. That’s the sign of a good friendship.
When the check came, I was delighted to spend my money. That conversation brought me a lot of happiness.
Since we met up, I’ve been revisiting in my mind so many of the topics we covered. I’m already looking forward to the next time we get together.
That’s money well spent.
Personal finance is not just about the numbers.
In the personal finance world, we spend a lot of time talking about numbers. That’s not a bad thing. Numbers help us turn our ultimate life goals into quantifiable action steps.
However, saying you want to “buy a house” is nice, but it’s not that helpful for planning purposes.
Saying you want to “save $100,000 for a down payment on a house in the next 3 years” is an improvement.
Running the numbers and committing to saving $2,800/month to achieve that goal is even better.
So, while numbers are certainly important in personal finance, it’s equally important to continuously recognize the emotions behind those numbers.
Those emotions turn into our motivation to stay on track and hit our numbers.
Personal finance is tied to our emotions.
I spent money on Baby Blue. In exchange, I received a triple happiness boost. The same is true about catching up with an old friend. These experiences reminded me of why I care about money.
Money is nothing but a tool. I care about money because I want to wield that tool to bring me and my family happiness.
Happiness is hard to define. Spending money in exchange for happiness can be hard to accomplish. What has helped me in that regard is thinking about how I can use money to get what I want.
Sometimes, that means taking a deep look at my Money Why. Or, it could mean sitting on a beach with a notepad (and maybe a beer or two) and writing down my Tiara Goals for Financial Freedom.
But, thinking about money is not just about long term goals.
It also means how we spend our money in the present.
Humans are emotional creatures. We can rationally look at examples and charts and won’t dispute the long term magic of compound interest.
At the same time, we have emotions and feelings that need to be tended to now.
It’s not realistic to expect people to put off all happiness until some unknown time in the future.
It is realistic to make reasonable sacrifices now to ensure a better future.
That’s the essence of investing. We invest money that we could spend today and hope it turns into more money later on.
What might be a reasonable sacrifice for one person may be totally unreasonable for someone else. That’s perfectly fine. Still, it’s one thing to make sacrifices. It’s another thing to deprive ourselves entirely.
I don’t think it’s reasonable to expect people to entirely deprive themselves of the things that make them happy. The key is understanding what those things are, and then spending our money in the pursuit of those things.
This is one of the things my friend and I talked about the other day. It’s not that hard to understand the numbers on the spreadsheet. It’s much more difficult to stay motivated to keep making good money choices.
This intersection of money and life is what makes personal finance so fascinating.
Personal finance is fascinating, not because of the numbers, but because of the emotional impact of money.
It’s why I encourage people to talk about money with their loved ones. Talking money is not about talking numbers and spreadsheets. It’s about motivating each other to intentionally use money in a way that aligns with our values. And, to do so both in the present and in the future.
When we create a Budget After Thinking, this is exactly what we’re doing. Not only are we generating fuel for our Later Money bucket, we are giving ourselves permission to spend our Life Money on things we truly care about.
So, what’s the best money you’ve spent recently?
I bought a tree.
I had a beer with a friend.
Sure, I could have saved that money and invested it. But, I’m glad I didn’t.
I recently attended a “financial empowerment” workshop hosted by a financial advisor.
The financial adviser was smart and very passionate about helping people plan for retirement. She shared a lot of valuable information, such as investing early and often.
She also shared good examples on how compound interest works and how inflation eats away at our purchasing power.
I liked just about everything she was sharing with the audience. It was solid advice, and her presentation included many informative charts and examples.
I was not even bothered that she was frequently pitching her services in hopes that audience members would hire her to manage their money. It was her presentation and she earned the right to promote herself.
The thing is, and I was not surprised by this in the least, the topic of fees hardly came up at all.
In fact, the first mention of fees did not come up until the very last slide. In total, fees were addressed for maybe 30 seconds in an hour-long presentation.
I don’t necessarily blame the advisor for not discussing fees until the very end. She’s trying to make a living and doesn’t want to scare people off before hearing what she had to say.
I think most people in her situation would have structured the presentation the same way.
That said, in my opinion, fees should be one of the first things discussed when it comes to investing. It should not be a throw-in at the end of a presentation.
The amount we pay in fees is one of the main things we as in investors can control.
There is not much we can control as stock investors. Markets are unpredictable. One of the only things we can control is the amount we pay in fees.
There are two primary types of fees: transaction fees and ongoing fees.
Transaction fees are charged each time you make a transaction, like buying a stock.
Ongoing fees are charged regularly, like account maintenance fees.
Whenever you are choosing how to invest your money, pay close attention to the fees associated with that investment option.
You cannot avoid fees completely, but you can minimize the amount you pay depending on the investments you choose.
Below, we will take a look at how even a seemingly small fee of 1% can have a huge negative impact on your account balance over time.
As a general rule, passively managed investments like index funds, charge lower fees. Actively managed investments charge higher fees.
If you choose to work with an investment advisor, be sure to understand all of the fees charged for those services. Pay particular attention to the ongoing fees, which can have a big impact on your investment portfolio.
I am not on a crusade against financial advisors.
Before all the financial advisors out there bite my head off, let it be known that I am not on a crusade against you.
Believe it or not, I’m not here to tell anybody whether he should work with a financial advisor or not. That’s not for me to decide.
I believe that advisors can offer significant benefits to a lot of people, including benefits that are difficult to quantify. For example, an advisor may help someone stay calm during market dips so that person stays invested for the long term.
I view my role in the personal finance food chain as that of an educator. I am not a financial advisor, and I won’t be giving personal investment advice.
My purpose in writing this post is to help you decide whether the cost of hiring an advisor is worth it to you.
I do the same thing when I teach personal finance to law students. I try my best to present options and information so they can make the best decisions.
When it comes to investment fees, it’s hard to know exactly what we’re paying. What does a 1% fee even mean?
By looking at the examples below, you should get a better idea of what a 1% fee looks like over the long term. Then, you can be better equipped to make a thoughtful decision on whether to work with an advisor.
In the end, I’ve done my job if I’ve helped you acquire enough personal finance knowledge to make educated choices with your money.
So today, we’re going to talk about fees.
Remember, none of us can control the market, and that includes financial advisors. The best any of us can do is project what may happen in the future based on what has happened in the past.
Since we can’t control the market, let’s focus on what we can control, like fees.
To help us understand how fees can be a drain on our investment returns, let’s revisit our friend Sally.
While in her 20s, Sally funded her retirement account with an initial contribution of $2,500. She then made contributions of $250 every month for 40 years.
She was comfortable with reasonable risk and invested in the S&P 500, which has historically earned an average annual rate of return of 10%.
After 40 years, Sally had contributed a total of $122,500.00. Her retirement account grew to $1,440,925.81.
Sally set herself up to have a lot of choices come retirement.
Now, let’s make one slight adjustment to our hypothetical to account for a fee of “only 1%.”
Sally earns 10% a year and pays a 1% advisor fee.
Let’s assume that Sally decided to work with a financial advisor that charges a 1% fee. That means every year, Sally pays her advisor 1% of her account balance.
We’ll assume that her advisor also averaged a 10% annual rate of return for Sally. However, because Sally pays her advisor a 1% fee, Sally’s actual earnings rate drops from 10% to 9%.
Let’s see how that 1% fee changes Sally’s performance over 40 years.
After 40 years of earning 9% after paying a 1% fee to her advisor, Sally will have $1,092,170.89.
The 1% fee resulted in Sally’s account dropping by $348,754.92.
That’s 24% less money than she had in our example when she earned 10%.
The impact of even a 1% fee is monumental.
Through this example, you should be able to see that even a seemingly small fee can have major consequences on your long term gains.
When people start investing, the 1% fee does not seem like a bad deal. In my experience, whenever a financial advisor has explained fees to me, he uses words like “just 1%” or “only 1%”.
I think that language is misleading and deceiving. Sally would probably agree that words like “only 1%” do not accurately express a cost of $350,000.
If you look at the very beginning of Sally’s investment profile, it’s true that the 1% fee seems to have little impact.
In Sally’s case, the difference in her account in the two scenarios after 1 year is only $25.
Sally’s account after 1 year at 10% interest: $5,750.
Sally’s account after 1 year at 9% interest:$5,725.
That’s a pretty marginal difference. However, it takes time for the impact of fees to materialize.
Let’s look at the difference in Sally’s account over time:
10% Return
9% Return
After 1 year
$5,750
$5,725
After 10 years
$54,296.63
$51,497.20
After 20 years
$188,643.75
$167,491.39
After 30 years
$537,105.57
$442,091.81
After 40 years
$1,440,925.81
$1,092,170.89
Looking at these numbers, it becomes clear how much a 1% fee can impact your overall investments.
One other consideration: the fee also typically gets taken straight out of your account. That can make it feel like the fee is relatively small or doesn’t exist at all.
It would feel much different if each month you had to go through the process of writing a check to your advisor. Maybe feeling that pain would impact your decision to pay the fee.
Decide for yourself if the real cost of an advisor is worth it to you.
You can play with these numbers to match your personal situation. Maybe you have an advisor charing less. Maybe yours charges more.
If you want to tweak the annual rate of return you expect to earn by working with an advisor, please do.
Or, maybe you just want to ask your advisor or potential advisor about fees and how they may impact your portfolio over the long term.
Hopefully, looking at these numbers gives you something to think and talk about.
I personally do not work with a financial advisor.
Let’s circle back to the financial empowerment workshop I attended the other day.
At its conclusion, the advisor’s husband came by to collect the sign-up sheet. I happened to be the last person to receive the clipboard.
Seeing that I had not signed up for a free consultation, he looked at me and said, “Oh, you forgot to sign up!”
I chuckled.
Uhh, no I didn’t “forget”.
I respectfully declined to be added to the list. I’ve chosen not to work with an advisor.
I shared my story about how I set $93,000 on fire when my former advisor pulled me out of the markets in 2008.
In that post, I also shared that it wasn’t her fault. It was my fault for not being educated.
Since then, I’ve been convinced by endless reports, such as this from Yahoo! Finance, that I’m better off without an advisor when considering the cost:
Making matters worse is that the professionals, who the average investor might turn to for guidance, have poor track records. In the past decade, an alarming 85% of U.S.-based active fund managers underperformed the broader S&P 500. Those who invest in these funds are essentially paying for unsatisfactory results.
How much does 1% matter to you?
I recently calculated how much I would have paid an advisor by this point in my life. I determined that If I had been working with an advisor, I would have paid more than $100,000 in fees so far.
When I think about all the things I could do with more than $100,000, I’m very happy that I chose to educate myself and keep that money instead of paying it to an advisor.
Maybe I would have earned more if I worked with an advisor. Maybe that $100,000 would have been a worthwhile price to pay. Then again, maybe not.
If you choose to work with an advisor, I won’t blame you. Hopefully your advisor consistently beats the returns of the S&P 500 or provides value to you in other ways.
Whatever the case may be, you now should have a better understanding of what you’re paying when you hear the phrase “only 1%.”
Do you work with an advisor?
What fee does your advisor charge?
What are the top benefits you receive in exchange for the cost?
I try to bring my lunch most days. It’s partly trying to eat healthier. The other part is that I have a hard time justifying the cost and have decided that lunch is really not something I care about.
Even so, there are days when I run out of time in the morning to get a lunch packed before I’m out the door. On those days, I’m usually looking for something relatively quick and healthy.
I’ve noticed that no matter where I go near my office, it seems like the cost of a fast-casual lunch is between $15-$20. That’s true whether it’s a sandwich or a salad or a burrito.
$20 for a lunch that is not even the least bit exciting! That’s hard for me to swallow (sorry, couldn’t help myself…)
Am I yelling at the clouds alone here?
Why does it matter that everything is getting more expensive?
There’s no single explanation for why things are getting more expensive. For example, restaurants are facing higher costs for ingredients, labor, and even online reservation sites.
Setting aside isolated explanations, the reality is that all things tend to get more expensive over time.
The word for that reality is “inflation.”
Specifically, inflation is defined as “ongoing increases in the overall level of prices.”
If you were accustomed to paying $10 for lunch, and now that same lunch costs $20, that’s what inflation looks like.
Terry took no risk and kept his money in a savings account. Terry did not play offense.
Sally took on reasonable risk and invested in the S&P 500. Sally played offense.
What happened after 40 years in our hypothetical scenario?
Terry, at a 3% interest rate from his savings account, had a total of $234,358.87.
Sally, at 10% annual returns from the S&P 500, had a total of $1,440,925.81.
As a result, Sally will have $1,200,000 more than Terry to do fun things with in retirement.
Sally clearly played offense. Terry clearly did not.
Investing to counteract inflation is playing defense.
You may be thinking that at least Terry’s “safe” approach meant that he played good defense.
Nope.
Terry’s approach was bad defense just like it was bad offense.
All because of inflation.
Investing to counteract inflation is playing defense. It’s protecting your hard-earned purchasing power.
Over the long term, it’s critical to invest your money and earn a return that exceeds the rate of inflation.
Otherwise, you risk not being able to afford the same items you’re accustomed to buying today because those items will be more expensive.
In our earlier examples of eggs and workday lunches, we’ve seen how things feel like they’re getting more expensive over time.
It’s not just eggs and lunches that get more expensive. Everything does.
Let’s plug some numbers into US Inflation Calculator to illustrate how things really are getting more expensive.
Let’s say you bought something in 2000 for $100. Based on the actual inflation rates between 2000 and 2025, that same $100 item would could $185.71 today.
That’s an increase of 85.7%!
So, by keeping his money in a savings account earning 3% interest, Terry may have thought he was doing the right thing because his balance was getting bigger.
The problem is that while his bank balance was increasing, so was the cost of everything he might want to buy. So, he had more money, but he could buy less things with that money.
That’s what inflation does.
The only way to get ahead of inflation is by investing and earning a higher rate of return.
So to return to our question: was Terry really playing good defense by keeping his money in savings?
No, because his actual purchasing power diminished even though his balance grew.
Investing is about playing offense and playing defense.
By now, you should hopefully be motivated to invest as a way to play offense and play defense.
It’s fun to think about what you can do with your money when it grows with very little effort on your part.
It’s just as important to think about investing as a way to protect your ability to buy the very same things in the future that you buy today.
Instead of being the man who yells at the clouds, you can be the one buying as many eggs and lunches as you want.
That’s cool. It’s never a bad idea to pay a little extra attention to your finances.
Of course, Think and Talk Money readers don’t wait until April to be reminded of all the things we should be doing with our money.
With more than 50 posts already at our disposal, Think and Talk Money readers pay attention to our money year round.
We know how important money is to reaching our ultimate goals in life. That’s why we like to think and talk money just a little bit every week.
Think and Talk Money readers know that personal finance starts with getting our money mindset in the right place. That’s why we create our personal version of Tiara Goals for Financial Freedom.
Is it just me, or are you also noticing more and more businesses charging fees to use credit cards?
I wrote about my disdain for credit card fees recently.
In just the past couple of weeks, I’ve chosen to pay with cash instead of credit card on multiple occasions:
At the butcher shop, which charges a 3% fee, and is kind of smug about it.
At the local ice cream shop, which charges a 4% fee and misleadingly labels it a 4% discount for customers paying in cash.
For the garage door repair guy, who creatively indicates the fee in terms of cash instead of a percentage. In this instance, $11 instead of 3% of the total bill.
At the tree nursery, which also charges a 3% fee for credit cards. This one hurt the most. Trees are expensive! I really would have liked those points.
By paying cash, I avoided hundreds of dollars in fees. Don’t get me wrong, I love credit cards points as much as anyone. But, I just can’t stomach paying these fees to earn the points.
I even ran the numbers recently and determined that the points don’t make up for the added penalty of using a card.
I know many business owners disagree, but in my opinion, these fees are bad for business.
Fees act as a deterrent for me to spend money. I imagine they are a deterrent for others, as well. If I do shop at one of these establishments, I end up being more selective and spending less money than I otherwise would have.
At the butcher shop, I didn’t buy the side items to go with my skirt steaks.
At the ice cream shop, I bought ice cream for my kids but not for myself. Luckily (or unluckily?), my son gave me his leftover, melty Superman ice cream with rainbow sprinkles.
I had no choice with the garage door guy- the garage was broken and needed fixing. You win, garage door guy!
At the tree nursery, I bought half as many trees and plants as I intended.
The way I see it, both the customer and the business lose out because of these fees.
For example, at the nursery, I didn’t get all the plants I wanted. That made me kind of sad.
At the same time, the nursery lost out on more than $1,000 in plant sales. I don’t know how that made the business feel. Obviously, it’s not that sad since it continues to charge the fee.
Taking a broader viewpoint, maybe these credit card fees are actually good for us consumers.
In our consumer-driven society, we all spend too much money when we go out to eat or go shopping. Studies have consistently proven that we spend less money when forced to use cash.
In that sense, a deterrent to spending, which is exactly what these fees are, is probably a good thing for us consumers.
I can’t imagine it’s good for business, though.
What do you think?
It’s OK that tracking your net worth is less fun during a market dip.
I track my net worth once per month using a simple spreadsheet. Today was the first day I updated the spreadsheet since “Liberation Day” and markets dipped.
Like so many others, my net worth took a hit this past month.
That’s not fun.
But, I’m not losing my mind over it.
I’m not saying it feels good. I would much rather see my net worth steadily improving.
I’m just saying I’m not freaking out about it. Time is on my side.
I expect dips like this will occur multiple times throughout my investing timeline.
One thing I’ve found is that it helps to talk about money when things aren’t going well. You realize that you’re not alone. Your friends and family are probably having the same feelings that you’re having.
You don’t have to share how much money you have or how much you lost. You can still benefit emotionally by acknowledging to your loved ones that you’re thinking about the markets a little bit more these days.
People are going bananas for The Bananas.
A reader sent in a great story about a couple who went $1.8 million into debt to start The Savannah Bananas.
If you haven’t heard of The Bananas, they might just be the best story in sports right now.
The Savannah Bananas are the best story in sports.
Owner Jesse Cole and his wife Emily went $1.8 million in debt to start the team, but they now have a broadcast deal with ESPN and will sell two million tickets this year.
Despite countless opportunities to cash in by taking on investors, the owners still own 100% of the team. They continue to do things their way, even if that means foregoing massive profits.
I love stories like this. These owners bet on themselves and found success. Instead of cashing in at the first chance, they’re staying true to themselves.
At the end of the day, they’re making money and seem to enjoy what they’re doing.
Two young coworkers, Terry and Sally, start the same job at the same time making the same amount of money.
While still many years away, Terry and Sally both know that they should invest early and often for retirement.
They each decide to fund a retirement account with an initial contribution of $2,500. They are also dedicated to making contributions of $250 every month until they retire.
Both plan to retire in 40 years while they’re in their 60s.
There’s one major difference between Terry and Sally.
Terry doesn’t like risk. He wants to be able to sleep at night knowing that his hard-earned money is safe and sound in the bank. He can’t stand the idea of potentially losing money from one month to the next.
When Terry wakes up in the morning, he likes to check his bank accounts while he drinks his coffee. He gets a jolt out of opening up his mobile banking app and seeing exactly how much money he has.
In fact, at any given moment, Terry can tell you within a few hundred dollars what his net worth is.
Because Terry doesn’t want to take any chances, he decides to stash all of his retirement savings in a savings account that earns an average annual return of 3%.
Sally is more comfortable with reasonable risk. Upon starting her career, Sally was aware that she had never learned basic personal finance skills. She was determined to put in a little bit of effort early on to set herself up for a prosperous future.
Through the process of educating herself about personal finance, Sally started thinking about what she really wanted out of life. Since she was young and had just started her career, it wasn’t easy to come up with a good answer.
Still, Sally knew that whatever she wanted to do in life, investing was an important part of her financial journey. If she wanted to create more time for herself down the road, she would need passive income from investments to sustain her.
So, after doing her homework, Sally decided to invest her money in a low cost S&P 500 index fund.
While she appreciated that there are no guarantees when it comes to investing, Sally knew that the S&P 500 has historically earned an average annual return of 10%.
Unlike Terry, Sally only checked her accounts once per month when she tracked her net worth and savings rate. Sally slept fine at night because she knew time was on her side.
Let’s see how Terry and Sally turned out 40 years later.
Using a simple online calculator like the one at investor.gov, let’s see how much money Terry and Sally will have in their retirement accounts after 40 years.
After 40 years, Terry will have contributed a total of $122,500.00 to his retirement savings account.
At a 3% interest rate, Terry will have a total of $234,358.87 after 40 years.
In other words, Terry has just about doubled the value of his total contributions in his account.
Not bad, Terry.
Now, let’s check out Sally’s account.
Sally’s retirement savings total $1,440,925.81.
Sally likewise contributed $122,500.00. After 40 years, at a 10% interest rate, Sally’s retirement account will have a total of $1,440,925.81.
Wow, Sally!
Sally’s retirement account is worth 10 times more than what she personally contributed. Terry failed to even double his account.
Recall in our little hypothetical, Sally did the exact same things as Terry, with one key difference. Sally was more comfortable taking on reasonable risk.
Because Sally was comfortable taking on some risk, her retirement savings were worth more than six times as much as Terry’s savings. She has over a million dollars more than what Terry has!
Look at compound interest in action.
One last thing: take a look at the pictures of Terry and Sally’s investments over time. Notice the gaps between each of their red and blue lines.
While they each benefited from compound interest, Sally benefited exponentially more.
Look at how Terry’s red line stayed much closer to his blue line. Because he wasn’t earning as much overall interest, he didn’t have as much money to multiply from compound interest.
Sally’s red line mirrored her blue line closely for the first 12-15 years. Then, the gap widened before the red line skyrocketed over the final decade or so.
The point of this hypothetical is to introduce the concept of risk when it comes to investing.
We’ve all heard the saying, “You don’t get something for nothing.”
That motto applies to investing as much as anything else. There is always risk involved in investing.
The question is how do you react to that risk.
Some people are so fearful of that risk that they don’t invest at all, like our friend, Terry.
Other people are so desperate to get rich quickly that they take wild risks.
The people that tend to reach and sustain financial independence are the ones who educate themselves and become comfortable with taking on reasonable risk. This is what Sally did.
In future posts, we’ll dive into the various ways you can reduce investment risk.
At this point, knowing why you’re investing and taking on risk is a powerful first step. I was recently reminded of my Money Why when my baby girl was born.
Think of risk as the cost to invest.
If you want to reach true financial independence or any other financial goal, it’s going to cost you something.
Think of risk as the cost to invest.
Sure, there may be some people out there who are able to reach financial independence on a massive salary.
For the rest of us, we’re going to have to get comfortable with investing.
There’s a reason we spend so much time talking about our ultimate life goals. It’s important to embrace the reasons why you’re investing and why you’re opening yourself up to risk.
It never hurts to remind yourself what you are hoping to achieve in the future.
When you know what that thing is, it’s much easier to pay the cost of risk.
When you look at Sally and Terry’s future outlook, who would you rather be?
It’s not really a hard question, right?
It’s not that Sally has a bigger bank account. What matters is that she has created options for herself.
Sally should be in position to do whatever she wants.
Terry probably can’t.
Are you naturally more inclined to act like Terry or Sally?
If you’re more like Terry, have you thought about what outcome in life would be worth taking on some reasonable risk?
There’s an infamous slogan in Chicago politics, “Vote early and often.” My professional advice: don’t do that. Instead, I prefer: “Invest early and often.”
We’ll call it the new Chicago way.
When you invest early and often, you can take advantage of the power of compound interest.
There’s very little we can control when it comes to investing. One of the main things we can control is how early we prioritize investing.
In today’s post, we’ll learn what compound interest is and why it’s so powerful in generating long-term wealth.
Invest early and often to benefit from the magic of compound interest.
Fortunately, the idea of compound interest makes a lot more sense with a simple example.
Let’s say you make an initial investment contribution of $1,000. Let’s assume that you earn 10% interest each year on that investment. We will also assume that you re-invest your investment gains.
After the first year, your initial contribution of $1,000 earns $100 in interest (10% of $1,000). That means after one year, you have $1,100 in your investment account.
Because we are re-investing our gains, that means that at the start of year two, yo have $1,100 to invest: $1,000 from your initial contribution plus the $100 earned in interest.
If you earn the same 10% interest on that $1,100 investment, you will have $1,210 at the end of year two.
Notice that in year two, you earned $110 in interest, whereas in year one you earned $100 in interest. That’s because in year 2, you earned interest on the interest your previously earned.
This is the key point about compound interest: you earned more money in year two, even though the interest rate remained the same and you did not contribute any additional money.
That’s how compound interest works. Compound interest is earning interest on interest you’ve previously earned.
So, why is compound interest so powerful?
Earning an additional $10 in interest year two may not seem like a lot.
Over the long run, those additional earnings add up.
Let’s look at an illustration from investor.gov of what happens to that initial $1,000 contribution over a 30-year period:
In 30 years, you will have a total of $17,449.40. That’s a pretty good result from total contributions of only $1,000.
However, for this example, that total is not the important part. The important part is to visualize how compound interest worked its magic to get that result.
Look closely as the two lines on the graph. The blue line that doesn’t change represents your initial $1,000 contribution.
The red line represents the amount of money you have over time.
Notice how in the first 10 years or so, the red line and blue line mirror each other pretty closely. Around year 12, you start to see some separation between the two lines.
While the blue line stays flat, the red line begins to arc upwards. That’s because all that interest you earned during the previous decade has been earning interest. Your investment begins to accelerate upwards without any additional contributions from you.
By the end of year 30, look at how steep the red line is jetting upwards.
We can look at the specific amount of money you’d earn each year in this hypothetical to really drive this point home.
As we mentioned earlier, you earned $100 in interest during year 1. Then, you earned $110 in interest during year 2. That’s a good, but modest, increase.
During year 12, you earned $285.31 in interest. That’s significantly more than you earned in the early years, all without any additional contributions on your part.
During year 30, you earned $1,586.31 in interest!
The more time that you stay invested, the more money you’ll earn as compound interest works its magic.
That’s the power of compound interest.
Invest early and often to be a millionaire with very little effort on your part.
Compound interest is so powerful that it can make you a millionaire with very little effort on your part. All it takes is time and consistency.
In other words, invest early and often.
Let’s look at another example to see how you can easily become a millionaire if you invest early and often.
Let’s say you begin your career after going to law school or grad school at age 25. During your first year working, you saved up $3,000 and decided to invest in a low cost index fund.
You also make a plan to contribute an additional $300 per month to your investment account for the next 40 years, setting yourself up to retire at age 65.
We’ll also assume you earn the same 10% interest from our prior example, and you don’t make any withdrawals from your account.
By the time you reach retirement age, you’ll have $1,729,110.97 in your retirement account!
That’s after contributing only $3,000 initially and $300 per month after that.
Put another way, your total contributions of only $147,000 turns into $1,729.110.97 by the end of your career.
Let’s look at the graph corresponding with these figures to once again visualize compound interest at work.
You’ll notice this graph looks almost identical to our prior example, even with the additional contributions that you make over time.
You can once again see that the blue and red lines mirror each other closely for the first 10-15 years.
Then, the blue line stays relatively flat while the red line gradually arcs up before skyrocketing towards the end.
Your personal investment picture should look similar in the long run.
Now, there’s no way to predict exactly when you’ll start to notice the magic of compound interest. There are too many variables at play.
The point is that given enough time, your personal investment trajectory should look similar because of compound interest.
You can play with the numbers in an investment calculator like the one available at investor.gov to match your personal situation.
If you’ve created a Budget After Thinking, you may be able to invest much more than $300 per month.
No matter what initial contribution you make and what interest rate you assume, you should notice a similar investment picture over the long run.
When I say investing is the easy part, this is what I mean.
I just showed you how an early contribution of $3,000 and regular contributions of $300 can turn into more than $1.7 million.
You don’t have to understand the math behind compound interest.
You just have to trust that it works.
Then, invest early and often.
Given enough time, assuming normal, historical market conditions, your investments will gradually increase before shooting up in the later years.
Read that sentence again. “Given enough time” is the key phrase.
The magic behind compound interest is time.
The earlier you can start investing, the better off you will be.
Since we can’t control investment returns, I prefer to focus on what we can control when it comes to investing.
We can control when we start investing and how long we invest for.
By making regular contributions over a long period of time, compound interest ensures that your wealth will grow.
Invest early and often.
$3,000,000 today or a penny that doubles each day for the next 30 days?
Let’s look at one more fun example to demonstrate the power of compound interest.
At the start of each personal finance class I teach, I ask my students this question:
“Would you rather have $3,000,000 today or one penny that doubles each day for the next 30 days?”
Maybe the fact that I’m asking the question in the first place gives away the answer. Still, some students refuse to believe that the penny could grow to more than $3,000,000 in 30 days.
The real lesson in asking this question is not that the penny ends up being worth more. The lesson is that it’s not until the very end of the time period that the penny takes the lead.
If you chose the penny, for the first 20 days, you’d be feeling pretty foolish. Even after 29 days, the penny still hasn’t outpaced the guaranteed $3,000,000.
Then, by day 30, you realize the full power of compound interest. The penny ends up being worth $5,368,709.12!
Just like we saw with our prior examples, it takes time for the magic of compound interest to do its thing.
When it comes to investing, time is the most important factor that we can control. The more time you spend in the markets, the better chance you have of significantly increasing your wealth.
People smarter than you and me preach the power of compound interest.
Warren Buffett, the world’s greatest investor, fully appreciates the power of compound interest. He’s famous for saying that his favorite holding period for an asset is “forever”.
Buffet’s not literally saying that there’s never a time or reason to sell an asset, like a a stock. He’s simply making the point that compound interest benefits people who stay invested over the long term.
If the world’s greatest investor isn’t impressive enough for you, how about the world’s greatest thinker?
Albert Einstein is often credited with this famous quote about compound interest:
Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.
You don’t have to be as smart as Buffet or Einstein to benefit from compound interest.
You just have to invest early and often.
The Chicago Way: Invest early and often.
Let’s recap:
Voting early and often = bad idea.
Investing early and often = good idea.
Whether you are new to investing or have been investing for some time, never underestimate the power of compound interest.
It will take time before you see results. But, the only way you’re going to get those results is by staying patient and staying invested.
When you’re tempted to pull out of the market, remind yourself that investing is a long-term game.
Picture the graphs that show how your money can skyrocket with enough time. Remember the question about the penny doubling for 30 days. Don’t ignore the words of Buffett and Einstein.
Investing is a major part of leading a healthy financial life.
It also should be the easiest part.
Despite all the attention, news, and marketing, investing doesn’t have to be complicated.
Investing simply means committing money now to earn a financial return later. This is why I refer to money I invest as Later Money.
To be honest, the most difficult part of investing is continuously generating money to invest in the first place.
The actual investing part is pretty easy.
That’s because when you invest the right way, your money should earn more money without much additional effort from you.
This is the best part about investing. Your money can (and should) grow over time without your active participation. This is why investment gains are often referred to as “passive income.”
If you are on a journey towards financial independence, you know how important passive income is. The best way to get your time back is to earn money passively through investments while you’re off doing something else.
We’ll soon learn why investing does not have to be complicated. If you can drown out the noise, all you’ll really need to do is regularly fund your investment accounts and watch your net worth slowly grow.
This is when personal finance starts to get really fun.
Investing is when personal finance starts getting really fun.
When you’ve invested the right way, your wealth will slowly multiply. You won’t notice it at first. Trust me, give it time.
You’ll soon see that all the effort you put into educating yourself about money was more than worth it.
No, you won’t be immune from market swings like the one we’re in right now.
But, you’ll be educated enough to not panic. You’ll know that time is on your side.
Have you noticed that we’re now 50 posts in and have hardly talked about investing?
There’s a reason we’ve hardly talked about investing in the first 50 posts of Think and Talk Money.
In order to get the benefits of investing, you need to have the right money mindset. That means knowing why you’re investing in the first place. Without the right motivation, you will struggle to consistently fund your accounts.
After all, when you invest, you are sacrificing money you could spend right now for the opportunity to spend even more later on. Without the right motivation, too many people put off, or give up on, investing altogether.
When they do that, they have a little more money to spend today. But, years from now, they will wonder why they’re still working so hard and don’t see an end it sight.
Your goal may be to pay for your kids’ college. One way to do that is to take advantage of 529 college savings plans.
You may not know exactly what you want down the road. That’s OK, too. Whatever it is, investing now will make it easier to pursue whatever that thing ends up being.
Once your mindset is in the right place, you’ll be more determined to craft a budget that consistently creates money to invest.
Think about it: would you rather be someone who invests $1,000 one time or someone who invests $1,000 every month?
If you practice solid personal finance fundamentals, you can be the person consistently investing to accomplish your ultimate life goals.
Too many people think personal finance is only about investing.
Too many people skip over the part where we learn strong personal finance habits. These people think that personal finance is only about investing.
Let’s play a game. Walk down the hall at your office and ask the first person you see what they know about personal finance.
I’m guessing you’re going to get a response like:
“Personal finance? Oh, yes. I need to learn that. I don’t know anything about the stock market.”
If I’m right, leave a comment below. This should be fun.
By the way, people that assume personal finance is only about investing are not bad people. They just haven’t been properly educated. Just like me when I set $93,000 on fire.
By now, you know that personal finance is about so much more than investing. You know that you need to develop strong habits so you constantly have money to invest in the first place.
And, you’ll soon learn that investing is really the easy part.
When you learn basic investing principles, like minimizing fees and playing the long game, your money can slowly grow over time.
As that happens, you move closer and closer to financial independence without much effort at all.
It’s actually pretty easy.
We’ll cover these basic principles in upcoming posts.
One thing we won’t discuss at Think and Talk Money is the latest hot stock tip.
If you want to study P/E ratios and company balance sheets in a quest for the best individual stocks, I won’t stop you.
I just won’t be joining you.
That’s because it’s very hard to pick winning stocks. Even the “experts” have a very hard time doing it consistently.
You don’t believe me, do you?
What if I told you that the vast majority of investment pros underperform the S&P 500?
Making matters worse is that the professionals, who the average investor might turn to for guidance, have poor track records. In the past decade, an alarming 85% of U.S.-based active fund managers underperformed the broader S&P 500. Those who invest in these funds are essentially paying for unsatisfactory results.
If the “pros” can’t beat typical market returns that are available on the cheap for all of us… why even play that game?
Why overcomplicate things?
Sure, maybe you’ll get lucky and your investment pro is one of the few who can beat the market. Odds are that if your pro beat the market one year, he probably won’t the next year.
If that’s your game, I wish you nothing but good fortune.
Personally, I’d rather do things the easy way. I’d rather focus on what I can control, like how much money I’m contributing to my investment accounts each month.
And, that brings us to an interesting point.
Even if you are working with a professional, you are not excused from participating in your investment journey. You still need to understand the basics.
Plus, while you may not be watching your portfolio closely, your job is always to make sure there is consistent money to be invested.
My guess (or is it hope?) is that your advisor has told you as much.
Investing is a major component of financial independence.
Whether you are striving for financial independence, or hoping to maintain it, investing is a major component.
To be a successful investor, you first need to practice strong financial habits.
Don’t worry. If your mind is in the right place, the investing part is actually pretty easy.
Back in 2008, I was a third-year law student. My entire life savings at that point was about $10,000. A lot of this money came from savings bonds gifted to me by my grandma for my birthday since the year I was born.
I mentioned the year was 2008, otherwise known as the beginning of The Great Recession. As detailed in Forbes Advisor:
The Great Recession of 2008 to 2009 was the worst economic downturn in the U.S. since the Great Depression. Domestic product declined 4.3%, the unemployment rate doubled to more than 10%, home prices fell roughly 30% and at its worst point, the S&P 500 was down 57% from its highs.
Suffice it to say, 2008 was not a great time to be graduating or looking for jobs.
Those of my friends fortunate enough to have secured a job offer soon learned that their offers were being rescinded. Such were the times.
But, I digress.
Back to how I set $93,000 on fire.
As I mentioned, my life savings at the time totaled about $10,000. I had previously decided to use a financial advisor to invest my money for me.
I had been working with this financial advisor for a few years prior to The Great Recession.
All these years later, I couldn’t tell you what she had me invested in prior to the markets imploding. I’m assuming that she took into account my age and risk tolerance and designed a suitable portfolio for me.
What I can tell you is that my portfolio suffered the same fate as just about everyone else towards the end of 2008. My $10,000 balance was shrinking.
At that point, my advisor took me out of the markets and stashed the remainder of my money in a savings account earning close to 0% interest.
I didn’t notice this maneuver right away. In fact, it wasn’t until 2010 that I noticed that my money was sitting in a savings account.
When I finally caught on that my account balance had not changed for a couple years, I called my advisor. She explained that she had pulled me out of my investments when things weren’t looking too good.
She didn’t have a good explanation for why I was still in the savings account in 2010. To be honest, it seemed like maybe she forgot about me.
By that point, the markets were improving. I had already missed all of the upswing from 2009. Since I had felt neglected, I withdrew my money and closed my account.
I wish I could tell you that I started investing on my own at that point.
Nope, that’s not how you set $93,000 on fire.
Instead of investing, I let the money sit in my checking account until it just kind of disappeared. I had no plan for the money. All these years later, I have no clue what I spent it on. I just know that it disappeared.
But Matt, you said you only invested $10,000. How did you end up setting $93,000 on fire?
I’m glad you asked.
If I had known then what I know now, I would have invested that $10,000 in a low-cost S&P 500 index fund.
I also would not have taken my money out of that S&P 500 index fund when the markets dropped.
Time was on my side. The smart thing would have been to do nothing at all.
Between the start of 2009 and the end of 2024, the S&P 500 earned an average annual return of 14.98%.
That means my $10,000 invested in a low-cost S&P 500 index fund at the start of 2009 would have been worth $93,265.90 by the end of 2024.
That, my friends, is how I set $93,000 on fire.
And, I have nobody to blame but myself.
Let me make one point perfectly clear:
It’s nobody’s fault but my own that I missed out on those earnings.
It was my fault for not taking a more interested, and educated, approach to my personal finances.
In a way, I’m glad I learned that lesson with only $10,000 at stake instead of later in life when I had more to lose.
It’s not my financial adviser’s fault. She did what she thought was best. For some people, her strategy was probably successful.
My problem was I blindly trusted my adviser without educating myself first. I didn’t know the right questions to ask. I didn’t understand the plan.Worst of all, I didn’t pay attention when my account statements arrived in the mail each month.
In my mind, once I transferred my money over to my advisor, I was excused from taking any responsibility for my future.
That was a mistake I’ll never make it again. When things didn’t go well, I had no one to blame but myself.
We all need to understand the basics of investing.
Whether you choose to work with an advisor or not, it’s up to each of us take accountability for our own future.
We need to educate ourselves enough to be part of the planning process. We need to know why we’re taking certain steps and be savvy enough to ask the right questions.
You may be more comfortable working with a financial advisor. That’s perfectly fine. You still need to understand the basics of investing.
My problem in 2008 and 2009 was that I hadn’t educated myself. I like to share this little story to illustrate how important it is to pay attention to our finances.
These days, I manage my own investments. I’ve determined that paying fees for someone else to manage my money is not worth it to me.
By the way, we’re going to spend a lot of time talking about fees so you can decide for yourself if you want to pay them.
Whether you manage your own investments or you use an adviser, it’s critical to understand the basics about investing in the stock market. The good news is the basic principles of investing are relatively straightforward.
Always remember: there are some things we can control and a lot of things we can’t control.
We’re going to focus on what we can control.
That means focusing on how much fuel you’re generating each month to invest in the first place.
Then, it means minimizing fees and maximizing your time in the market.
If you can successfully implement just those ideas, you will wake up years from now with major gains to your net worth due to the power of compound interest.
There are other strategies we’ll cover, as well. You’ve likely heard fancy terms like “diversification” and “asset allocation.” We’ll talk about what those phrases mean with the goal of convincing you that investing does not have to be complicated.
That’s right. Investing does not have to be complicated.
You don’t have to read the Wall Street Journal. You don’t have to study financial statements. Even people who do that for a living struggle to predict what’s going to happen next.
So, let’s not waste our time. We’ve got better things to do on our way to financial independence than studying corporate balance sheets.
With even just a little bit of knowledge, you can feel comfortable and confident investing in the stock market. Then, all you’ll need to stay on track is the occasional reminder to think and talk about money with your loved ones.
I’m further away from financial independence today than I was five years ago.
You know what’s funny?
I couldn’t be happier about where I am today.
Let me explain.
In 2020, my wife and I had very minimal expenses.
At the start of 2020, my wife and I were both working as lawyers in Chicago. We lived in an apartment in a 4-flat that we had purchased in 2018. We had no kids at the start of the year, but were about to welcome our first.
This was a good apartment in a popular part of town. It had 3 bedrooms and 2.5 bathrooms. That was plenty of space for my wife and I, and eventually the two babies we brought home there.
We purchased this 4-flat from a real estate investor who had done a decent job on the renovation. It had in-unit washer/dryer, modern finishes, and plenty of storage.
We had a small outdoor patio with enough room for a grill and little table. We also had a garage parking space but ended up parking our 20-year-old car on the street most days.
When we purchased the building, it was the most expensive 4-flat that had ever been sold in that part of town. It was a bit of a risk to set the high-water mark in the area.
Even though the building was expensive for the area, this was not a fancy apartment. This part of town was still up-and-coming. Some people probably thought it was not a nice part of town.
I doubt many people came over and thought, “Wow, look at this amazing apartment!”
The more likely reaction was probably something like, “What the heck are they doing?”
To be fair, I asked myself that question plenty of times.
So, what were we doing?
We were paying ourselves to live there.
Say that again?
My wife and I paid ourselves to live in that apartment.
We lived for free. And made a profit at the same time.
See, the rental income from the other three units covered the entire mortgage plus all expenses for the property.
But, that’s not all. On top of covering all the expenses, the rental units generated a profit of $1,000 per month on average.
So, not only did we spend zero dollars each month on housing, we profited $1,000 per month.
Looking back, getting paid to live in a decent apartment was maybe the best decision we ever made.
What happens to your finances when you live for free?
Let’s take a look at how living for free can be a major advantage on your way to financial freedom.
The common wisdom is for people to spend no more than 30% of their gross income on housing. Regardless of how much you make, that usually means thousands of dollars.
Because our tenants were paying our living expenses for us, we did not have that expense for the five years we lived in that apartment.
In other words, we didn’t have to worry about budgeting for housing.
We also drove a nearly 20-year-old car and could walk to the “L” (Chicago’s subway). We lived in a neighborhood with plenty of nearby restaurants and shops. That meant our transportation costs were next to nothing.
Because we weren’t paying for housing and had very minimal transportation costs, we could supercharge our savings.
How much were we able to save?
Let’s take a look.
Between 2018 and 2023, my wife and I acquired three buildings and ten apartments in that same neighborhood. We’re very familiar with market rents in the area.
We rent our apartments for anywhere from $2,300 to $3,600 per month. Our usual tenants are professionals like engineers, lawyers, doctors, consultants, and pilots.
The unit we were living in from 2018 to 2022 was one of our larger units. At the time, it would have rented for $3,500 per month on average. That equals $42,000 per year to rent that apartment.
Keep in mind, if someone was paying rent to live there, that would be $42,000 of after-tax money.
Since we owned the building, we lived there for free. We could save that $42,000 we would have otherwise paid in rent. Instead of spending that savings on things we didn’t need, we were able to save that money for our next real estate investment.
Plus, we earned $1,000 on average per month while we lived there. That’s an additional $12,000 per year in profit.
We lived in that unit for almost five years.
Add it all up and we saved $270,000 by living in that apartment for five years.
$42,000 saved rent x 5 years =$210,000.
$12,000 profits x 5 years = $60,000.
Total savings = $270,000
We used that $270,000 for a downpayment on a rental condo in Colorado ski country.
It took five years of living in a decent, but not-awesome, apartment to have a ski condo that will hopefully be in our family for decades.
Choosing to live in our 4-flat to save $270,000 over five years was one of the best financial decisions we’ve ever made.
I highly recommend you consider house hacking if you’d like to start investing in real estate.
Many of you are familiar with the strategy of living in a building (or home) you own while tenants (or roommates) pay for it. Brandon Turner, of BiggerPockets fame, popularized the concept he dubbed “House Hacking”.
You can read all about house hacking on BiggerPockets here.
Without a doubt, there is no better strategy for entry level real estate investors than house hacking. I gave you a glimpse of the financial upside earlier in this post.
Besides the financial upside, it’s like landlording with training wheels. Since you live on site, you can more easily learn how to manage a rental property, including responding to tenants and handling routine maintenance.
The naysayers will say something like, “I don’t want to live with my tenants. They’re going to stress me out. I don’t want to be bothered at 2 a.m.”
Ignore them.
My wife and I lived with our tenants for five years at this property and two more years at a subsequent property. We did this while working full-time jobs as lawyers and raising two kids.
Because we didn’t listen to the naysayers, we now have four income-generating properties and our “forever home” just outside Chicago.
Even though we’re no longer living for free, the income from our rental properties is enough to cover the expenses of our home.
So, why am I further away from financial independence today?
I’m further away from financial independence today because my expenses have gone up since 2020. I’ve already alluded to those increased expenses throughout the post.
In 2020, we had our first child. Now, we have three children.
Also, after seven years of house hacking, we decided it was time to purchase a long-term home for our growing family just outside the city in a terrific area.
We also finally traded in our 21-year-old car for our first new car ever.
How’s this for easy math:
Three Children + Nice House + New Car = Further Away from Financial Independence
While that combination means I’m further away from reaching financial independence, I now have everything that I could possibly ever want.
That’s why I couldn’t be happier with where I’m at today.
My end game is finally in sight. Five years ago, I didn’t know where I’d be living or what car I’d be driving or what my family situation might be.
Now, the picture is clear.
I can calculate with reasonable certainty how much money I need to be truly financially independent. I can use that number as a target and make every financial decision with that target in mind.
That’s why in 2025, I’m focused on paying down HELOC debt. Each time I make a debt payment, I move closer to financial independence.
I have no intentions of retiring any time soon. Retiring early is not, and has never been, my goal.
My goal is to become financially independent to create as many options as possible to protect myself and my family. I want to be financially independent so I can pivot no matter what life throws at me.
If my goal was to retire early, I may have skipped the single family home in a great neighborhood. I could have continued house hacking, minimized my expenses, and lived off of the rest of the rental income.
But, I want more for me and my family. I don’t want to just survive.
Have you delayed financial independence to craft the life you really want?
My life has certainly changed in the past five years, but all that change has been for the better.
That meant house hacking at first to keep expenses as low as possible. Now it means enjoying the wealth I created by making those earlier sacrifices.
In order to have the life I want, I needed to temporarily move further away from financial independence.
Still, I’m confident that I’ve taken the right steps to not just reach financial independence, but to reach it while living the life I want.
The tradeoff is that it will take me longer to be truly financially independent. I’m perfectly happy with that.
Financial independence has never been more clearly in sight. It’s just delayed a little bit.
Is your goal to reach FIPE and pivot as quickly as possible?
Or, are you OK with delaying FIPE temporarily for the life you truly want?
We focus a lot on financial independence here at Think and Talk Money. That’s because achieving financial independence is the ultimate goal for most of us.
To me, financial independence does not mean retiring.
That’s why I don’t like the popular acronym, FIRE: Financial Independence, Retire Early.
Instead, I I like to view my financial freedom journey as FIPE: Financial Independence, Pivot Early.
Let me explain why I believe in FIPE not FIRE.
FIPE = Financial Independence, Pivot Early
Whatever it is that you truly want to do in life, financial independence makes it possible.
When you have financial independence, you have options. You can make decisions based on your core values instead of making decisions based on money. You can pivot, if necessary.
Financial independence is for people who want to be empowered to take more control of what they do with their working hours.
It’s not about quitting work. It’s about the freedom to pivot to other work, if you want. I’m convinced that humans are meant to be productive. We are social creatures who at our core want to be contributing.
That doesn’t mean we have to be or want to be employees. But, it does mean that we want to do something meaningful with our working hours every week.
That’s why I believe in the power of pivoting, not retiring.
Why I don’t like the name FIRE.
Part of the misconception about financial independence may stem from the name of the popular personal finance concept known as FIRE: Financial Independence, Retire Early.
It’s not uncommon for people to hear financial independence and immediately think that’s only for people who want to quit their jobs and retire. That’s how widespread FIRE has become in the personal finance space.
I agree with so many of the principles of FIRE. I just don’t agree with the name.
Financial independence is about much more than retiring early.
FIRE emphasizes saving more and spending less until you reach the point where your passive investments generate enough income to allow you to quit your job.
I love this part of FIRE: the idea of creating enough income streams so that you have the freedom to do what you want with your time. I share the primary goal of saving more money and spending less to achieve more life freedom.
I call this Parachute Money. I like to view each income stream as a separate parachute string. The more parachute strings you have, the safer it is to make a big change in life.
The problem for me is that the FIRE end game is suggested right there in the name: become financially independent so you can retire.
I don’t like that part. I don’t like what the word “retire” implies.
If you look it up, you’ll see that the word “retire“means to withdraw, to retreat, to recede.
None of those things sound appealing to me at all.
Each word implies moving backwards. I’m not working so hard to achieve financial freedom so I can move backwards in life.
I prefer to think of financial independence in terms of creating options. I prefer to think of financial independence as a way to move forward in life.
I think “pivot” better reflects that mission.
Pivot means to adapt or improve through modifications and adjustments.
That sounds so much more appealing to me.
With FIPE, financial independence is still the primary goal. But, the endgame is not to withdraw or retreat. The endgame is to adapt and improve how you spend your working hours.
FIPE = Financial Independence, Pivot Early.
Granted, the name “FIPE” is not as catchy as FIRE.
But, I think it actually better encapsulates the entire purpose of financial independence in the first place.
To explain, let’s look back at the modern day origin of FIRE for a minute.
Vicki Robin and Joe Dominguez are often credited for laying the groundwork for the modern day FIRE movement. Robin and Dominguez wrote an incredible book called Your Money or Your Life.
It’s one of my favorite personal finance books. You should definitely read it if financial independence is important to you.
In their book, Robin and Dominguez have a lot to say about the relationship between money, work, and time.
Guess what?
Most of us are doing it all wrong.
Most of us make the mistake of chasing money at the cost of our precious time. When you read Your Money or Your Life, you will start to value your time for what it’s really worth.
By making good choices about how to earn money- and as importantly what to do with that money- you can get the most out of your money and your life.
That’s what FIRE is really all about. It’s about choosing to use your working hours in a way that is more meaningful to you than clocking in-and-out as an employee each day.
It’s not about retiring from meaningful work. It’s about pivoting to work that is more meaningful to you.
FIRE proponents would likely agree that the goal is not to withdraw or retreat.
I think proponents of FIRE would actually agree with me that the end game is really not about withdrawing or retreating. The mission is always about moving forward, not backwards.
My belief is that people who are disciplined and skilled enough to reach financial independence in the first place are the type of people who don’t retreat or withdraw.
They may opt for periods of temporary retirement, as they should. But, I don’t think financially independent people are truly wired for full-time retirement.
That’s why you see so many people who have obtained financial independence continue to pursue income streams.
That might mean managing real estate investments, teaching others, or even starting a financial freedom blog.
So, technically speaking, most people who have obtained financial independence have not actually retired. They haven’t withdrawn or retreated. Instead, they have pivoted.
They are now spending their working hours doing other things. They may not be working full-time for an employer, but they’re still working.
They’ve achieved financial independence and have earned the right to pivot.
Financial Independence, Pivot Early.
Even FIRE leaders would likely agree that the end game is not to completely retire.
FIRE is not about retiring or quitting. It’s about pivoting to more meaningful life pursuits.
I don’t want to speak for Robin, but I think this is what she was getting at.
I just think the name FIRE doesn’t accurately portray the mission. Pivoting early seems more appropriate to me than retiring early.
We all have the same goals in mind: financial independence. And, I believe we have the same end game in mind: pivoting to more meaningful work.
That’s why I like FIPE instead of FIRE.
Are you looking to retire early or simply to pivot?
What is it that you’re aiming for by getting your personal finances in order? If you want to retire early, there’s nothing at all wrong with that. You may be at the point in your career and life where that makes sense.
Personally, I’m not looking to retire early. That’s why I like to view financial independence as a chance to pivot.
Pivoting doesn’t mean you have to switch jobs or change things up just for the sake of change. It just means that you have that option if you want it or need it.
By the way, I’m not alone in viewing financial independence as a chance to pivot instead of retire.
I’m in complete alignment with Trench. I like almost everything about FIRE, just not what the name implies.
With FIPE, the goal is not to retire. The goal is to give yourself the freedom to choose what to do next.
Whether you want to retire early or just pivot to a new chapter in your life, being good with money is key.
Do you like the name FIRE or FIPE?
At the end of the day, whether you like to view it as FIRE or FIPE, the mission is the same. We are all looking for the freedom to choose what to do next.
When striving for financial independence, the goal is to create options. Those options likely include pivoting to more meaningful work, rather than withdrawing or retreating.
Personally, I think the name FIPE better encapsulates that mission.
Do you agree?
What name resonates more with you on your financial freedom journey?
Are you interested in retiring early or pivoting early?
Financial freedom doesn’t happen overnight. I’ve been on my journey to financial freedom for more than a decade.
I’m not there yet.
Here’s a look at how my journey to financial freedom has progressed since I graduated law school in 2009.
My journey to financial freedom began in my late-20s and was focused on eliminating debt.
In my 20s, I needed to pay off credit card debt and student loan debt. All I knew about the journey to financial freedom back then was that it seemed very far away.
I started budgeting, which meant reigning in my spending on things I didn’t really care about.
I began to establish good money habits. It wasn’t easy, and I was far from perfect. That’s OK. The 80/20 rule reminds us that we don’t need to aim for perfection.
By the way, my life didn’t all of a sudden become boring and miserable when I became more money conscious. Quite the opposite, actually.
I became more confident in myself because I had a plan. I no longer felt like I was sliding backwards. With each paycheck, I moved one step closer to erasing my debt. That was a powerful feeling.
In my early-30s, my journey to financial freedom was about fueling my savings.
By the time I turned 30, I had paid off my credit card debt and my student loan debt. I’ll never forget the day I made my last student loan payment as my family and I were heading out to Colorado. A huge weight had been lifted from my shoulders.
I felt free. My journey to financial freedom was still in the early stages, but I was on my way. Most importantly, I still had good habits and a plan.
The money I had been allocating to student loan and credit card debt could now be put towards more fun goals and experiences.
Instead of aimlessly spending the thousands of dollars each month that had been going towards debt, I rolled that money directly into savings. Highest on my list was saving for an engagement ring.
Within a year, I had enough saved to purchase the ring. I thought being free from debt was strong motivation. Turns out that motivation was nothing compared to the desire to buy a ring for the woman you love.
As your career progresses and you earn more money, you will benefit from strong personal finance habits.
As my career progressed, like many of you, I started earning more money. When I earned more, I did my best to use that additional income as fuel for my goals.
I’m grateful I had previously learned strong personal finance habits on my journey to financial freedom when I earned relatively little.
For most of us, our usual career progression is the exact opposite of the typical lottery winner. Who hasn’t heard the stories about the lottery winners that hit it big and then quickly go broke?
These stories are unfortunately all too common. What starts out with so much elation usually ends in tragedy.
The normal downfall involves unrestrained spending on things like houses, cars, and extravagant nights out. It also involves the pressure to give money away to family, friends, and charities.
The challenge is the same for lottery winners and professional athletes. They come into a lot of money suddenly without any prior personal finance education. When this happens, that money disappears quickly.
What can we learn from lottery winners and professional athletes?
I think it’s safe to say that none of us are going to win the lottery or earn millions as a professional athlete. I hope I’m wrong about that!
But, we can still fall victim to the same set of challenges on the journey to financial freedom. It may not be a sudden rise and then an equally sudden drop-off. Our financial growth presents itself more slowly.
Over time, we may earn referrals/commissions, raises, and bonuses. These earnings certainly add up and can make a huge difference in our lives, if we have a plan. That’s a big “if” for most of us.
I didn’t have the full plan figured out in my 20s. Our goals change as life changes. There’s nothing wrong with that.
That said, because of the steps I took in my 20s to learn about personal finance, I was better prepared for the opportunities and challenges that arose in my 30s. I learned that when you create a solid foundation for yourself, you have options.
To me, life is all about giving yourself options. Nobody likes feeling stuck, including me.
In my mid-30s, my journey to financial freedom was about building wealth through real estate.
Besides saving for an engagement ring and a wedding, I was able to save up for a downpayment on a home. At the time I started saving up for a home, I had no idea that I could use my savings to invest in real estate.
It wasn’t until I went to a Cubs game with a good friend of mine, The Professor, that I learned about real estate investing.
This is when my journey to financial freedom really accelerated.
See, The Professor had a beautiful condo with an incredible rooftop deck near Wrigley Field. During the game, he told me he was selling the condo and moving into a 4-flat with his fiancee in an up-and-coming part of town.
Huh?
Why on earth would you give up your amazing condo?And move to a random neighborhood I’d maybe been to one time in my life?
I thought The Professor had lost his mind. Back then, I had no idea what a 4-flat even was. I couldn’t even point to his new neighborhood on a map of Chicago.
The Professor set me straight.
He walked me through the numbers. He explained that he was going from paying $3,000 per month for his condo to receiving $700 per month on top of living for free in the 4-flat. That’s a $3,700 difference per month!
The Professor also introduced me to BiggerPockets. That was huge for me because I believe in the motto, “Trust but verify.”
Over the next week, I read everything I could and listened to podcasts every day. It didn’t take long before I was convinced that I wanted a 4-flat of my own.
Eight years later, I own three buildings and 10 apartments in that same Chicago neighborhood. I have a ski rental condo in Colorado.
Without that great talk with The Professor, I don’t think I would be where I am today on my journey to financial freedom.
We all need to position ourselves to benefit when luck comes our way.
I was fortunate to have learned from The Professor’s experience. We all need some luck on the journey to financial freedom. I’m convinced that we’ll all catch a break here or there. The question is what we do with that luck when it comes our way.
If I hadn’t taken the time to learn about personal finance in my 20s, I wouldn’t have been positioned to benefit from that conversation with The Professor.
That’s why I say the journey to financial freedom doesn’t happen over night. It’s about one building block at a time.
For any aspiring real estate investors out there, please take that message to heart. Before you can successfully invest in real estate, you have to invest in your own financial literacy.
I’ve learned firsthand that the same principles that apply to personal finances apply to managing a real estate portfolio. Each pursuit takes a plan that only works with discipline and patience.
In my late-30s, my journey to financial freedom was about paying off debt.
In my late-30s, my journey to financial freedom pivoted from acquiring properties to optimizing my portfolio. My wife and I decided we were ready to transition from growing our real estate portfolio to paying off our debt.
In a way, I’ve come full circle on my journey to financial freedom.
Reading Small and Mighty Real Estate Investorhelped us conclude that at this point in our lives, we have enough. Our portfolio generates enough income to help fuel our current goals. If we were to continue expanding, the headaches could end up outweighing the financial benefits.
In the short term, that mortgage debt pulls me further away from financial freedom.
If my plan works, that same debt will push me more rapidly to financial freedom.
Financial freedom through real estate has existed for decades, if not centuries.
By the way, I didn’t invent the plan of achieving financial freedom through real estate. That idea has existed for decades, if not centuries. I’d avoid anyone who tells you they pioneered this concept.
Years ago, I remember sharing my newfound passion for real estate with mom. She had this smile on her face as I excitedly shared this “new” phenomenon of investing in real estate to achieve financial freedom.
The next time I saw her, I realized her smile was actually more of a smirk.
It’s natural to want to jump to the finish line. I’m guilty of that, too. I think about achieving financial freedom every day and need to remind myself to take it one step at a time.
Even with all I’ve learned about personal finance, it can sometimes feel like I’m heading in the wrong direction.
Wherever you currently are on your journey to financial freedom, remember that it doesn’t happen over night. I need to constantly remind myself to stay the course.
Keep coming back to Think and Talk Money for daily reminders that financial freedom is within all of our grasps.
I had the happiest occasion to think about that question this past week.
My wife and I welcomed our third child, a little baby girl.
We were very fortunate and had a smooth delivery process.
Even so, when you’re in the delivery room, your mind runs wild. You just want everything to go well. It’s completely out of your hands by that point.
Things get really interesting when you’ve been at the hospital for a while and haven’t slept. There’s no telling where your mind will go.
No matter how much you tell yourself not to do it, you can’t help but think of all that can go wrong.
During these moments, I can assure you that one thing you’re not thinking about is money. If anything, you’re thinking that you would trade all the money you have for a healthy baby and a healthy mom.
When you finally hold your new baby, nothing else in the world matters. Everything around you goes quiet. The sense of relief is overwhelming and you cry.
It’s a beautiful thing.
In those first few moments, I told my baby girl that I love her. I promised that I will always protect her. Whatever she needs, I will be there.
If I want to keep that promise, I need to be good with money.
To be good with money, I need a powerful Money Why.
I wrote down that goal before I was even married or had kids.
Years later, my Money Why hasn’t changed. The only thing that’s changed is my Money Why has gotten stronger and stronger since then.
In 2017, my Money Why got stronger when I got married.
Then in 2020, my Money Why got stronger when my daughter was born.
Again in 2022, my Money Why got stronger when my son was born.
This week, my Money Why got stronger when my baby girl was born.
My Money Why has never been more clear. It doesn’t even matter if my brain is functioning at half speed right now on limited sleep.
My Money Why is my baby girl, my son, and my daughter. My Money Why is my wife.
Of course, I want to provide for my family financially.
But my Money Why is more than that.
I don’t want to just provide money, I want to provide time. And, I want to be present and share experiences.
Most of all, I want to be with them.
My overall goal in life is to spend as much time as possible with the people who are meaningful to me. To accomplish that goal, I need to be good with money.
If I’m good with my money, I can achieve financial freedom.
With financial freedom, I can choose how to spend my time. That means I can choose who to spend my time with.
My Money Why is not about being rich.
Saying that I want to be good with money is not the same thing as saying that I want to be rich. Funny enough, people that are good with money oftentimes feel rich regardless of what their net worth is.
But I’ve noticed on my path to financial freedom there were several times when I felt incredibly rich and money wasn’t the dominant reason.
I couldn’t agree more with Dogen. There’s no richer feeling than having just come home from the hospital with a healthy baby girl. That feeling has nothing to do with money.
Check out more from Dogen at his website financialsamurai.com. There’s a reason why he is one of the leading voices in the personal finance space.
Simply making a lot of money will not make you feel rich.
On the flip side, people that make a lot of money but are not good with money often feel like they’re struggling to get by. As CNBC explained after talking with financial psychologists:
Whether you’re aiming to save more cash or boost your overall earnings, it’s important to ask yourself what you hope to achieve by obtaining more money, Chaffin says. Otherwise, if you don’t change your internal money beliefs, you may still feel anxious about money even if you hit millionaire status.
The takeaway is that it is pointless to make money without stopping to think why you want that money and what you’re going to do with it.
Money is nothing but a tool that you can manipulate to get what you truly want out of life. The thing is, you have to actually think about what you want if you are going to use that tool effectively.
Don’t wait for a major life event to start thinking about money.
You don’t have to wait until you have a baby to start thinking about what money can do for you. In fact, if you wait for a major life event like that, it’s going to be a lot harder than if you start thinking now.
Ask yourself:
“What is my Money Why?”
Whatever comes to mind, write it down.
Maybe you want to retire early. Maybe you’re just looking for a life pivot, as Scott Trench, CEO and President of BiggerPockets wrote about recently and has regularly discussed on the BiggerPockets Money podcast.
I personally agree with Trench, and I like almost everything about FIRE, which stands for Financially Independent Retire Early. It’s just that I know that retiring early is not for me.
I prefer to think of it as FIPE:
Financially Independent Pivot Early
With FIPE, the goal is not to retire. The goal is to give yourself the freedom to choose what to do next.
Whether you want to retire early or just pivot to a new chapter in your life, being good with money is key.
Besides, I’ve never seen the point in working endless hours to make money, while spending hardly any time seriously thinking about how to keep that money.
What’s your Money Why?
My Money Why gets clearer by the day. It has never been more clear than it is right now after bringing home a little baby girl.
What is your Money Why?
Has your Money Why changed over time?
How does your Money Why impact your relationship with money?
They’re a weight that we carry around long before we even make the first repayment. Sometimes that weight feels so heavy, it’s hard to imagine it ever going away.
And as much as we wish we could, we can’t ignore our student loans.
One way or the other, we have to get rid of them.
And when we do get rid of them for good, there might not be a better personal finance feeling in the world. Personally, I’ll never forget the day I made my last payment and shared the news with my future wife and family.
To help you have that same feeling of accomplishment, here are my top 10 student loan tips for lawyers and professionals.
Top 10 Student Loan Tips for Lawyers and Professionals
Locate all your loans.
Sign up for automatic payments.
Do not miss a payment.
Consider using Debt Snowball or Debt Avalanche.
Make an extra monthly payment.
Create a BAT that generates fuel for your student loans.
Make more money and use that money for your loans.
Take a tax deduction and use your tax refund for your loans.
Consider a loan consolidation.
Look for ongoing scholarship opportunities.
1. Locate all your loans.
As a first step, be sure that you are aware of all of your loans. Most people end up needing both federal loans and private loans, which are not tracked by the same loan servicers.
Additionally, you may have taken out different types of loans at different stages of your education. It’s not uncommon to forget about some of those loans.
Before you can implement a thoughtful strategy to pay back your loans, you need to ensure that all of your loans are accounted for.
The best place to locate all of your loans is on your credit report. The next best option is to ask your school’s financial aid office.
A credit report is a document that tracks your history of repayment and the current status of any loans you’ve taken out.
You are entitled to receive a free copy of your credit report from each of the three main credit reporting agencies every year. To do so, simply visit annualcreditreport.com.
For federal loans, you can also check online at studentaid.gov. But, your private loans won’t be tracked by the federal government at studentaid.gov.
Besides checking your credit report, you can access all your private loan information from your loan servicer.
Once you’ve identified all your loans, you can implement a strategy to pay them off efficiently.
2. Sign up for automatic payments.
By signing up for auto pay, you can save .25% interest on your federal loans. Many private loan companies also offer a .25% discount for using auto pay.
Over time, those savings will add up. And, there’s really no downside to you.
In fact, you should be using automatic payments even if your loan servicer does not offer a discount.
When it comes to paying back loans or achieving any other financial goal, automating your money is a very good idea. In The Automatic Millionaire, David Bach thoughtfully explains how the single step of automating your finances can help you achieve all of your financial goals.
You can learn more about Bach’s philosophy on his website.
I personally implement many of Bach’s strategies in my own life. I used to automate my student loans payments. Now, I automate my mortgage payments.
You know that expression, “Act now, apologize later”?
That absolutely does NOT apply to loan payments.
No matter how responsible or well-intentioned you are, sometimes life happens. Whether it’s technically your fault or not, a missed loan payment is a big problem.
It may seem unfair, but even a single missed payment can severely impact your credit history and credit score.
Because the consequences of a missed payment are so severe, this is another reason why setting up auto payments is such a good idea.
If you know ahead of time that you won’t be able to make a payment, it is imperative that you notify your loan servicer ahead of time. Your loan servicer may be able to work with you and figure out a solution before major consequences set in.
4. Consider using Debt Snowball or Debt Avalanche to pay off your student loans.
When you apply the Debt Snowball strategy, the idea is to focus on the loan with the smallest balance first, regardless of interest rate.
Once you have paid off the first loan in full, you move to the loan with the next smallest balance, again regardless of interest rate. The money you had been paying to the first loan can now be rolled into the second loan.
When you apply the Debt Avalanche strategy, the idea is to prioritize the loan with the highest interest rate, regardless of the balance.
Once you’ve paid off the loan with the highest interest rate, you move to the loan with the next highest interest rate. Just as before, the money you had been paying to the first loan can now be applied to the second loan.
Either approach works perfectly for paying off multiple student loan balances. Regardless of which method you choose, always pay the minimum required amount on all loans every month.
5. Make an extra monthly payment for massive savings.
You may be surprised how big of an impact even a small additional payment each month can have on your loans.
Let’s look at an example.
Let’s say you owe $100,000 in student loans and currently pay back $1,250 per month with an 8% interest rate.
Using calculator.net, you learn that at this pace, it will take you 9 years and 7 months to pay off your loans. You’ll pay back a total of $143,377.94.
Now, let’s imagine you are able to pay back an additional $100 per month.
Look what happens:
You can eliminate your loans an entire year sooner and save $5,040.13 in interest payments. Just with an extra $100 per month!
What about if you are able to pay back an extra $250 per month?
This is when I start to get excited.
Check this out:
For just $250 per month, you can knock off 2 years and 2 months of loan repayments and save $10,684.35 in interest!
Think about how good it will feel to get 2 years and 2 months of your life back without loan payments.
How are you supposed to come up with an extra $100, $250, or more per month?
I’m glad you asked.
6. Create a Budget After Thinking that generates fuel for your student loans.
If you want to pay off your student loans faster, you really only have two options.
The first option is to create a Budget After Thinking that prioritizes loan repayment. One of the key purposes of budgeting is to generate fuel for your future goals, including eliminating student loan debt.
Instead of letting your hard-earned dollars disappear, put them to good use. Even $100 a month can make a big difference, as we just saw.
If you’re having a hard time generating additional fuel for your student loans, check out my 10 Tips to Win the Budget Game.
So, the first option to pay off your loans faster is to create a budget and spend less money elsewhere.
What’s the second option?
7. Make more money and put those extra earnings directly to your loans.
If you’re not going to cut spending in favor of student loan repayment, then your only other option is to make more money.
That might mean getting a valuable side hustle. Or, it might mean earning a raise or a bonus at your primary job.
Whatever the case may be, as you make more money, focus on improving your savings rate.
Your savings rate is simply the amount of money you save each month divided by the amount of money you make.
Even though it’s called “savings rate,” there’s no reason why you can’t include debt repayment in your calculations. Whether you are adding money to a savings account or eliminating debt, your net worth improves.
It all counts in my book.
The point is that when you start to earn more money, put that money to good use.
Instead of shopping at more expensive stores or eating at fancier restaurants, keep your spending habits the same. Put those higher earnings towards your important life goals, like eliminating student loan debt.
8. Take a tax deduction and use your tax refund for your loans.
The IRS permits borrowers, up to certain income limits, to take a federal tax deduction up to $2,500 per year for student loan interest payments. That means that you can reduce your taxable income by up to $2,500 per year based on the interest you paid that year.
The actual amount of money you’ll save with this tax deduction depends on variables like your tax bracket. Check with your accountant or tax professional for specifics.
Regardless, as we’ve seen above, even a small amount of extra money can go a long way if used for additional student loan debt payments.
In the same vein, what if you made it a goal to apply your entire tax refund to your student loan debt?
Let’s return briefly to our example above.
This time, let’s assume that each year, you receive a tax refund of $1,700. Instead of wasting that $1,700 annually on things you don’t care about, you decide to put that money directly towards your student loans.
Look what happens when you apply that $1,700 tax refund to your student loans each year, without making any additional payments whatsoever:
With just that one decision to use your annual tax refund for student loan payments, you knock off 1 year and 4 months of payments and save $6,099.26!
That seems like a great use of money that you’ll never miss anyways.
9. Consider a loan consolidation.
Consolidating your various loans into a single loan can help make your life easier and save you money.
Your life should get easier when you only have to track and pay one loan back each month. There’s also a much smaller chance that you forget to make a payment or lose track of a loan altogether.
Besides the convenience, when you consolidate, you should receive an overall lower interest rate. That means long-term savings.
Before you consider a loan consolidation, be sure to do your homework. One major consideration is that you will lose whatever federal loan benefits you currently have if you consolidate, such as the possibility for loan forgiveness.
10. If you’re still in school, look for ongoing scholarship opportunities.
This is something that didn’t occur to me until my final year of law school. It took me that long to realize that schools regularly offer scholarships, stipends, and grants to current students, not just prospective students.
During my third year of law school, I applied for a scholarship and was awarded $2,000. I didn’t think of it at the time, but looking back, I could have used that $2,000 to prepay my student loan interest.
That would have accelerated my progress towards eliminating my loans while I was still in school.
This is a good time to point out that personal finance requires consistent attention. You don’t have to think and talk about money every day. Not even I want to do that.
But, you do have to intentionally make your personal finances a regular part of your life.
Let’s revisit our example once more.
Sorry, I can’t help myself.
What if you combined some of the 10 tips we just talked about?
Let’s say you decide to make an extra $250 monthly payment, contribute your $1,700 tax refund annually, and make a one-time payment of $2,000 for a scholarship you earned while finishing up school.
With just three relatively painless decisions, you can knock off 3 years and 1 month of student loan payments! And, you’ll save $15,481.76!
Think about what you could do with an extra 3 years and 1 month of your life without student loan payments.
You can now use that $1,500 per month you had been using for student loans on other goals. Not to mention what you could do with your annual tax refund.
On top of that, think about what you could do with that $15,481.76 you saved in interest payments.
Decisions like these are how financial freedom happens.
That’s powerful stuff.
What are your favorite student loan repayment strategies?
To recap my top 10 student loan tips for lawyers and professions:
Locate all your loans.
Sign up for automatic payments.
Do not miss a payment.
Consider using Debt Snowball or Debt Avalanche.
Make an extra monthly payment.
Create a BAT that generates fuel for your student loans.
Make more money and use that money for your loans.
Take a tax deduction and use your tax refund for your loans.
I don’t have any better idea than you do about what may happen in the student loan landscape.
No matter what happens, the way I see it, you have two options .
The first option is to do nothing, get angry, and blame everyone else.
The second option is to take ownership, get prepared, and educate yourself about the student loan system so you’re ready for whatever comes next.
If you’ve chosen the second option, you’re in the right place. That means you’re determined to not let outside factors you can’t control hinder your progress towards financial freedom.
In this post, we’ll cover the basics about federal and private student loans so you can begin to make informed decisions to most efficiently eliminate your student loan debt.
Whether you are finishing up school or currently paying off loans, this is a good place to start. No matter how the student loan landscape changes, it’s a fair bet that these basic concepts will remain in place.
In the end, paying off student loan debt is really not that different from paying off any other form of debt. However before we start playing the game of conquering student loan debt, we need to understand some key ground rules.
Let’s dive in.
Student loan debt is a major obstacle to reaching financial freedom.
Student loan debt is one of the major obstacles for people striving for financial freedom. That makes sense given that more than 42 million people in the United States currently have student loan debt.
It’s not just about the number of people who have student loan debt. It’s the dollar amount of those loan balances. In my opinion, I don’t see how someone can be truly financially free when burdened by student loan debt.
The average person with a graduate degree owes up to $102,790 in federal student loan debt.
54.0% of all graduate school students have federal student loan debt.
55.2% of people with master’s degrees have federal student loan debt.
74.8% of people with professional doctorates have federal student loan debt.
76.2% of doctors have student loan debt.
It’s because so many of us rely on student loans to pay for school that there is no shortage of information available online. The problem is there’s so much information, it’s hard to know where to start.
Let me help you get started.
Federal loans are better than private loans.
The first thing to know about student loans is that there are two entirely different types: federal loans and private loans.
Federal loans are funded by the United States government. You can access the main federal student loan website at studentaid.gov.
Private loans are funded by lenders, like banks. Some of the most popular private student loan companies are SoFi, College Ave, and Sallie Mae.
When you hear about student loans in the news, you’re hearing about changes to the federal loan system. There may be some side effects for the private loan system, but the federal system is getting all the attention right now.
There’s no real dispute that federal loans have long been a better option for borrowers than private loans. Federal loans almost always offer the best rates and terms. Even the private loan companies admit as much.
The reason people have both federal and private loans is because federal loan amounts are capped. Once you’ve taken out all the federal loans you are eligible for, private loans become necessary to fill whatever funding gap remains.
With tuition costs rising for college and grad school, it’s likely you’ll leave school with both federal and private loans.
Understanding the available options and differences for each type of loan will help you eliminate your student loan debt as efficiently as possible.
What to Know about Federal Student Loans
Even with a changing landscape, below are the key aspects to keep in mind regarding federal loans.
With this background in mind, you’ll be better equipped to make adjustments to your student loan payoff strategy should that time come.
There are 3 main types of federal student loans.
There are three main types of federal student loans: Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct PLUS Loans.
Direct Subsidized Loans offer the best rates and terms and are designed for undergraduate students with financial need.
The main advantage of subsidized loans is that the federal government pays the interest for the borrower for a certain period of time, like when the borrower is still in school. That could be major savings.
Direct Unsubsidized Loans are available for undergraduate and graduate students and are not restricted to students with financial need. However, the borrower is responsible for all the interest on the loan.
Your school determines which type of loan you are eligible for. Keep in mind there is cap to the amount you can borrow for each type of loan. We’ll discuss the caps in a moment.
Your credit score does not factor into Direct Subsidized or Unsubsidized Loans.
Unlike with private loans, Direct loans do not depend on your credit score. This is a key advantage of federal loans for people who have no credit history or poor credit history.
Direct PLUS Loans are available for parents and graduate students.
Direct PLUS Loans are for eligible parents and graduate and professional students.
The other main differences with PLUS loans relate to the amount you can borrow and the interest rate you’ll pay, as seen below.
Also, with PLUS loans, the borrower’s credit history is a factor considered during the application process. These loans are not available to people with poor credit.
Federal Loans are capped depending on the loan type and education level.
The amount you can borrow in federal loans depends on the loan type and education level (undergraduate or graduate/professional).
As an undergraduate, you can borrow up to $12,500 in Direct federal student loans each academic year.
For PLUS loans, you can borrow up to the cost of attendance for your school minus any other financial assistance received.
With these caps in mind (besides PLUS loans), you can see how federal loans alone are usually insufficient to cover the full costs of higher education.
Federal loans offer the best interest rates and lowest fees.
As mentioned above, federal loans have long offered the best interest rates and lowest fees.
Rates are always subject to change. For illustration purposes, here are the current interest rates for federal loans:
Loan Type
Level
Interest Rate
Direct Subsidized and Unsubsidized
Undergraduate
6.53%
Direct Unsubsidized
Graduate/Professional
8.08%
Direct PLUS
Parents or Graduate/Professional
9.08%
In addition to interest, most federal loans also include loan fees. These fees are taken out of the loan at the time the loan is first disbursed. That means the amount you’re borrowing and responsible for paying back is more than the amount you actually receive.
As you can see, even within federal loans, the interest rate and fees charged vary depending on the type of loan and level of education.
The federal government contracts with loan servicers to manage your loans.
The federal government will assign your loan to a loan servicer to handle billing and other services. When you need information or have questions about your federal loans, you’ll need to contact your loan servicer.
The federal government currently works with the following loan servicers:
Keep your loan servicer’s contact information close by, especially these days.
Your first federal loan payment is typically due six months after leaving school.
With federal loans, you will usually have a six month grace period after you leave school before your first loan payment is due.
Not all federal loans have a grace period, and interest usually will accrue during the grace period. You are allowed to pay this accrued interest before you enter repayment.
The federal government offers a number of loan repayment plans, for now.
The federal government offers a number of loan repayment plans.
It’s anyone’s guess if these repayment plans will continue to exist and who may be impacted.
For up-to-date information on the available repayment plans, please visit studentaid.gov or contact your loan servicer.
So, what is a loan repayment plan?
Generally speaking, a standard repayment plan means paying your loans back in equal monthly payments spread over ten years.
In addition to the standard repayment plans, there are a number of plans currently available to reduce your monthly payment and extend your repayment term. These plans are typically based off of income level.
The idea behind most of these repayment plans is to help you pay back your loans while still affording your other monthly expenses.
Your loan servicer will work with you to determine the best repayment plan for your situation.
With federal loans, there should be no prepayment penalty if you accelerate your loan payments on your way to financial freedom.
One important note: regardless of the repayment plan you choose, you are still responsible to pay back the entire loan. If you choose a plan that offers lower monthly payments spread over a longer time period, you will end up paying more in total interest.
Loan Deferment, Forbearance, Forgiveness and Discharge
With federal loans, you typically have better options when you are struggling to repay your loans. Note that just because you may have more options does not mean you’ll be let off the hook.
Loan forgiveness may be available to people who work in eligible public service jobs who make loan payments for ten years.
Again, this may be all in flux.
For up-to-date information on the available repayment plans, please visit studentaid.gov or contact your loan servicer.
What to Know about Private Student Loans.
With a basic understanding of federal loans as context, it’s not too difficult to understand how private loans work.
The key here is that when it comes to private loans, there are more variables to consider. Lenders may have different rates, loan terms, and repayment schedules.
Be aware that private loans likely will not offer loan forgiveness and may involve additional fees and potential penalties.
The best thing you can do is to compare the various options for private student loans. A good place to start is with three of the most common private lenders:
Each of these lenders provides detailed information on its websites. Even if you don’t choose any of these lenders, you can still do your homework on their websites.
Besides just the interest rate on a potential loan, pay attention to other important factors like:
Loan fees
Repayment options
When the first loan payment is due
Prepayment penalties
Consolidation options and fees
Quality of service and responsiveness
In the end, you’ll likely find that most private loan lenders offer comparable rates and terms. They are competing with each other for your business, after all.
Where are you in your student loan journey?
Ultimately, only you are responsible for your loans. You can blame everyone else for the changing landscape or you can educate yourself and make a plan.
Whether you are finishing up school or currently paying off loans, this post is intended to provide student loan basics that should hold true no matter how the student landscape changes.
Now that you understand the basic ground rules, you can work on a plan to pay off your loans as efficiently as possible on your way to financial freedom.
Where are you in your student loan journey?
Do you know anyone who would benefit from taking about student loan basics?
Debt from student loans and financial freedom go hand-in-hand for most professionals. Maybe a better way to put it is that student loans can be a major obstacle on your path to financial freedom.
Student loans and financial freedom go hand-in-hand.
Whether you have student loan debt from college or graduate school, it’s important to have a plan to pay that debt off.
All debt acts as a roadblock to financial freedom. Student loans are no different.
Of course, the more education you’ve received, the more student loans you likely have.
When considering student loans and financial freedom, look no further than these recent stats provided by the Education Data Initiative:
The average person with a graduate degree owes up to $102,790 in federal student loan debt.
54.0% of all graduate school students have federal student loan debt.
55.2% of people with master’s degrees have federal student loan debt.
74.8% of people with professional doctorates have federal student loan debt.
76.2% of doctors have student loan debt.
This is why it’s especially important for professionals to realize the connection between student loans and financial freedom.
Hold on before you tune out because you don’t have any student loan debt.
The journey towards financial freedom is often a shared journey for many of us.
This data shows that even if you don’t personally have any student loan debt, the odds are you are going to marry someone who does. Or, you’re the parent, or will someday be the parent, of someone who has student loans.
That’s why we all need to learn about student loans and financial freedom. You may soon find yourself in a relationship where you’ll want these student loan strategies.
If nothing else, your prior experiences with student loans can help someone else if you’re just willing to talk about them.
I’ll never forget the day I made my last student loan payment.
My family was heading out to Colorado around Christmas time for some snowboarding and skiing. Don’t worry, I didn’t break a wrist that trip.
My goal that year had been to finish paying off my student loans entirely. However, I can’t take credit for wanting to pay off my loans that year.
That credit goes to my wife. She was the first person who helped me appreciate the interconnection between student loans and financial freedom.
Here’s what happened.
About 11-12 months before that trip to Colorado, my (future) wife and I talked about how we wanted to start our marriage debt-free. We were thinking about buying a home and starting a family. Student loan debt did not fit into this picture.
She saw how focused I was in creating a Budget After Thinking and how important it was for me to stick with it.
My wife also experienced firsthand how much better I felt once I had a plan to pay off my debt. She wasn’t just an observer, either. She was an active participant.
So, when I had finally paid off all of my credit card debt, it was time to focus all that financial energy on my student loan debt.
This may sound odd, but I was excited to move on to a new challenge. Not that paying off debt is ever easy. But, with my student loans, I knew it was going to be easier than paying off my credit card debt.
That’s because I had already learned and experienced the hardest part of paying off debt with my credit card experience. I had already shifted my money mindset.
Money mindset is so important to student loans and financial freedom.
Once your money mindset is in the right place, you can make informed and intentional choices about debt. It doesn’t matter if you’re paying off credit cards, student loans, or even HELOC debt.
When you’re honest and dedicated to fostering a healthy money mindset, you’re better able to establish habits like budgeting and saving. That’s how you create fuel for your Later Money goals, like eliminating debt.
Personally, my money mindset was in a much different place by the time I prioritized paying off student loan debt compared to paying off credit card debt.
With my credit card debt, it took waking up one day and feeling ashamed for how irresponsible I was with my spending before I committed to paying it off. I felt down and discouraged.
With my student loans, I wasn’t starting from a feeling of failure. It was quite the opposite, actually. I had a much better attitude because I had proven to myself that I could pay off debt. I had experienced how good that felt.
So, when my wife and I talked about eliminating my student loan debt before we got married, that was just one final incentive.
My wife would say that I’m a quietly competitive person. When she initiated that talk about paying off my student loans before we got married, it was game on for me.
I didn’t need any extra motivation, but I sure felt extra motivated after that talk.
I prioritized paying off my student loans the rest of that year.
For the next 11-12 months, I made it my priority to eliminate my student loan debt. I had been making the required payments each month for years, but eliminating my student loans always took a back seat to my other goals. Now, it was time to prioritize eliminating my student loans.
Using the Debt Snowball method, I used whatever excess money I had each month to pay off the remaining balance on one loan at a time.
This was before we owned any real estate, but I had begun my side hustle as a law school professor. Whenever I got a paycheck from the law school, I immediately put it towards my student loans.
When I earned a raise that year, I put the whole raise towards my student loans. I did the same thing with irregular earnings, like from commissions, bonuses and even my tax refund.
As our Colorado trip was approaching, I knew that the finish line was in sight. I waited to tell my future wife just how close I was until after I had made the final payment. I’ve always liked surprising her.
I remember telling her I just made the last payment on the day before we left for the trip. She was thrilled, and surprised, at how quickly I accomplished the goal.
I thanked her for motivating me.
The next day in Colorado, I shared the news with my parents that I had pay off my student loans. They were even happier than my wife and I were. All my siblings were there with us. We had a toast and celebrated. It was a night I’ll never forget.
It’s natural to worry about paying back student loan debt.
When I teach personal finance for lawyers, student loan debt is always one of the most important topics. It’s natural to worry about paying back such a large sum of money as you are beginning your career.
Even if I didn’t realize before, I now fully appreciate the relationship between student loans and financial freedom.
My hope is that by thinking and talking even a little bit about your student loans, you won’t have to worry. You’ll have a plan to pay back your loans in the most efficient way possible on your way to financial freedom.
In our initial series on student loans, we’ll learn how to:
Find your loan balance, set up payments, and other important basics when you’re just getting started.
Choose a repayment plan that works best for your personal situation.
Strategize to pay off student loan debt within the context of your overall life goals.
Navigate the ever-changing landscape of student loans.
Then, you’ll have your own reason to celebrate with your loved ones just like I did in Colorado.
Have you thought about student loans and financial freedom?
Where are you currently with your student loans? Just starting out, nearing completion, or somewhere in the middle?
Are you the partner or parent of someone with student loans? Have you discussed a plan for paying those loans off?
Let us know so we can learn from each other’s experiences in the comments below.
If you would have asked me this a couple years ago, the answer would have been “100% yes.”
I’ve long been a big fan of using credit cards to earn rewards points and to help track my spending. As long as you pay your credit card bills on-time and in-full every month, credit card rewards can be quite valuable.
The best vacations I’ve ever had were paid for using points instead of cash.
My wife and I have taken some amazing vacations that we would have never gone on if we had to pay in cash.
We used points to fly first class to Florence for our honeymoon. We’ve used points to stay at luxury hotels in Paris, Barcelona, and Santorini that normally charge more than a thousand dollars a night.
When my wife and I were still dating, we went to New York for a wedding. We got out there two nights early, and I used points to book us a room at the Waldorf Astoria. This was back in my real life, really lost boy days when I didn’t have any spare cash for something like this.
My wife and I had a great time at the Waldorf before heading out to Long Island for the wedding.
I may have forgotten to tell my wife that in Long Island, we’d be sharing a room with two (turned out to be three) of my buddies. I didn’t have any points left for this hotel. Oops.
She was a good sport. Not even the surprise ice storm from the groom in the middle of the night bothered her. She was a keeper.
I could go on and on. The point is there was a long period of time where all of our vacations were paid for using points instead of cash.
Using points also helped me stay on budget and build my net worth.
That meant our net worth grew in the background while we were out having these amazing experiences.
I also have long been a fan of using credit cards to help me stay on budget. With credit cards, I can quickly track my spending online during the month to see if I’m on pace for a good month.
If I notice that I’ve overspent, I can slow down my spending to get back on track.
Between the rewards points and the ability to track my spending, I still am a big fan of using credit cards for most everyday purchases.
When used responsibly, meaning paying your credit card bill in full and on-time every month, credit cards can be part of a healthy financial life.
That said, nowadays, I’ve started using cash more frequently.
I’ve started using cash more often these days.
I still use credit cards more than cash, but I’m starting to use cash more often than I used to.
There are a couple main reasons for this.
I use cash for the convenience for smaller transactions.
I now use cash regularly for smaller or quicker transactions, like going to the farmer’s market, grabbing ice cream for the kids, or paying for taxis.
Yes, I still take taxis. I work as a mesothelioma attorney in downtown Chicago near the courthouse. Taxis are plentiful and a lot of times quicker and cheaper than ride share companies.
And, there are ATM’s on just about every corner near my office in Chicago, so it’s not inconvenient to keep cash on hand.
For these types of transactions, I value the convenience of paying with cash more than the small amount of credit card points I would earn.
I also like to pay cash to help out these types of small businesses because they seem to generally prefer being paid in cash. I leave whatever change I’m owed as a tip.
Also, I’m no longer worried about precisely tracking my cash spending in my Budget After Thinking.
Instead, I simply account for a few hundred dollars of spending using cash each month. I generally know what types of things I’m spending cash on, so I don’t worry about tracking each expenditure specifically.
Besides convenience, there’s another reason I use cash more frequently now.
Besides convenience, I’ve started to use cash regularly for another reason.
It’s not that the rewards have changed very much. Or, that I no longer like tracking my spending.
It’s for a different, and somewhat disappointing, reason:
More and more service providers, retailers, and restaurants are charging fees to use credit cards. These fees can be as high as 4% of the purchase price.
These additional fees are sometimes referred to as “surcharges” or “processing fees.”
Be warned, sometimes these fees are cloaked as “discounts for cash payments.” Don’t be fooled. This is just a sneaky way to say you will be penalized for using a credit card.
Why do businesses charge processing fees?
For a little bit of context, credit card companies make money by charging businesses a “merchant fee” or “interchange free” whenever customers pay with a credit card.
Most businesses pay these merchant fees. That’s because there are plenty of incentives for businesses to accept credit cards.
For one, many customers prefer to pay with credit cards, like me. Businesses typically don’t want to lose out on these customers who prefer to pay with credit cards.
For another, businesses are well aware of the fact that people tend to spend more money when using credit cards instead of cash. Obviously, it’s good for business when people spend more.
There are certainly other incentives, as well. The point is that businesses have long paid these merchant fees in exchange for benefits provided by credit card companies.
In recent years, more and more businesses have decided to pass these fees onto customers.
Businesses, especially smaller businesses, commonly point to the past few years of surging inflation for why they need to pass these processing fees onto customers.
Have you also noticed these fees popping up seemingly everywhere these days?
As a consumer, whether we like it or not, these processing fees seem to be sticking around.
So, what can we do about it?
We can choose to use cash instead of credit, or we can choose to not spend our money at that business.
Let’s look at an example to help you make that decision for yourself.
Who really cares about a small processing fee anyways?
A processing fee of 4% may or may not sound like a lot to you.
Let’s look at an example to put some real numbers on it.
Let’s assume you’re going to buy a new TV that costs $1,000.00 (all taxes included) from a reputable store. A 4% processing fee on the purchase of a $1,000.00 TV means adding $40 to the price of that TV.
That TV now costs you $1,040.00 with the processing fee.
That’s a $40 penalty simply for using a credit card instead of cash. That’s a penalty that the next customer paying in cash doesn’t have to pay for the exact same TV.
Keep in mind this is a $40 penalty charged on just this one purchase. Consider all the other purchases you make with a credit card and what those total penalties could add up to.
We’re assuming you’re shopping at a reputable store, so you shouldn’t have to worry about purchase protection.
So, that really leaves only one potential benefit to using a credit card for this purchase.
What about the points you can earn?
Let’s play that out so you can decide for yourself.
Aren’t points worth more than whatever the processing fee is?
Let’s continue our same example of purchasing the TV for $1,000.
Including the 4% fee, the TV costs $1,040.00.
Let’s assume you buy this TV using the Chase Freedom Unlimited, which is the actual card I would use if I were making this purchase.
The Chase Freedom Unlimited offers 1.5 points per dollar spent. That means this TV purchase of $1,040.00 would earn you 1,560 points (1040 x 1.5 =1,560).
Next, let’s look at my favorite website for valuing rewards points, The Points Guy. Currently, The Points Guy values each Chase Ultimate Reward point at 2.05 cents.
So, 1,560 points, valued at 2.05 cents per point, is worth $31.98 ((1,560 x 2.05)/100=31.98).
Now, we can decide if paying the 4% service fee to earn points is worth it.
In this example, by choosing to use your credit card with the $40 processing fee, you’ll earn $31.98 worth of points.
In other words, even accounting for the points you’ll earn, this transaction still costs you an extra $8.02.
Does that sound like a good deal to you?
Personally, I would rather keep the $40 in my bank account instead of earning $31.98 worth of points.
To me, this is not even a close call.
It doesn’t make a lot of sense to trade in a higher amount of cash for a lesser amount of points. Not only are you technically losing money, cash is more flexible than credit card points. You can use cash everywhere.
I don’t think it’s a stretch to say you’d be hard pressed to find anyone who would take $31.98 worth of points instead of $40 in cash.
What if the processing fee was lower?
Even if the processing fee was lower, say 3%, my decision wouldn’t change.
At a 3% fee, the TV would cost $1,030 and you would earn 1,545 points valued at $31.67.
In this scenario, it’s true that the points are worth $1.67 more than the processing fee.
I’d still rather have the cash. I value the flexibility that $30 in cash provides me more than a comparable value in points.
Admittedly, it’s a closer call when the processing fee is 3%. I won’t argue with you if you’d rather go strictly by the math and have the points in this scenario.
Money is emotional, after all, like we saw when choosing to pay down debt using the Debt Snowball method.
I went through this exact process when paying my property taxes recently.
Recently, I went through this exact thought process when paying my property taxes. I had the option to use a credit card and pay a 2.1% convenience fee.
I chose to pay cash, even though the points I would have earned were worth $170 more than the convenience fee.
The math indicated I should have taken the points. Still, I didn’t like the idea of paying another 2.1% on top of my already sky-high property taxes.
Even though I lost out on valuable points, money decisions are emotional. It felt better to not pay the extra 2.1% and to keep that cash in the bank.
Setting aside the math and the value of credit card points, there’s another reason I have started using cash more frequently these days because of processing fees.
These processing fees really bother me on principle.
You may disagree, but I don’t think it’s right for businesses to pass this fee onto customers when businesses do benefit by accepting credit cards.
I especially don’t think it’s fair when businesses spring this fee on a customer when he is standing at the register about to pay.
Maybe it’s just me, but these fees annoy me so much that I won’t go back to a business that passes these fees onto customers.
If it’s a business that I simply can’t live without, and there are very few businesses that reach this level, I’ll pay cash instead of using credit.
I’m not insensitive to the fact that certain businesses are struggling with inflation. If a business is having a hard time staying profitable without charging a 4% fee, I would prefer that it raises its prices by 4% instead of surprising me at the cash register with this extra fee.
At least then, I can make an informed decision ahead of time about whether I want to eat at that restaurant or purchase that item before it’s time to pay.
I know this is a polarizing debate. There are business owners who I’m sure would vehemently disagree with my thoughts on the matter. That’s OK.
Businesses are of course free to choose how to run their businesses. As a consumer, I am free to choose to avoid certain businesses.
Have you noticed this processing fees more often lately?
Where do you come out on paying a processing fee to use a credit card?
Credit cards make it very easy to track these two numbers.
Here’s exactly how I use credit cards to track my spending.
When I get my monthly statement for each credit card, the first thing I do I add the amount and due date to my Notes app.
I’ve been doing this for years now, which means I have a clear understanding of my family’s usual spending habits.
I can then quickly assess whether it was a good spending month. For example, if I normally spend $4,000 per month on my card, and this month I spent $5,000, I’ll know very quickly that something is off.
Sometimes, it’s obvious why I overspent. Maybe it was something like buying airplane tickets for a family vacation. If that’s the case, I don’t need to study my credit card statement too closely because I already know why my spending was more than usual.
Other times, it’s not so obvious. When I don’t immediately understand why my spending was higher than normal, I take a closer look at my statement.
This same process also helps me track that month’s savings transfers to make sure I maintain a strong savings rate.
Why I also track the payment due date in Notes.
The reason I write the payment due date is to make sure I never miss a payment. This is the most important rule of responsible credit card use.
If you miss even one payment on a single credit card, that missed payment will appear on your credit report. Your credit score will also drop.
As a landlord, I play close attention to any potential tenant’s credit history and score. I am not willing to risk entering in a financial relationship with someone who has a history of missed payments.
We recently received an application from someone who has missed 8 of her last 25 payments on her auto loan. That was a major red flag.
I automate some, but not all, of my monthly payments.
Even though my wife and I only use two credit cards for our personal spending, we have business credit cards for our real estate properties.
We also have mortgages and HELOCs that need to get paid at various times each month. I use the Notes function to remind me when these payments are due.
For each credit account, I have automatic payments set up to pay the minimum required amount each month. I then pay the full balance each month manually.
That’s because we have various sources of income that come in sporadically throughout the month. It’s simpler for me to pay certain bills manually instead of automatically.
When you have multiple income streams, you have Parachute Money. Currently, our Parachute Money includes:
Using the Notes function helps me make the required payments each month after these income streams hit my checking account.
What other benefits do credit cards offer?
Credit cards offer a variety of other benefits to entice customers. Besides tracking your spending, two of my favorite perks are purchase protection and credit score monitoring.
Purchase Protection and Fraudulent Charges
Purchase protection is so important in today’s world. The last thing any of us needs is for our personal finances to get wrecked by scam purchases or fraudulent charges.
Let’s say you buy something with Zelle, debit card, or cash. There are very little, if any, protections to get your money back if that transaction needs to be cancelled.
Credit cards, on the other hand, typically offer the best purchase protection available. If you’ve been scammed or deceived in any way, your best bet at fixing that issue is to work with your credit card company.
Also, credit card companies are generally very proactive and helpful in addressing fraudulent charges. If you do encounter any fraudulent charges, your credit card company will work with you to fix the problem.
While credit card companies are pretty good these days at spotting fraudulent charges, I like to double check my online account to protect myself. To make sure I have not been targeted, I take about 30 seconds to look at my credit card transactions each week.
Credit Score Monitoring
Most credit card companies today offer free credit score monitoring through one of the major credit agencies, like Experian. You can see your credit score right in your online account.
Your credit score will automatically update, usually once per month. You can see how your score changes from month to month and what factors currently influence your score.
How can I see all the benefits my credit card offers?
Because there are so many credit card options on the market, the best thing to do is look up the card you have or are thinking about applying for.
I prefer to visit websites like thepointsguy.com for thorough breakdowns and even valuations on each card’s offerings. This makes it easy to compare credit cards from different banks.
You can also visit the credit card company’s website directly to learn the full extent of the benefits offered by each card.
In today’s post, we’ll discuss 10 credit card tips for lawyers and professionals so you can benefit from the perks of credit cards without suffering from the penalties.
I’ll also share what two credit cards I carry in my wallet for all of my everyday spending.
I’m a big fan of earning credit card points on everyday spending and turning those points into once-in-a-lifetime vacations.
My wife and I have traveled all over the world together using credit card points. Using points, we’ve stayed at some incredible hotels like the Mandarin Oriental in Lake Como and the Park Hyatt in Sydney.
The key is to recognize that credit cards are a privilege, like any other form of credit. If you abuse the privilege, you’ll face severe personal finance consequences.
With that underlying principle in mind, here are ten credit card tips for lawyers and professionals:
10 Credit Card Tips for Lawyers and Professionals
Only charge what you can afford to pay off.
Avoid overspending because you’re using credit instead of cash.
Do not treat your credit card like an emergency savings account.
Understand how credit card interest works.
Never miss a credit card payment.
Know the fees associated with your account.
Learn how much points are actually worth.
Use points for travel instead of cash back.
Be strategic about what, and how many, credit cards you have.
Don’t spend money just to earn points.
1. Only charge what you can afford to pay off.
While it may seem obvious to only charge what you can afford to pay off, many of us have trouble following this primary rule of responsible credit card use.
Let’s look at some scary stats about credit card use to solidify this point:
48% of credit card holders carry a debt balance, an increase of 9% since 2021.
53% of people have been in credit card debt for more than a year.
From 2023 to 2024, credit card balances on average increased 3.5% to $6,730.
Credit card balances increased by $45 billion from the previous quarter and reached $1.21 trillion at the end of December 2024.
2. Avoid overspending because you’re using credit instead of cash.
Making a purchase with a credit card instead of cash makes it seem like we’re not spending real money.
We have all fallen victim to this tendency to overspend because of how easy it is to swipe a credit card.
Whether it’s the daily Starbucks habit, running up a bar tab, or buying another new toy for your kid, it’s a lot less painful in that moment to use a credit card instead of cash.
If you’re honest with yourself and know that you tend to overspend when using a credit card, try leaving your credit card at home. Bring some cash with you instead.
The simple act of needing to pay with cash instead of credit is oftentimes enough to stop you from spending on that thing you don’t really want anyways.
3. Do not treat your credit card like an emergency savings account.
This may be the single most problematic area we’ll discuss in my credit card tips for lawyers and professionals.
33% of Americans report they have more credit card debt than emergency savings.
None of us are immune from these types of unexpected expenses.
Be sure to establish an emergency savings account so you don’t end up relying on your credit card when the unexpected happens.
These unexpected expenses can be substantial and result in monthly credit card balances that accrue large amounts of interest.
4. Understand how credit card interest works.
If you’re going to use credit cards as part of your everyday life, you should understand the basics on how interest is charged.
This may be the most overlooked of my credit card tips for lawyers and professionals.
Credit card interest is typically expressed as an annual percentage rate, or APR.
If you carry a balance on your card, the credit card company charges interest by multiplying your average daily balance by your daily interest rate. You will be charged this interest until your balance is paid off in full.
Credit card interest rates are typically variable, meaning they can change over time.
In the abstract, it can be difficult to fully appreciate how penalizing credit card interest is on our finances.
Let’s look at an example to better understand the consequences of carrying a balance.
Let’s say you just moved to a new apartment and purchased a $1,400 TV using a credit card. You don’t have enough money saved up for the full purchase, so you decide to pay off $100 each month. Your credit card charges 23% interest.
At that interest rate, it will take you 17 months to pay for that TV. You will end up paying a total of $1,645, which includes $245 in interest.
The $245 in interest equals 15% of the original price of the TV. That means you paid 15% more than the TV actually cost.
If that doesn’t catch your attention, don’t forget this is just the interest on one purchase after moving to a new apartment.
What if you want to buy a new sofa to go with your TV? How about a coffee table and a rug? Floor lamp? End table?
You can see how a 15% penalty on each of these purchases can start to add up quickly.
5. Never miss a credit card payment.
Write this rule down in stone: never miss a credit card payment.
If you don’t remember any of the other credit card tips for lawyers and professionals, remember this one.
It may seem unfair, but even a single missed payment can severely impact your credit history and credit score.
Because the consequences of a missed payment are so severe, it’s a good idea to set up your account for automatic payments.
You have options when setting up automatic payments. Ideally, you can pay your full balance automatically each month.
If that won’t work for your situation, you can set up automatic payments for the minimum required amount to stay in compliance with your account terms.
By paying at least the minimum amount required on-time each month, you will not be penalized with a missed payment.
What is the minimum required payment?
Credit card companies typically only require customers to make a minimum payment towards their balance each month. The minimum payment is generally 2% to 4% of your balance, or a predetermined minimum fee of around $35.
It may sound enticing to only pay the minimum. However, you will be charged interest on that remaining balance. That interest compounds and will be a major drag on your finances.
Let’s look at another example to see what happens when you only make the minimum required payment.
Let’s say you have a credit card balance of $2,000. Your minimum required payment will likely be between $40 and $80 to stay in compliance with your account terms.
In this example, assume the minimum required payment is $40. If you make the minimum payment of $40 out of your total balance of $2,000, that means your remaining balance is $1,960.
On the next billing cycle, you will be charged interest on that remaining balance of $1,960. At 23% interest, you will be charged $37.39, which gets added to your total balance.
So, on the next billing cycle, your total balance will be $1,997.39.
Let that sink in.
Even though you paid $40 last month, your balance only decreased by $2.61. Ouch!
Note: this example is for illustration purposes only and may not be precisely how your credit card company calculates interest.
By the way, credit card companies want you to only pay the minimum each month. That’s how they make so much money.
How much money do credit card companies make in interest and fees?
Beyond interest, credit card companies profit by charging fees, such as late fees and balance transfer fees.
For these credit card tips for lawyers and professionals, I want to focus on the annual fees tied to rewards credit cards. These fees can cost hundreds of dollars annually and cancel out the value of any points you earn.
For example, if you have a credit card that charges an annual fee of $500, and you only earn $400 worth of points each year, that’s a losing proposition.
You’d likely be better off using a credit card that does not charge an annual fee, even if that means losing out on some points.
For that reason, it’s important to do your homework before applying for a new card.
So, how can you determine if you’re getting enough value out of your card to justify the annual fee?
That leads us to our next tip.
7. Learn how much points are actually worth.
This is not an easy thing to do. Luckily, there are some great websites that are dedicated to credit card rewards that have done these calculations for you.
I like The Points Guy for determining the value of credit card points. While it’s not an exact science, The Points Guy calculates the value of each credit card company’s points and miles every month.
To give you an idea, The Points Guy currently values Chase Ultimate Rewards points at 2.05 cents/point and American Express Membership Rewards at 2 cents/point.
With that information, you can then determine if a certain credit card is worth having in your wallet.
For example, let’s say a particular Chase card you have charges an annual fee of $500 per year. When you look at your total spending from the previous year, you see that you earned 20,000 points using that Chase card.
Using The Points Guy valuation of 2.05 cents/point, that means you earned $410 worth of points. That’s $90 less than what you paid as an annual fee to have the card. That’s obviously not a good tradeoff.
Yes, credit cards come with other benefits that may add value to you. These benefits are oftentimes related to travel. If you travel frequently, these benefits may be worth it. If you don’t travel often, these benefits may not offer much value to you.
Keep in mind there are plenty of credit cards available that do not charge an annual fee and still offer points.
The takeaway is that you should regularly evaluate your spending habits and credit card reward programs to ensure you are still getting value from that card.
8. Use points for travel instead of cash back.
Many credit cards offer various options to redeem points. The easiest redemption option is to convert your points into cash that then gets applied to your balance.
While cash back is the easiest redemption option, it is typically the least valuable. You’ll get far more value by redeeming your points for travel rewards.
Credit card companies like Chase and American Express have partnerships with airlines, hotels and other travel providers. You can transfer your credit card points to these travel programs to maximize the value of those points.
If you’re reading a blog on credit card tips for lawyers and professionals, I’m guessing travel is a part of your life. Whether for leisure, business, or necessity, there should be plenty of opportunities to use your points for travel.
To figure out the best redemption options, it takes a little bit of effort. There are endless options and entire websites dedicated to point redemption strategies.
Before you get overwhelmed, I’d suggest first talking to your friends and family to see if any of them have already investigated the best redemption option for your personal situation.
Did you know that talking about money, and credit card points, is not taboo?
9. Be strategic about what, and how many, credit cards you have.
There was a time in my life when I had ten different credit cards because I wanted to maximize the points I earned on every purchase.
I had airline branded cards, hotel branded cards, and general travel rewards cards. I had credit cards with Chase, American Express, and CitiBank.
My wallet was thicker than a Harry Potter book.
I did earn a lot of points. But, it was so stressful.
Keeping track of what card to use for every single purchase was complicated. Making sure I paid off each card every month was even harder. In the end, it wasn’t worth it.
In these credit card tips for lawyers and professionals, I recommend you keep things simple.
We still earn plenty of points and our finances are much simpler.
One other suggestion: if you’re in a relationship and share finances, I suggest you align your credit card strategies. Most major credit card companies allow you to combine points with a household member.
You can more quickly accumulate points by focusing on a single rewards program, instead of spreading out those points among various programs.
As crazy as it sounds, you may be tempted to spend money you otherwise wouldn’t because you want to earn more points.
It’s possible to become so obsessed with collecting points that you forget about the strong personal finance habits you’ve worked so hard to establish.
It can be easier to justify careless spending when we trick ourselves into thinking that spending will eventually lead to a vacation. For example, if you have a credit card that offers bonus points at restaurants, you may be tempted to spend more money when you eat out.
Or, you may be tempted to pick up the tab for your friends even though that spending doesn’t align with your budget.
The temptation to earn points can overwhelm your plans to stay on budget. This logic applies to any type of spending, not just dining out and bar tabs.
Use your credit cards to spend within your Budget After Thinking, not as an excuse to justify blowing your budget.
To recap, here are my ten credit card tips for lawyers and professionals:
10 Credit Card Tips for Lawyers and Professionals
Only charge what you can afford to pay off.
Avoid overspending because you’re using credit instead of cash.
Do not treat your credit card like an emergency savings account.
Understand how credit card interest works.
Never miss a credit card payment.
Know the fees associated with your account.
Learn how much points are actually worth.
Use points for travel instead of cash back.
Be strategic about what, and how many, credit cards you have.
Don’t spend money just to earn points.
Let us know your best credit card tips for lawyers and professionals in the comments below!
Each year, they analyze data from 140 countries and publish their findings in an effort to give everyone the knowledge to create more happiness for themselves and others.
Please imagine a ladder with steps numbered from 0 at the bottom to 10 at the top. The top of the ladder represents the best possible life for you and the bottom of the ladder represents the worst possible life for you. On which step of the ladder would you say you personally feel you stand at this time?
WHR explains that this “life evaluation” question empowers people to make their own judgments about what matters most.
As part of its analysis, WHR uses economic modeling to explain countries’ average life evaluation scores. They look at six variables, and one of them jump out at me:
“Freedom to make life choices.”
What countries would you guess scored the highest on the 2025 rankings?
The top five countries in the happiness rankings are:
Finland
Denmark
Iceland
Sweden
Netherlands
Each of these nations has ranked near the top for a long time.
Where is the United States on the happiness chart?
The United States fell to number 24, its lowest happiness ranking ever.
The United States’ highest ranking was 11th place way back in 2011.
I’m not totally surprised that the United States’ ranking is as low as it’s ever been.
We’ve discussed some theories that may help explain this drop:
8 out of 10 of us are worried we may lose our jobs this year.
Nearly half of us don’t use our hard-earned paid time off (PTO) and choose to work more days than we are asked to.
I wasn’t surprised to see the United States rank 24th in the global happiness rankings, but I was shocked by the sub-ranking for this specific question:
Are you satisfied or dissatisfied with your freedom to choose what you do with your life?
The United States ranked 115th out of 147 countries in response to the freedom question!
When we are financially free, we can choose to live life on our own terms. To me, that sounds a lot like what the WHR freedom question is trying to answer.
When you have financial freedom, you can make important decisions based on what truly matters. When you don’t have financial freedom, you risk making unsatisfactory decisions for money reasons.
We can choose to spend more time with the people who are meaningful to us.
We can choose to use our skills for work that is meaningful to us.
Most of us grow up thinking that life only revolves around getting an education and then getting a job. We don’t allow ourselves to believe that financial freedom is possible for us.
This was exactly how I felt before I wrote down my Tiara Goals one day on the beach in 2017.
My goal with Think and Talk Money is to help us all realize that financial independence is within our reach. If we can think and talk about our money choices even a little bit every week, we can make sure our money life remains in balance with the rest of our life.
By practicing strong personal finance habits, each of us can feel more satisfied with our freedom to choose what to do with our lives.
How would you rank yourself on the freedom question?
Are you satisfied with your freedom to choose what you do with your life?
What are your core values?
Have you ever written down your core values?
Do you know what you’re striving for?
Successful businesses look at these questions regularly. I find it helpful to learn how successful businesses operate so I can apply similar principles to my own life.
For example, there’s a great business book called Traction by Gino Wickman. In the book, Wickman encourages businesses to focus on vision, mission, and values.
It seems like a pretty good idea for all of us to think about vision, mission, and values as they apply to our own lives.
For example, if you’re one of the nearly half of Americans not taking your PTO, are you making that choice based on your core values?
It’s possible that you are. Perhaps you’re being strategic and have formulated a plan to benefit from all those extra hours at the office.
Or, it’s possible that you’ve never really stopped to think about why you’re working so much. You’ve never paused to articulate to yourself what you want out of life.
In Traction, Wickman makes a compelling argument why businesses should not skip this crucial step.
We all should take the same step in our personal lives. In 2017, I wrote down my core values, what I call my Tiara Goals.
Looking at the big picture, my Tiara Goals have helped me visualize what I truly want out of life.
In the short term, my Tiara Goals help guide me through difficult decisions. As long as I’m clear with myself about what I want in the long run, I can make daily decisions to get my closer to those goals.
Millennials want more kids but can’t afford them.
According to a recent report from Business Insider, Millennials want more kids but can’t afford them.
This makes me sad.
The study points to rising costs, as well as the reality that Millennials are saddled with large amounts of student loan debt.
Combined, it makes sense that Millennials are worried about money.
If you want to start a family, or grow your family, what better motivation could there be to spend a little bit of time each week thinking and talking about money.
If this is your reality, or you know someone in this position, establishing strong personal finance habits is crucial.
Each week at Think and Talk Money, we focus on developing these strong personal finance habits.
Your credit history will touch almost every important financial transaction you enter into today. I don’t just mean credit cards and loans.
If you apply for a job, need insurance, or want to rent an apartment, those companies are going to review your credit report and credit score.
So, even if you don’t intend to take out loans, your credit history and credit score are still important.
But, obsessing over your credit score is counter productive.
Has obsessing over any number ever served you well, anyways?
GPA…
Weight…
Social Media Followers…
Yes, these things may be important to you. But, obsessing over the number itself is not how they improve. The habits behind the number are more important.
If you want to improve your GPA, you need to study more.
To lose weight, you need to practice healthy living.
For more social media followers, you need to create better content.
The same logic applies to credit scores.
If you want a good credit score, the best thing to do is to practice strong personal finance habits that we routinely discuss in the blog.
Obsessing over your credit score number is a waste of mental energy.
With this backdrop in mind, we can discuss credit scores.
What is a credit score?
As we learned in our post on using credit the right way, credit refers to an agreement to borrow money with the obligation to repay that money later, usually with interest.
Credit also refers to a person’s trustworthiness or history of repayment.
We then learned that a credit report is a document that tracks that history of repayment, as well as the current status of any loans you’ve taken out.
Your credit report will typically include:
Personal information (name, social security number, current and former addresses)
Credit accounts (current and historical accounts, including credit cards and any other loans)
Collection items (missed payments, loans sent to collections)
Public records (liens, foreclosures, bankruptcies)
Inquiries (when you apply for a new loan)
Now, we’ll talk about credit scores.
A credit score is a three-digit number calculated based on your credit history that represents your present day creditworthiness.
Your credit score captures a moment in time. That means it will change over time, sometimes quickly and dramatically.
We each have multiple credit scores depending on the scoring service. While there are many others, the two main scoring services are FICO and VantageScore.
Keep in mind that your score may vary depending on the type of loan you are applying for. For example, an auto lender looks at different factors than a mortgage lender.
FICO and VantageScore each assign a score ranging between 300-850.
For both services, if you’re around 800, you’re doing very well. If you drop below 650, you’ve got some work to do.
Before we look at the factors that go into your credit score, I can’t emphasize this next point enough:
Don’t obsess over your credit score.
You certainly want to pay attention to dramatic changes in your score so you can understand where you need to make adjustments. That said, you should not be concerned with slight movement in either direction.
For example, FICO considers a score between 800 and 850 as “Exceptional.” Once you’re in that range, it makes no difference whether your score is 804 or 837. You may notice slight variation from month to month. That’s normal and perfectly fine.
Instead of worrying about fluctuations in your score, spend your time and energy on more important financial wellness strategies, like writing down your Tiara Goals.
What factors go into your credit score?
Regardless of the scoring service, your credit score generally consists of these factors:
Payment history
Current unpaid debt
The types of loan accounts
Length of credit history
New credit inquiries
Amount of available credit being used
Collections, foreclosures or bankruptcies
Of course, not each factor counts equally. For example, FICO weighs each factor like this:
Payment history: 35%
Amounts owed (credit utilization rate): 30%
Length of credit history: 15%
Credit mix: 10%
New credit: 10%
VantageScore does not assign percentages to each factor, but does define the importance of each factor like this:
Payment history: Extremely influential
Total credit usage: Highly influential
Credit mix and experience: Highly influential
New accounts opened: Moderately influential
Balance and available credit: Less influential
In comparing the two main scoring methods, we can see that both methods generally look at the same factors. They both also place the highest emphasis on payment history and place less emphasis on new accounts opened.
Here’s all you need to know about each factor.
There’s no reason to overcomplicate what each factor means.
Here’s all you need to know:
Payment history reflects whether you consistently make on-time payments.
Amounts owed, credit utilization rate, and total credit usage refer to how much of your available revolving credit you are currently using.
Revolving credit mostly refers to credit cards, but could also include loans like a line of credit.
For example, if you have a credit card with a monthly limit of $1,000, and you are currently charging $300 per month on that card, your credit utilization rate is 30%.
To maximize your credit score, aim for using 30% or less of your available credit. This ratio applies to each individual account and to your total account balances.
Length of credit history refers to how long various accounts have been open.
The longer the accounts have been open, the better your score will be.
Credit mix looks at what types of loans you have open.
Generally, lenders prefer to see a variety of loans, like credit cards, auto loans, and mortgages.
New credit refers to how many loans you’ve applied for recently.
Applying for too many loans in a short period can negatively impact your score since you may seem desperate for loans to fund your lifestyle.
What factors are not considered in your credit score?
Credit scores do not take into account personal information like race, gender, age, or marital status.
Credit scores also do not consider income or employment history.
Keep in mind that while personal information or employment history is not a factor in your credit score, it certainly will be considered as part of your application by lenders.
For example, mortgage lenders and landlords will want to confirm your history of steady employment and income before entering into a financial relationship with you.
Don’t get caught up in precisely how your score is calculated.
FICO and VantageScore provide the above information as general guidance. However, each of our credit scores is determined on a unique set of circumstances that changes over time.
While these factors are generally considered for everyone, specifically how each factor is weighed varies for each of us.
Your credit report and FICO Scores evolve frequently. Because of this, it’s not possible to measure the exact impact of a single factor in how your FICO Score is calculated without looking at your entire report. Even the levels of importance shown in the FICO Scores chart above are for the general population and may be different for different credit profiles.
Like we mentioned before, it’s important to not get hung up on the different methodologies that each scoring service uses. For the most part, your score won’t vary significantly from one service to another.
The key point is to pay attention to the general factors that impact your score but understand that your score is always changing. Don’t waste your energy trying to decipher how much weight is given to each factor.
How to check your credit score.
These days, it’s easier than ever to monitor your credit score.
Most major banks offer free credit scores to their customers.
You can also sign up for credit monitoring, including credit scores, with the major credit bureaus, Equifax, Experian, and TransUnion. Note that only some services are provided free of charge.
Of course, there are also no shortage of apps and websites providing similar services, sometimes free and sometimes for a price.
If you’d like additional guidance on how to obtain your credit score, please reach out on the socials or by replying to our weekly newsletter.
What should I do instead of obsessing over my credit score?
Instead of obsessing over your credit score, focus on the strong financial habits we discuss regularly in the blog.
You should not have to worry about your credit score if you:
When you can make these habits part of your regular life, your credit score will automatically rise along the way.
Look at credit scores from a potential lender’s point of view.
I hope this goes without saying, but lenders are in the business of making money. They make money by gauging risk. The lower an applicant’s credit score, the more the lender’s risk increases.
When the lender’s risk increases, it may decide to not lend you money. Or, it may choose to lend you money and charge you a higher interest rate to compensate for that higher risk.
The same logic applies when other entities besides lenders are reviewing your credit score.
For example, an employer may check your credit score to determine your level of trustworthiness before offering you a job.
A landlord may check your credit score before agreeing to rent you an apartment to confirm whether you are likely to make the required payment each month.
Always remember why credit scores are used in the first place.
If nothing else, remember why credit scores are used in the first place:
Credit scores are used to measure how risky it would be for someone else to enter into a financial relationship with you.
In other words, can you be trusted with money.
If you have a history of not making on-time payments, or not paying loans back, that indicates you are not responsible with money.
When you are using up most of your current credit and carrying high balances, that demonstrates that you have a hard time limiting your spending.
If you are constantly applying for new credit, it shows that you may be dependent on credit to fund your life.
In any of these scenarios, the risk of entering into a financial relationship with you increases.
Credit scores are especially important before big purchases.
If you have a big purchase coming up, like buying a home or a car, it’s important to have your credit score in a good spot before applying. This is because your credit score will impact the interest rate you are offered.
For a big purchase, even slight variations in the interest rate can make a huge difference.
Because it’s normal for your credit score to change frequently, it is worth waiting to apply for that loan until after you’ve improved your score.
The best ways to improve your score in the short term are to pay off debt and avoid applying for new credit.
By paying off debt, you’ll improve your payment history and your credit utilization rate, two of the most important factors in your score regardless of scoring method.
The best thing you can do to avoid the costly consequences of a poor credit score is to implement the personal finance fundamentals we routinely discuss in the blog.
Have you ever needlessly obsessed over your credit score?
Let us know what that felt like in the comments below.
We need to replace a 20 year-old wood fence at our home that’s one strong storm away from falling over. In these past few weeks, I’ve learned more about fences that I care to admit.
On the bright side, shopping for a fence has led me to think about and practice many of the personal finance habits we talk about in the blog.
Let me walk you through my thought process to help you whenever you have a big expenditure in front of you.
In the world of privacy fences, there seem to be three primary choices available: wood, vinyl, and composite. I won’t bore you with all the details. The key points to consider for our conversation are:
Wood is the cheapest, but requires the most upkeep and will eventually need to be replaced.
Vinyl (plastic) comes with a lifetime warranty, requires little-to-no upkeep, but is 30-40% more expensive than wood.
Composite is the most durable, looks incredible, requires no upkeep whatsoever, has soundproofing ability, is made from recycled materials, comes with a 25-year warranty, but is nearly 3x more expensive than wood.
We’ve ruled out wood after doing our research and determining that we’ve got too much going on to worry about annual fence upkeep.
So, that leaves vinyl and composite. From our research, both would be good options. However, there’s really no doubt that composite is the best overall option, if you can stomach the cost.
Talk to your people about expensive purchases.
This is a big financial decision, so of course, I’ve been talking to my people for weeks about what they would do.
I’ve gotten three common responses that go something like this:
“You’re planning to live in this home for the long run, make the investment in the best fence possible and never worry about it again.”
“How much do you really care about a fence? I’ve never even noticed my fence. Think of what other projects you could spend that money on.”
“Dude, leave me alone. I don’t want to talk about your fence.”
As you can see, talking to your people does not mean that you’re off the hook for making the decision yourself. You will likely get a wide spectrum of advice.
However, you’ll gain invaluable perspective to consider so you can make the best decision for your personal situation.
Expensive purchases test your personal finance habits.
Whenever you have a big purchase ahead of you, many of the strong personal finance habits you’ve been working to establish will be tested. You’ll be asking yourself questions like:
My wife and I have considered all these questions as we’ve talked through the options.
As of this moment, we’re leaning towards the composite fence so we never have to think about fencing again.
To help defray the cost, we’re considering a financing option that offers 0% interest for 18 months.
Important side note: if you ever choose to go with an attractive financing option, always read the fine print first.
The lender is hoping you fail to pay off the purchase within the 0% interest period so you’re forced to pay insanely high interest on the remaining balance. The financing option we’re looking at jumps from 0% interest to 26% interest if we fail to pay off the loan in 18 months. That’s a serious penalty.
Financing aside, we’ve also concluded that other projects will have to wait for a while so we don’t crush our money goals for the year.
We’ll make our final decision this weekend.
What would you do?
Leave a comment below to help my wife and I decide.
Sharing Think and Talk Money with Others.
Over the past couple days, I’ve heard from several readers who have shared Think and Talk Money with people they care about.
One reader told me that he shared the blog with his 25 year-old son. The reader was very appreciative because he’s experienced how important personal finance is.
He knows his son will only benefit in the long run if he implements strong money habits at the beginning of his career.
Another reader shared the blog with a friend who is now tracking her spending for three months. This is the first time she has ever tracked her spending to learn where her money is going each month.
She is using her phone and a simple spreadsheet to track her expenses. She reports that even though it’s only been a month, she’s learning things about her money choices she never knew before.
I love reader stories like this because they reflect one of our core philosophies at Think and Talk Money:
It doesn’t matter if you’re talking about paying for a fence or starting a budget. We all could use help when it comes to making good, consistent money decisions.
Your friends are likely going through the same money challenges.
Since writing about my challenges with credit card debt at the beginning of my career, I’ve had some great talks with friends I knew back then.
Multiple friends have shared with me that they were dealing with the same credit card debt issues at the same time that I was.
None of us ever knew it at the time. We were hanging out with each other every weekend, spending money we didn’t have. The joke of it all is that we were likely encouraging each other’s poor habits.
Learning that I was in the same position as my friends all these years later does make me feel at least a little bit better about the mistakes I made back then. But, that’s not the important takeaway.
The big takeaway for me is that if my friends and I were dealing with the same money challenges back then, we’re probably dealing with similar money challenges today.
It might not be credit card debt from our social lives, but it might be something like saving for college or paying for a home. Maybe it’s what we should do when the stock market slumps.
Just like we mentioned above, my friends and I will only benefit from having these kinds of money talks.
Instead of just talking about mistakes we made in the past, we can talk about how to get it right as we move forward.
I spoke to this debt collector after breaking my wrist snowboarding.
For the second time in a year.
Let me explain.
About six months earlier, my friends and I took a road trip to go snowboarding in Wisconsin. I had never been to this location before and wanted to explore the entire ski area. After a few loops on the main run, I found my way to the terrain park.
My plan was to scout out the terrain park and report back to my friends. I must have forgotten the plan as I approached a jump that I had no business approaching. That turned out to be a mistake.
Heading towards the jump, I had too much speed and, for lack of a better word, panicked. My friend reported afterwards that as soon as I jumped, my body and snowboard turned parallel to the ground like I was lying in bed.
After all these years, It almost seems peaceful to picture myself lazily flying through the air on a beautiful, blue sky, sunny day.
Almost.
To state the obvious, this was not a good position to be in since I needed my feet and snowboard to hit the ground first and land safely.
I ended up landing on my backside with my hand and wrist hitting the ground first. The unpleasant result was a trip to the emergency room and a broken wrist.
My reputation for having fragile wrists was secured.
OK, back to the debt collector.
A few weeks after returning to Chicago, I received a bill in the mail from the emergency room for approximately $200.
I didn’t understand why I was receiving a bill since I had insurance and provided that information to the emergency room. I figured it must have been a mistake to send me a bill, and that my insurance company would pay for it.
So, I crumbled up the bill and threw it in the trash.
Before you shake your head, remember that I was still in school and on my parents’ insurance. This was my first interaction with a medical provider where the bills came to me instead of them.
I didn’t know at the time that even with insurance, I could potentially be responsible for some portion of the bill.
For the next few months, I continued to receive bills from the emergency room. And, I continued to throw these bills straight in the trash.
At some point, I received a new type of letter in the mail. This one caught my attention. It was from a collections agency.
The letter said something to the effect of, “Call us immediately to dispute or pay this medical bill before we are forced to take action against you.”
The scare tactic worked.
I picked up the phone and had a surprisingly nice conversation with the debt collector. The debt collector explained how the collections process works and the potential impact failing to pay would have on my credit report.
Credit report?
Never heard of that before.Don’t think I have one.
After hanging up the phone, I did some research and realized the debt collector wasn’t scamming me.
I certainly did have a credit history, as reflected in my credit report, that I needed to be mindful of.
I wrote a check to pay the bill the next day.
This is how a broken wrist and a debt collector first taught me about credit reports.
What is a credit report?
As we learned in our post on using credit the right way, credit refers to an agreement to borrow money with the obligation to repay that money later, usually with interest.
Credit also refers to a person’s trustworthiness or history of repayment.
A credit report is a document that tracks that history of repayment, as well as the current status of any loans you’ve taken out.
Your credit report will typically include:
Personal information (name, social security number, current and former addresses)
Credit accounts (current and historical accounts, including credit cards and any other loans)
Collection items (missed payments, loans sent to collections)
Public records (liens, foreclosures, bankruptcies)
Inquiries (when you apply for a new loan)
Every time you open a loan, like a credit card, auto loan, or mortgage, it will appear on your credit report. Likewise, whenever you make a payment or miss a payment, that information will be reflected on your credit report.
When someone has “good credit,” it means they have a reliable history of repayment. When someone has “bad credit,” it means they have not previously demonstrated a reliable history of repayment.
Remember this key point: your credit report represents a complete picture of your interactions with credit over an extended period of time. Your credit report will include information about you going back years and years.
This means that the information reflected on the report will follow you for the long term. Any negative information on your credit report will typically stay on your credit report for 7-10 years, depending on the credit reporting agency.
If you haven’t obtained your credit report recently, I highly encourage you to do so.
Regularly checking your credit report is the best way to make sure that nobody has fraudulently opened any accounts using your social security number. It’s also the best way to monitor all the loans you are currently responsible for.
Believe it or not, it’s not uncommon for people to forget about loans they have previously opened.
Did you ever go to a Cubs game in college and sign up for a credit card just to receive a free XXL white t-shirt with a blue W on it?
No?
Uhh… me neither.
How about signing up for a new credit card while making a purchase at your favorite store to save a whopping 10% that day?
You may never end up using these credit cards and completely forget that you opened them. They’ll still appear on your credit report, and you are still responsible for those credit cards.
Is a credit report different from a credit score?
Yes, credit reports and credit scores are different.
We’ll soon discuss credit scores in detail. For now, understand that a credit score is a number calculated based on your credit history that represents your present day creditworthiness.
Your credit score captures a moment in time. That means it will change over time, sometimes quickly and dramatically.
Unlike a credit score, your credit report does not change quickly. Like we mentioned earlier, any negative information on your credit report will typically stay on your credit report for 7-10 years.
Why does my credit report matter?
We typically rely on our ability to borrow money to make our biggest purchases in life. When you take out a mortgage or finance a car purchase, you are relying on your ability to borrow money to make that purchase.
In these scenarios, lenders will “pull your credit” or do a “credit check” before agreeing to give you a loan.
If you have a history of responsibly borrowing money and paying it back on time, a lender is more likely to lend you money.
On the other hand, if you have a history of falling behind on payments, a lender may choose to not lend you money.
Or, a lender may agree to give you a loan and charge you a higher interest rate to compensate for the increased risk. This could end up costing you lots of money.
Poor credit history can lead to lost opportunities.
Besides just financial consequences, a poor credit history can also lead to lost opportunities.
As an example, it’s common practice for landlords to check an applicant’s credit history before renting them an apartment. Most major rental property search websites, like Zillow and Apartments.com, offer credit checks as part of the standard application process. My wife and I require a minimum credit score for all potential tenants.
It makes sense why a landlord would pull an applicant’s credit. When you rent an apartment, you are signing a contract (a lease) to pay a predetermined about in exchange for a place to live.
Landlords rely on those rent payments to pay for the property’s mortgage and upkeep. These rent payments can also directly impact the landlord’s livelihood.
It should be no surprise that landlords are hesitant to rent apartments to people who have a poor track record of paying for things.
Just as a landlord is sizing up your ability to pay the rent each month, other lenders, like a car dealership or mortgage lender, are sizing up the likelihood you can repay its loan.
Don’t ignore your credit history.
Have you checked your credit report this year?
My wife and I check our reports at least once per year to make sure there are no red flags.
Fortunately, I realized my mistake with the debt collector before that red flag ended up on my credit report.
If I hadn’t, I would have seen that negative mark on my credit report for 7-10 years. This would have severely impacted my ability to qualify for mortgages and grow my real estate portfolio.
I’m glad I learned that lesson about credit reports.
I’m also glad that I haven’t been back to a terrain park since law school.
I’ll give you an example. This weekend, we hosted a birthday party for my five-year-old daughter. She wanted a rainbow unicorn theme.
When asked what she wanted for a present, she would unhelpfully respond, “No clue.”
OK, great.
Fortunately, the local toy store was stocked with rainbow unicorn items: puzzles, books, stuffed animals, craft kits, etc. The kids at school must be on the same page with their interest in rainbow unicorns this year.
The rainbow unicorn party went well. We started with pizza, decorated cupcakes, and had a unicorn egg hunt.
The highlight of the party?
The birthday cake.
We ordered a rainbow unicorn cake from one of the most popular bakeries in Chicago, Sweet Mandy B’s. The next time you’re in Chicago, do yourself a favor and pop in for a cupcake or cookie.
After singing “Happy Birthday,” I started cutting pieces of cake for the kids. A few jumbo pieces of cake later, one of our guests came to my rescue and showed me how to cut smaller, kid-appropriate pieces.
It’s a good thing she did because with the way I was cutting the cake, we were going to run out before all the adults got a piece. And that would have been a bad thing.
See, this cake was incredible. I’m not always a cake guy (unless it’s ice cream cake), but this one was special.
Vanilla confetti cake with buttercream frosting. It had the perfect balance of cake and filling. Sweet, but not too sweet. Soft and also firm.
It wasn’t just me. I never saw a cake disappear so fast. Usually, we end up with so much cake leftover that I’m sneaking bites every time I open the fridge for the next week. Not this time. Sadly.
By the end of the party, we had barely a single piece left (which was devoured within 24 hours).
There is a bright side to finishing the cake, though.
If I had an unlimited supply of this cake, I’m not sure I could stop myself from eating it. The temptation would be too strong to sneak back to the fridge all day long, fork in hand. One little bite at a time.
It’ll be fine.
What does birthday cake have to do with personal finance?
You know where this is going.
Eating a wonderful cake at a birthday party is a good thing.
Eating cake every day for the next week, no matter how good it is, would be a bad thing.
You see? Something can be good and bad at the same time.
And that leads us to our next major topic in the blog: the responsible use of credit.
What is credit?
Credit refers to an agreement to borrow money with the obligation to repay that money later, usually with interest. In this context, think of “credit” as another way of saying “debt.” When you use credit, you’re taking on debt.
Credit also refers to a person’s trustworthiness or history of repayment. When someone has “good credit,” it means they have a reliable history of repayment.
It’s important to always remember that credit and debt go hand-in-hand. That’s why before we discuss how credit can help us, we learned scary stats about debt. We discussed three big reasons why we’re in debt. And, in a preview to our conversation on credit, we learned the difference between Good Debt and Bad Debt.
We typically rely on credit for big purchases.
We typically rely on our ability to borrow money, or our credit, to make our biggest purchases in life. When you take out a mortgage or finance a car purchase, you are relying on your ability to borrow money to make that purchase. That ability to borrow money is known as credit.
If you have a history of responsibly borrowing money and paying it back on time, a lender is more likely to lend you money.
On the other hand, if you have a history of falling behind on payments, a lender may choose to not lend you money. Or, a lender may charge you higher interest rates to compensate for their increased risk.
This could end up costing you lots of money.
Poor credit will cost you more than just money.
Besides just financial consequences, a poor credit history can also lead to lost opportunities.
As an example, it’s common practice for landlords to check an applicant’s credit history before renting them an apartment. It should be no surprise that landlords are hesitant to rent apartments to people who have a poor track record of paying for things.
These reasons, and other reasons we’ll soon discuss, illustrate why it’s so important to responsibly use credit.
In our initial series on credit, we’ll discuss:
The basics of credit reports and credit scores and why they each matter.
How the responsible use of credit cards can fit into our personal finances.
What you need to know to maximize the benefits of credit card reward programs.
How to use other forms of credit, like a Home Equity Line of Credit (HELOC), to accelerate your progress towards financial freedom.
By understanding what credit is and how your credit history is tracked, you’ll gain the confidence to use credit responsibly as part of a healthy financial life.
I am in favor of the responsible use of credit.
As I previewed in our discussion on Good Debt, I’m in favor of people responsibly using credit as part of a healthy financial life.
That applies to our every day choices, like using credit cards to track our spending. It also applies to other forms of credit, like Home Equity Lines of Credit (HELOCs), to acquire assets. We’ll discuss these and other benefits of responsibly using credit in our upcoming posts.
The important caveat, however, is that like the Sweet Mandy B’s birthday cake, we have to know when a good thing can become a bad thing.
If we abuse the privilege of credit, the consequences can be severe. I abused the privilege of credit cards at the beginning of my career, and it took years to dig out of the hole.
By understanding how credit works and how your credit is tracked, I hope you can avoid falling into a similar mess.
I want you to happily enjoy the cake without the potential negative consequences.
If you haven’t seen it, the show is a competition between 10 survival experts who are dropped off in the middle of nowhere, completely isolated from all human contact. Each person is allowed to bring ten survival items, some clothes, and a safety kit. They all have cameras to film their journeys. Whoever survives the longest wins $500,000.
It is astonishing what these people are capable of. They build their own shelters and catch all their own food. On a daily basis, they’re forced to solve problems. They have no one to help them, or to blame, but themselves.
My favorite competitor is an Australian guy named Outback Mike. I was blown away by the ideas he came up with and the things he built. There was no mental or physical challenge that he backed down from.
My wife and I first discovered Alone during the pandemic. It was the perfect show during that time of immense mental and physical hardship. There was something about the way each survivalist focused on that day’s tasks, and blocked everything else out, that resonated with us.
Watching the latest season of Alone these past few weeks, it occurred to me that the show is full of analogies for the personal finance topics we discuss in the blog.
I’ve found analogies to be great teaching tools, so here we go.
1. Not all calories are created equal.
The major challenge in Alone is getting enough calories to survive. Food is not exactly plentiful in the remote locations where the competitors are dropped off.
To survive, competitors dedicate endless hours strategizing and looking for food. Common strategies include fishing, trapping, hunting, and foraging.
One of the first things you learn is that not all calories are created equal. Calories from fat and protein are at a real premium. Even with an unlimited supply of berries and greens, the competitors make clear that you cannot survive for long periods without fat and protein.
Besides the importance of the type of calories, the way the calories are procured is just as critical.
This makes perfect sense in a survival scenario. If you expend 2,000 calories of energy to catch a fish, and that fish only provides you 1,000 calories of food, that is a losing proposition. If you continue on that trajectory long enough, you’ll starve to death.
This is why contestants on the show always think about ways to passively procure food, such as setting traps or using gill nets. If they can obtain food passively, they can then use that time to rest (save calories) or on other necessary tasks.
In the show, most competitors eventually tap out, on the brink of starvation, having failed to obtain enough food. It’s never for a lack of effort. It’s just really hard.
So what do calories have to do with personal finance?
Just as not all calories procured are created equal, not all dollars earned are created equal.
This begs the question:
If you think about what you do to earn money, are you the contestant trading 2,000 calories of energy for 1,000 calories of food?
The first professional works 80 hours per week and earns an annual salary of $200,000.
The second professional works 40 hours per week and earns an annual salary of $120,000.
Which one would you rather be?
Would your answer change if we convert the annual salary to an hourly rate?
On an hourly rate, the first professional ends up earning $48 per hour.
The second professional earns $58 per hour.
If you’re still leaning towards the first professional who earns more overall but less per hour, did you think about how valuable that extra 40 hours per week could be?
That’s time that could be spent on your true passions. It’s time that could be spent with friends and family. That’s time that could also be spent developing a skill or earning income through a side hustle.
Looking at it another way, what if you could earn the same $200,000 without having to work 80 hours per week? This is where passive income streams come in.
Like the gill net that catches fish without the active involvement of the fisherman, have you explored ways to make money while freeing up your time for other worthwhile pursuits? This is an unavoidable step on your way to financial freedom.
For what it’s worth, I’m confident that the survival experts would all choose to be the person who makes more money per hour while also having more time available for other pursuits.
2. Attitude is everything.
Watching Alone, you see a wide range of personalities. While each contestant has the resume of a survival expert, one attribute always separates the winners from the losers: attitude.
The contestants are forced into what would be impossible survival scenarios for the average person. It’s completely understandable to have tense, frustrating, and stressful moments.
This isn’t me judging the contestants who have poor attitudes. I wouldn’t last an hour in the woods by myself. I’ve never even been camping. My wife caught more fish when she was six than I’ve caught in my whole life.
This is just my observation that most of the time, contestants have similar survival skills. What separates the winners is their attitude and ability to recognize that things will go wrong.
When things go wrong, they don’t blame anyone else or play the victim.
Instead of getting frustrated and quitting, they think of solutions to the problem at hand. This is what so impressed me with Outback Mike.
Yes, we all need a bit of luck in life to thrive. But, we need to put ourselves in position to benefit from luck when it comes our way. That takes intentional thought and effort.
I’m guessing we all know very smart and talented people that have bad attitudes. When things don’t go their way, they immediately blame other people. Nothing is ever their fault. They feel entitled to success without doing the work.
That type of person usually doesn’t lead a very happy or fulfilling life.
For sure, that person would not last a week on Alone.
3. Along with starvation, missing family is the hardest part.
If it’s not starvation, odds are contestants will tap out because they miss their families. The physical challenges of being forced to survive on limited food in rugged conditions is hard enough.
To do it alone and isolated from your family makes it nearly impossible.
One of the most enlightening parts of the show is when the contestants reveal their mental struggles to the camera. Since they’re alone, and typically starving, we get to see raw emotion in real time. You learn a lot about the human condition in these moments.
One unavoidable truth is that us humans are social creatures.
We need our people. We need love and support and connection. Going through life alone goes against our DNA.
Even the chance at winning more money than the contestants ever dreamed of is not nearly enough to keep them away from their families any longer.
There’s one other lesson Alone teaches us about the importance of family. A lesson that is extremely relevant to me right now.
When each season begins and the new contestants are introduced, my wife and I know right away who isn’t going to make it: the people with young kids.
These people have all the skills necessary to survive. But, those skills don’t matter when they start missing their kids. The emotion is too strong. The longing to be with their kids overcomes all else. They simply do not want to miss another day of their kids’ lives.
I think about this lesson in the context of our daily lives. Like the professional in our example above working 80 hours per week, at what sacrifice do all those hours come? How many hours away from home is that? How much time away from our kids?
When I think about those questions, I again think about what I would do with my time if I was financially free.
Let’s take a deeper dive into the two most common strategies for paying back debt when you have multiple loans: Debt Snowball v. Debt Avalanche.
In our post on how to confidently tackle debt, we discussed that it’s a smart idea to apply one of these strategies. Here, we’ll see why.
You’ll notice we have lots of charts and numbers in this post. Don’t worry, you don’t need to do any math. I’ll show you how to use a simple online calculator to help you decide with strategy is best for you.
Before we look at the strategies, always keep in mind the number one rule:
Always pay the minimum required amount on every loan no matter what.
Whatever strategy you end up using, always pay the minimum payment on every loan. If you fail to do so, you will be charged penalties and your credit history and score will be negatively impacted. You will also accrue interest on those penalties, compounding your mistake.
Don’t worry if this sounds confusing right now. We’ll discuss credit cards and the responsible use of credit in detail in upcoming posts.
The below strategies apply to any excess funds you have left after paying at least the minimum on every loan balance. No matter what, you need to make the minimum payment on each loan every single month.
What is the Debt Snowball method?
The first strategy is known as “Debt Snowball.” When you apply the Debt Snowball strategy, the idea is to focus on the loan with the smallest balance first, regardless of interest rate.
Remember, these strategies are for helping you pay back multiple loan balances.
Once you have paid off the first loan in full, you move to the loan with the next smallest balance, again regardless of interest rate. The money you had been paying to the first loan can now be rolled into the second loan.
What is the Debt Avalanche method?
The second strategy is referred to as Debt Avalanche. With this method, you will prioritize the loan with the highest interest rate, regardless of the balance.
Once you’ve paid off the loan with the highest interest rate, you move to the loan with the next highest interest rate. Just as before, the money you had been paying to the first loan can now be applied to the second loan.
You can apply either of these strategies in the same way no matter how many loans you have.
The first step in choosing a debt payoff strategy is to gather some basic information on each loan that you have.
For each loan, you’ll need to find the outstanding balance, the interest rate, and the minimum required monthly payment. You can pull this information from your most recent monthly statement.
Once you have this information, you can plug the numbers into a simple online calculator. By doing so, you’ll get an idea of how much it will cost you (in terms of time and money) to pay off these debts.
They have calculators for all sorts of different purposes, including a Debt Payoff Calculator. Using the Debt Payoff Calculator, you can decide the best payoff strategy for your personal situation.
You may prefer the quicker emotional wins that come with the Debt Snowball method. Or, you may prefer the savings that come from the Debt Avalanche method.
There’s no wrong answer. The choice is yours.
Let’s see how Debt Snowball and Debt Avalanche work in practice.
Note, for simple illustration purposes, the minimum payments in these examples remain the same throughout the life of each loan.
Example 1: Two Different Credit Card Balances
Imagine you have two credit cards with balances owed.
Credit Card 1: $5,000 balance with a 15% interest rate and a minimum required payment of $150 per month.
Credit Card 2: $10,000 balance with a 20% interest rate and a minimum required balance of $200 per month.
Balance
Rate
Min. Pay.
Credit Card 1
$5,000
15%
$150
Credit Card 2
$10,000
20%
$200
After creating a Budget After Thinking, you’ve determined that you have $1,000 per month to put towards these two loans. Because you have to pay a minimum of $150 to Credit Card 1 and $200 to Credit Card 2, you have $650 left to deploy.
How should you do it?
Debt Snowball
If you apply the Debt Snowball approach, you prioritize paying off the loan with the smallest balance. That means paying $800 to Credit Card 1 ($150 minimum payment plus $650 remaining funds) until that loan is paid off completely. The remaining $200 needs to be applied to cover the minimum payment on Credit Card 2.
Once Credit Card 1 is paid off completely, you will add that $800 payment to Credit Card 2 for a total payment of $1,000.
Balance
Rate.
Min. Pay.
Snowball
Credit Card 1
$5,000
15%
$150
$800
Credit Card 2
$10,000
20%
$200
$200
Using calculator.net, you’ll see that it will take you 18 months to eliminate both loans with the Debt Snowball approach. It will cost you a total of $17,303.70, of which the total interest is $2,303.73.
Importantly, Credit Card 1 will be completed paid off in 7 months.
Debt Avalanche
Now, let’s see what happens when we apply the Debt Avalanche approach. Under this approach, you would prioritize Credit Card 2 because it has the higher interest rate. That means you would pay $850 to Credit Card 2 and only the $150 minimum payment to Credit Card 1. Once Credit Card 2 is paid off, you would pay the full $1,000 to Credit Card 1.
Balance
Rate
Min. Pay.
Avalanche
Credit Card 1
$5,000
15%
$150
$150
Credit Card 2
$10,000
20%
$200
$850
Using calculator.net, you’ll see that it will take you 18 months to eliminate both loans with the Debt Avalanche approach. You’ll end up paying a total of $17,071.84, of which the total interest is $2,071.87.
It will take you 14 months to eliminate the first loan, Credit Card 2.
Now, we can compare the results of using Debt Snowball or Debt Avalanche.
Under the Debt Snowball approach, you’ll pay $231.86 more in interest. It will take you 18 months to eliminate both debts under each approach.
However, under the Debt Snowball approach, it will only take you 7 months to completely erase one loan. Under Debt Avalanche, you will not erase the first loan until 14 months have gone by.
Now that you have this data, you can decide whether you prefer Debt Snowball or Debt Avalanche. Some people may prefer the emotional win of eliminating one loan completely after 7 months using the Debt Snowball method.
Other people will prefer the Debt Avalanche approach, which results in more savings. The tradeoff is that they won’t eliminate any loans completely until month 27.
As we said before, there is no right or wrong answer. It is entirely a matter of personal preference.
Why not just pay the same amount to each credit card?
If you pay $500 to each credit card from the beginning, let’s see what happens:
Balance
Rate
Min. Pay.
Equal
Credit Card 1
$5,000
15%
$150
$500
Credit Card 2
$10,000
20%
$200
$500
You will end up paying off both loans in 18 months and paying a total of $17,249.39, of which the total interest is $2,249.42. You won’t eliminate any loans completely for 11 months when Credit Card 1 is paid off.
Compared to the Debt Snowball approach, splitting the payments evenly means four more months to pay off the first loan completely. That means you’re waiting longer for your first emotional win.
Compared to the Debt Avalanche approach, you’ll end up paying $177.55 more in total interest. If you’re looking to maximize your savings, splitting payments is not the way to go.
As you can see, whatever your preference is, it makes sense to pick either Debt Snowball (fastest emotional win) or Debt Avalanche (most money saved).
Personally, I prefer the Debt Snowball approach.
I prefer the Debt Snowball approach because of the emotional win that comes with eliminating a debt in less time, sometimes even twice as fast.
That victory is more important to me than saving $231.86 spread out over 18 months (the length of time it takes to eliminate both debts).
If you prefer paying the least amount in interest, I won’t argue with you. There’s nothing wrong with saving money. It’s a personal choice.
That said, there is one instance where I prefer Debt Avalanche to Debt Snowball.
If you have Bad Debt, like credit card, always pay that debt first.
Bad Debt typically has significantly higher interest rates than other forms of debt, like student loans, auto loans, or mortgages.
Compare these current (February 2025) average interest rates for various types of loans:
It’s not hard to see that credit card debt comes with a significantly higher interest rate than any other form of common debt.
This is why I recommend you always pay your credit card debt first.
Let’s look at a second example to illustrate this point.
Example 2: Auto Loan and Credit Card Balance
Auto Loan: $8,000 balance with an interest rate of 5% and a minimum required payment of $50 per month.
Credit Card: $20,000 balance with an interest rate of 20% and a minimum required payment of $400 per month.
Balance
Rate
Min. Pay.
Auto Loan
$8,000
5%
$50
Credit Card
$20,000
20%
$400
Just as before, you’ve determined that you have $1,000 per month to put towards these two loans. Because you have to pay a minimum of $400 to your credit card and $50 to your auto loan, you have $550 left to deploy.
How should you do it?
Debt Snowball
If you apply the Debt Snowball approach, you would prioritize paying off the loan with the smallest balance. That means paying $600 to your Auto Loan until that loan is paid off completely. The remaining $400 needs to be applied to cover the minimum payment on your credit card debt.
Once the auto loan is paid off completely, you will add that $600 to the credit card debt for a total of $1,000.
Balance
Rate
Min. Pay.
Snowball
Auto Loan
$8,000
5%
$50
$600
Credit Card
$20,000
20%
$400
$400
Using calculator.net, you’ll see that it will take you 37 months to eliminate both loans with the Debt Snowball approach. It will cost you a total of $36,753.16, of which the total interest is $8,753.18.
Importantly, the auto loan will be completed paid off in 14 months.
Debt Avalanche
Now, let’s see what happens when we apply the Debt Avalanche approach.
Under this approach, you would prioritize the credit card loan because it has the higher interest rate. That means you would pay $950 to the credit card and only the $50 minimum payment to the auto loan. Once the credit card is paid off, you would pay the full $1,000 to your auto loan.
Balance
Rate
Min. Pay.
Avalanche
Auto Loan
$8,000
5%
$50
$50
Credit Card
$20,000
20%
$400
$950
Using calculator.net, you’ll see that it will take you 34 months to eliminate both loans with the Debt Avalanche approach. You’ll end up paying a total of $33,822.14, of which the total interest is $5,822.17.
It will take you 27 months to eliminate the credit card debt.
We can again compare the results of using Debt Snowball and Debt Avalanche.
Under the Debt Snowball approach, you’ll pay $2,931.01 more in interest. It will also take you three months longer to eliminate both debts.
On the plus side, your auto loan will be completely paid off in 14 months, which is nearly twice as fast as with Debt Avalanche.
Some people may still prefer the emotional win of eliminating one loan completely after 14 months using the Debt Snowball method.
For me, the price of that emotional win has gotten too expensive. I would prefer to save the $2,931.01 and have both loans paid off in less time, even if that means waiting longer to pay off a single loan.
If you do this exercise with any normal credit card compared to another form of loan, you’re likely going to find that the credit card interest rates are so high that you should target those loans first.
Do you prefer Debt Snowball or Debt Avalanche?
As we said before, there’s no right or wrong answer. Money decisions are emotional. Paying off debt is the perfect example.
Using a simple online calculator can help you make the best decision for your situation. All you need to do is find the balance, interest rate, and minimum payment for each of your loans and the calculator will do the rest.
Whichever method you choose, stick with it. Save yourself the stress of doing mental gymnastics each month.
The most important thing is that you are making your payments every month.
In this post, we’ll learn how to pay off debt on a budget. In our initial series on debt, we first looked at some scary stats about how common debt is in society.
By recognizing that debt is something that impacts nearly all of us, I hope that you stop feeling alone if your’e in debt. There’s no reason to be ashamed. You are not a bad person.
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.
When you’re faced with these inevitable temptations, take a look at your Tiara Goals. I keep my Tiara Goals in my notes section on my phone. I also have a picture on my phone of the original sheet of notebook paper I scribbled on.
All it takes is a quick glance at my most important life values to overcome whatever temptation is in front of me.
Getting out of debt is not easy. Make it easier by regularly reminding yourself what you would do with financial freedom.
2. Create a Budget After Thinking so the debt stops growing.
If you’re currently in debt, it’s crucial that you stop that debt from getting larger. Think about it. If you’re paying off $1,000 of credit card debt each month, but you’re still spending $1,200 more than you earn, your efforts will be for nothing.
Your debt is growing faster than you’re paying it off. You’re not getting any closer to being debt-free.
Once you’ve stopped the disappearing dollars and learned where your money is going each month, you can make thoughtful decisions to pay off debt on a budget.
Then, you can be confident that any money you allocate to debt will actually lower your debt balance.
3. Prioritize Later Money funds to pay off debt.
As we’ve discussed, the art of budgeting is to generate fuel for your Later Money goals. The more fuel you can generate each month, the faster you will achieve your personal finance goals.
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.
Seeing your savings and investments grow while focusing on how to pay off debt on a budget can provide an emotional lift. Establishing good savings and investment habits now will also have longterm benefits that should survive your debt phase.
4. Apply our Top 10 Strategies for staying on budget.
Our Top 10 Strategies for staying on budget will help you generate more money to allocate to debt. These tips are crucial if you’re trying to learn how to pay off debt on a budget.
For example, when you see something that you might want to buy, make a note in your phone instead of buying it right away. After a couple weeks, you probably won’t even want that thing anymore. Take that money you didn’t spend and put it towards your debt.
As another example, how about playing The $500 Challenge Game? When you come in under budget that month, use the excess funds to pay down debt.
When you have debt, applying our Top 10 strategies to staying on budget can teach you something powerful. You’ll see for yourself that the emotional high of paying down debt is better than the feeling you’d get from spending that money on things you don’t care about. It’s important not to ignore these emotional wins when learning how to pay off debt on a budget.
5. Talk to your people about how to pay off debt on a budget.
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.
The problem was that none of us talked about it. I think about how much stress we could have saved each other if we were just willing to talk about money like we talked about everything else. Instead, we hid our truths from each other. Even worse, we likely enabled each other’s poor spending habits.
I now know that it didn’t have to be that way. I would have been better off if I was open about it.This part still bothers me today: I also might have helped my friends facing the same challenges just by starting the conversation.
6. Track your net worth and savings rate for small wins.
Remember that your net worth grows when you reduce your liabilities, meaning debt. When we think of net worth, it’s common to focus on growing our assets. Don’t forget that reducing your debts has the same impact on your balance sheet.
For example, when tracking your net worth, eliminating $1,000 in debt is the same as an investment that grows by $1,000.
Even when you’re focused on how to pay off debt on a budget, tracking your net worth can be very motivating. Every payment you make to reduce that debt improves your net worth.
This is especially helpful if you are focused on paying off student loans or paying down a mortgage. You may not have many appreciating assets, but you can still make a positive impact on your net worth by reducing your debt.
The same logic applies to tracking your savings rate. Measure and feel good about each additional amount you dedicate to eliminating debt. The goal is to stay motivated while you pay off debt on a budget.
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.
Personally, I use the Debt Snowball method.
I value the emotional wins of eliminating a debt entirely, even if it ends up costing me more in the long run. I am currently applying the Debt Snowball method to pay off HELOC debt.
I’ve experienced firsthand that our money choices have more to do with emotions than they do math. If you prefer to play it strictly by the numbers, I completely understand.
The key is that whichever strategy you pick, stick with it. You’ll save yourself a lot of unnecessary mental gymnastics by choosing one approach and then moving on.
One word of caution: whichever method you choose, be sure to always pay the minimum on all of your loans. Otherwise, you’ll be in violation of your loan terms and face devastating penalties.
The idea with either of these methods is to allocate whatever funds remain to the single loan you have prioritized after paying the minimum on all loans first.
8. Think about loan consolidation or balance transfers.
Whether you have credit card debt, student loan debt, or even mortgage debt, you may have the option to consolidate each type of loan into a single loan. If you do your homework, you should end up with a lower overall interest rate and have only one loan payment to make each month.
If you choose to go this route, make sure you fully understand the fine print involved.
For example, if you’re thinking about consolidating your student loans, you’ll end up sacrificing certain loan forgiveness provisions that accompany federal loans.
The same caveat applies when considering a credit card balance transfer. A balance transfer is when you move the balance from one credit card to a different credit card with a lower interest rate. Most major credit cards accept balance transfers from other banks’ credit cards.
The main reason to consider a balance transfer is if the card you are transferring into carries a significantly lower interest rate than your current card. In some instances, you may even qualify for a promotional rate with no interest charged for a limited period of time.
I used balance transfers when I was focused on eliminating credit card debt at the beginning of my career. I did my homework and found a card that was advertising 0% interest for 12 months with no balance transfer fees. That meant that for an entire year, I paid no interest. Every payment I made went directly to lowering my overall debt.
If you’re considering a balance transfer, be mindful that there are usually upfront fees involved, usually around 3%. That fee may end up cancelling out any benefit from doing the transfer in the first place.
9. Get a side hustle to help pay off debt on a budget.
At the end of the day, there are really only two ways to more quickly pay off debt on a budget: spend less money and/or make more money.
We already talked about creating a Budget After Thinking to help on the spending side.
If you really want to get rid of your debt faster, earning more money and the same time you’re spending less money is a dominate combination.
If you take on a side hustle, you can use every dollar you earn to pay off debt. Since this is new money you’re earning, you shouldn’t need it to fund your Now Money or Life Money.
Avoid the temptation of using that money on things you don’t really want anyways. Think about how much faster that debt will disappear if you’re able to throw additional money at it each month.
If you’re not ready for a side hustle, the same logic applies anytime you earn a bonus or commission at your primary job. Put that money to good use by paying down your debt.
10. Don’t let yourself fall backwards while you pay off debt on a budget.
When you do succeed in eliminating a debt, don’t let yourself fall back into bad habits. It’s hard to pay off a debt. It takes time. It takes patience and discipline.
Don’t let it all be for nothing.
When you pay off a loan, celebrate that accomplishment!
Be proud of yourself and let that good feeling motivate you to continue on your journey towards financial freedom.
Before you know it, debt will be part of your past life. You can shift all your attention to the opportunities that comes next for you and your family.
Let us know in the comments below:
Have you used any of these strategies to pay off debt on a budget?
What about any other strategies to pay off debt on a budget that have worked for you?
A few months before we got married, my wife and I took a trip down to Florida. One afternoon, I headed out to the beach with a book, a notebook, and a few ice cold beverages.
The weather was perfect. It was sunny but not too hot. Blue skies and just a slight breeze. The beach was quiet that afternoon. I set up my chair to face the ocean and started reading. This little break was exactly what I needed in the middle of “wedding planning.”
I don’t recall the book I was reading that day. I’ve been meaning to look back at my journals to see if I can figure it out. Anyways, I’ll never forget what I learned about myself that afternoon.
The author wrote about the power of financial freedom. We’ve discussed financial freedom in previous posts. The basic idea is that when you are financially free, you can choose how to live your life on your own terms. You can make important decisions based on what truly matters to you, as opposed to being forced down a certain path for money reasons.
On the beach that day, the concept of financial freedom was not new to me. I had read about it for years. The concept really hit home that afternoon when the author asked a simple but powerful question:
What would you do with financial freedom?
Maybe the question really resonated with me because I was about to get married. It’s only natural to daydream about what life would be like after the wedding, even though my wife and I had been a couple for six years by that point.
Over the years, we had talked a lot about what we wanted our lives together to look like. We knew long before the wedding how we each felt about major topics like starting a family and where we wanted to live.
We were also on the same page when it came to money decisions. My wife and I met early on during my personal finance journey, not long after I had determined to get my money life sorted out. My wife still jokes that she was my first personal finance student.
By the time we got married, I had been on my personal finance journey for about seven years. I was out of debt and was starting to think about the options that were now available to me. It was around this time that I learned one of the most powerful words in personal finance:
DINK
Back then, my wife and I were both working as lawyers in Chicago. We didn’t have any kids. I didn’t realize it until later on, but we were DINKs.
DINK means “Dual Income No Kids.”
When you’re in a relationship where you have two incomes coming in and are sharing financial responsibilities, you have the opportunity to supercharge your Later Money goals.
If you are currently a DINK, or will soon be a DINK, please pay extra attention here.
Don’t waste this powerful opportunity to supercharge your Later Money goals.
This is what my wife and I were able to do, even if we didn’t know what a DINK was. We each had good incomes coming in and our monthly expenses were low. The two of us could comfortably share an apartment, instead of each paying for an apartment separately. That’s major savings each month.
We didn’t have to worry about childcare. We were young so the odds of unexpected medical care were lower. All things considered, it was pretty easy to keep our Now Money to a minimum with plenty to spare for Life Money.
This allowed us to fuel our Later Money goals, like having a nice wedding and saving up for a home or rental property. We had money in the bank and seemingly endless choices.
And, I didn’t want to screw it up.
Which brings us back to me sitting on the beach, thinking about what I would do with financial freedom, with maybe 1 or 2 less beverages in the cooler.
What did I really want out of life?
I put my book down and looked off into the ocean, thinking about what I wanted out of life. I started thinking about what my ideal life would look like. By this point, I was engaged in the type of deep thought where you don’t even realize what’s happening around you.
It quickly occurred to me that I had 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.
Without a doubt, I had never written down the answer to that powerful question: what would I do with financial freedom?
I hadn’t ever 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.
That said, I completely understand why I felt that financial freedom was unattainable for someone like me. This was in the phase of my life where I had been preoccupied with eliminating debt. Because of that debt, I didn’t allow myself to dream about what life could look like if money wasn’t holding me back.
This was also before my wife and I had rental properties. It was before we recognized the impact of side hustles and multiple streams of income. I had read about and understood these concepts in theory, but I hadn’t put what I learned into practice.
That day on the beach, it was like a light went on in my head.
After years of patience and discipline, I had climbed out of debt. I was now a DINK with Later Money in the bank waiting to be deployed. That meant I had created opportunities.
I wasn’t financially free, but for the first time in my life, I allowed myself to accept that financial freedom was possible for me.
This was one of the most powerful moments in my life.
With that realization in my mind, I walked into the ocean to cool off and think some more.
What would I do with financial freedom?
There in the ocean, I wasn’t thinking about dollars or career goals. This was more important than that. I was thinking about what I wanted my life to look like if money was not an issue. I was thinking about what I would do with my time if I was in complete control.
Floating there in the water, it was like I had an epiphany. Everything suddenly became clear to me. I ran out of the ocean to get back to my chair before I forgot what just popped into my head.
I whipped out my top bound spiral notebook and started writing with a blue pen. Minutes later, I had written down seven answers to the question: what would I do with financial freedom?
My “Tiara Goals” were born.
Nearly eight years later, I still have that sheet of notebook paper. I keep it safe in a leather binder protected by a laminated page holder. It has those familiar tear marks on the top of the page where the paper connected to the spiral binding.
Even though I have these seven goals memorized by now, I still look at this sheet of paper every month. Looking at this sheet is an incredible reminder of that day on the beach when everything became clear to me.
A quick aside, I call my goals “Tiara Goals” because it’s a silly, but meaningful, description to me. Have some fun with what you name your goals. If you do it right, you’ll be thinking and talking about these goals a lot.
What are my Tiara Goals?
So, here are my original Tiara Goals from 2017, as scribbled on that sheet of paper and edited for clarity:
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.
In a future post, we’ll unpack each of these goals.
While I haven’t reached financial freedom yet, I think I’m doing a pretty good job already living by these fundamental values.
We can obtain Parachute Money. We can choose to do meaningful work and choose to spend more time with people who are meaningful to us.
No, it’s not easy to achieve financial freedom. But, it is a whole lot easier when you know what you are striving for in the first place.
That’s why at the beginning of my financial wellness class, I ask my students to write down their own versions of Tiara Goals. I want to help them avoid the limiting beliefs that I had before that day on the beach.
My favorite part of class is when my students share their Tiara Goals.
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.
I also regularly hear one thing that my students, and the rest of us, don’t want:
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 this post 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.
Have you thought about what you would do with financial freedom?
Have you ever written it down or shared your answers with others?
8 out of 10 people! Is it just me, or is that mind-boggling?
On the flip side, only 4% of workers report no concerns about losing their jobs.
These numbers are shocking to me, but maybe I shouldn’t be that surprised. As Yahoo Finance explains,
Many large corporations have already announced or kicked off a round of layoffs, including Chevron, CNN, Estee Lauder, Meta, and Southwest Airlines. And that, of course, doesn’t count the thousands of workers terminated under Elon Musk’s campaign to reduce the federal workforce.
My mind immediately jumps to a follow-up question:
Surveys like this one motivate me to continue bringing attention to core personal finance issues, like having adequate emergency savings. This is why I so strongly believe that talking about money is not taboo.
Life is too short and too precious to be in a constant state of worry. Is there any sense worrying about something, like getting laid off, when you have practically no control over whether it happens or not?
Nearly half of US workers choose to work more days than they are required to!
And, it gets worse if you’re a high earner or highly educated.
According to the same study, the more money you earn, the less likely you are to take your full paid time-off.
The more educated you are, the less likely you are to take your full paid time-off.
The more senior you are, like being a manager vs. non-manager, the less likely you are to take your full paid time-off.
If the first survey mentioned above surprised me, this one just makes me angry.
Do you recognize a difference between working hard and always working?
Don’t misunderstand why these results make me angry. It’s not about working hard vs. slacking off. It’s not about being a good employee vs. a bad employee. I am 100% in favor of people working hard and working with integrity to get the job done.
My frustration is that somewhere along the way, “working hard” turned into “always working.”
By the way, before you accuse me of being a slacker, I am no stranger to working hard.
I work full-time as a lawyer, manage 11 rental properties, teach law school courses on Wednesdays and Sundays, and publish three blog posts per week. Still, none of these things are more important to me than spending quality time with my family.
Years ago, I first read Tim Ferris’ game-changing book, The 4-Hour Workweek. Ferris described how his small business took off as soon as he started doing less, not more. He empowered his staff and stopped himself from getting in the way. Not only did his company thrive, he had more time available to pursue what really mattered in his life.
If you’re one of these people choosing to work more hours instead of taking your earned vacation time, have you ever asked yourself why?
Keep in mind, these are days off that your company has already agreed to give you. You earned them. Why are you not taking them?
Are you worried about getting fired? Passed up for a promotion? Is your self-worth tied to how many hours per week you work?
Years from now, when your grandkids are huddled up for story time, do you plan on telling them how much you worked and how many life experiences you skipped out on?
These are hard questions to truthfully answer. If you’re being honest with yourself, you may start thinking about another set of questions:
Is this job the right job for me? Do I want to spend my life stressed from working too much? What would be a better use of my working hours so I can spend more time doing the things that I love with the people that I love?
I’ve spent a lot of time thinking about these questions. I’ve realized that I’ll never understand what the point is of working so much at the cost of spending time with the things and people you love.
Maybe I’m the weird one. But, I don’t think I am. Unfortunately, the data backs me up and confirms that working too much can have series consequences.
Fortunately, we can learn from strategies geared towards retirees. Let me explain.
The tips include finding a purpose, strengthening your body, and rebuilding your brain.
When I came across this story, I immediately thought that we shouldn’t wait for retirement to do these things. This is solid advice for all of us, at any stage in our lives.
Do you know what sounds pretty great to me?
A life filled with purpose sounds pretty great. The same goes for being fit and smart.
The challenge is that work often gets in the way.
When we let this happen, the consequences can be catastrophic.
As just one example, lawyers as a profession have long struggled with mental health issues. I first learned about these challenges during law school orientation. Today, I see it in practice. 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.
Anecdotally, I’ve personally talked to people recently in a wide variety of other fields, like consultants and small business owners, who are frustrated for the same reasons.
The point is, regardless of industry, many of us struggle with work stress.
What can we do about it?
That’s a complicated question with many possible answers. For starters, I firmly believe that by building strong personal finance habits, we can create more opportunities to find purpose and practice good health.
I recommend you think back to our conversations about Parachute Money and why you should want to be good with money. When you’ve made thoughtful money choices, you can choose to live a life right now on your terms rather than waiting until retirement.
I agree with what you’re probably thinking. These are not easy or fun topics to think about. However, in my opinion, it’s much worse to let life go by while failing to take responsibility.
Am I wrong about people working too much?
Maybe I’m wrong about people working too much?
I don’t think I am.
The data paints a very sad picture for lawyers, and I have to believe anyone else working long and hard hours. If you have similar data about your profession, please share it with us. I hope I’m wrong about what that data will show, but I fear I’m right.
As always, let us know what you think in the comments below.
And, thank you for continuing to share stories you’ve come across that would be good to discuss here.
There may not be a more polarizing debate in personal finance than the concept of Good Debt vs. Bad Debt.
“Good Debt” generally means loans used to acquire income generating assets, like rental properties or businesses.
“Bad Debt” generally refers to consumer debt, which is personal debt owed because of buying things for personal or household use. For most people, this simply means credit card debt.
Two absolute giants in the field, Robert Kiyosaki (of Rich Dad Poor Dad fame) and Dave Ramsey (maybe the most well known personal finance expert in the world), take opposite viewpoints.
Before addressing their different opinions, it’s important to highlight that both Kiyosaki and Ramsey agree on a critical point:
All consumer debt is bad.
You’d be hard-pressed to find any personal finance expert who says that credit card debt is OK. I’d be concerned if you found anyone at all, expert or not, who seriously took the position that credit card debt is OK.
A quick side note: There is some difference in opinion as to what else besides credit card debt qualifies as consumer debt. For example, is your primary home mortgage considered consumer debt? What about your student loan debt? I’ll give you my take below.
Now, let’s take a look at how each Kiyosaki and Ramsey differ on Good Debt v. Bad Debt.
Kiyosaki believes in the power of Good Debt.
Kiyosaki argues that Good Debt is a powerful tool to generate consistent cash flow from investments. Kiyosaki defines Good Debt as debt that is used to buy assets like real estate or businesses that generate income.
As long as the debt leads to positive income, it’s considered Good Debt. For example, Good Debt would include taking out a mortgage to buy a cash flowing rental property.
Kiyosaki suggests that Good Debt can be responsibly used to quickly acquire more assets, even if the debt is considered a liability.
If it were up to Ramsey, there would be no distinction between “Good Debt” and “Bad Debt.” All debt is bad and carries risks that will weigh on your emotions and drag down your net worth.
Ramsey is adamant that debt should not be used as a tool to build wealth. He contends that a person’s income is the best way to consistently build wealth.
In his bestselling book, The Total Money Makeover, Ramsey walks you through how to build wealth without relying on debt.
So, where do I come out on the Good Debt v. Bad Debt debate?
Kiyosaki and Ramsey are personal finance legends. There’s no right or wrong in this debate. I appreciate each of their viewpoints.
Ultimately, what side of the debate am I on?
I’m on Team Kiyosaki.
When you responsibly use Good Debt, you can more quickly create income streams to accelerate your journey towards Parachute Money. However, if you’re struggling with consumer debt, taking on any additional debt, even Good Debt, is a bad idea.
Like other real estate investors, my wife and I have experienced firsthand the power of Good Debt. In seven years, we have acquired four cash flowing rental properties (three in Chicago, one in Colorado) that add extra income to our personal balance sheet each month. Without that income coming in, our financial picture would look completely different.
On top of that, we have benefited from appreciation with each of our properties, further increasing our net worth. Of course, appreciation is largely out of anyone’s control. Market conditions have been very favorable for us.
That doesn’t change the fact that we acted on opportunities when others only talked. We lived in small apartments for six years with a growing family. We responded to tenants whether we were on vacation or it was the middle of the night. Above all else, we stayed disciplined, focused on our goals, and paid the bills even when money was tight.
For these and so many other reasons, I believe in the responsible use of Good Debt to acquire cash flowing assets.
Just because we’ve taken on debt doesn’t mean we don’t worry about it.
All that said, Ramsey’s voice still rings in my ears when it comes to debt. Up to this point in our lives, my wife and I are comfortable with the Good Debt we’ve taken on to build our portfolio. Even so, we frequently think about Ramsey’s point of view and the valid debt risks he highlights.
Even with the extra rental income coming in, we still feel the heavy burden of mortgage debt. That’s why our goal for 2025 is to prioritize eliminating as much mortgage debt as possible. While we are comfortable with a certain level of debt, we don’t ever want to be reckless.
If you’re thinking about using debt to acquire assets, don’t ever ignore the heavy emotional toll that debt will have on you. Just as importantly, if you’ve struggled with debt in the past, be careful about going down that road again.
It’s easy to get blinded by the potential cashflow of an investment while ignoring the accompanying debt. Long before you ever sign the loan documents, make sure you’ve done your homework and thought hard about what it’ll take to pay that loan off.
What about primary residence mortgage debt and student loans?
I mentioned that I would share my perspective on whether debt to buy a primary residence or student loan debt is Good Debt.
I think both should absolutely be considered Good Debt.
This is one area where Kiyosaki and I don’t agree.
Why I consider a primary home mortgage Good Debt.
Kiyosaki favors using Good Debt to buy assets, meaning investments that put money in your pocket. A primary home does not put money in your pocket, so Kiyosaki would not recommend using debt for this purchase.
He’s not alone in this viewpoint. Many smart people think it’s financially foolish to buy a primary residence instead of renting. For an in-depth analysis on the question of buying vs. renting, check out this video from Khan Academy.
I don’t agree with this viewpoint. For most of us, our primary residence is the best way to build generational wealth for our families. This is not my personal strategy for building wealth. That said, I understand that this strategy is how most of us do build wealth.
Besides just wealth building, I appreciate more than ever how owning a home can be emotionally beneficial. Since we moved to our longterm home, I’ve already experienced the psychological benefits of establishing roots and feeling connected to a community. After bouncing around apartments in Chicago for nearly 20 years, I can tell you that it feels good having a permanent home.
So, I consider a primary home mortgage Good Debt. For similar reasons, unlike Kiyosaki, I recommend including your primary residence in your net worth.
Why I consider student loans Good Debt.
I also disagree with Kiyosaki on whether student loans count as Good Debt.
I don’t want to put words in Kiyosaki’s mouth, but his perspective seems mostly shaped by how he feels about the modern educational system in this country.
How exactly does he feel about our education system?
All things considered, it makes perfect sense that he thinks student debt is Bad Debt.
I don’t agree. I’m grateful for my education through law school. I learned how to think and solve problems. I learned how to challenge myself and do hard things. I think this is true for anyone that goes to school and takes it somewhat seriously.
I’m not discounting Kiyosaki’s point that maybe the system needs fixing. Regardless, I believe that education opens doors, whether that’s through connections made along the way or licenses earned (like the license to practice law).
From my perspective, debt incurred to pay for that experience and training is well worth it.
If that wasn’t enough, the data shows highly educated people earn more money. In fact, men with graduate degrees earn $1.5 million more over a lifetime than those with only high school degrees. That’s another reason why I consider an investment in yourself through student loans Good Debt.
Are you Team Kiyosaki or Team Ramsey?
Maybe you feel there is such a thing as Good Debt. Maybe not. Either perspective is completely valid.
In the end, can we at least all agree that credit card debt is always bad debt?
In today’s Q&A, we’ll address two great questions from readers about shopping for a home in today’s environment. We’ll also talk through how to know if you have enough Parachute Money.
As always, please continue to reach out with your questions on our socials or by replying directly to our weekly newsletter emails. I personally read and reply to every email.
Should I wait for mortgage rates to drop before buying a home?
This question has been on people’s minds for a few years now. Ever since rates started climbing from the all-time lows during the pandemic, people have been hoping they might significantly drop again.
In my humble opinion, that ain’t happening. At least not anytime soon.
Google “Are interest rates going to drop” and you’ll find that nearly every major news outlet and mortgage lender has a prediction. Most predictions right now are about the same. US News summed it up just about perfectly:
Analysts expect the 30-year fixed mortgage rate to stay elevated between 6% and 7% for the next two years. Just two months ago, economists thought it would fall into the 5% range by the second half of 2025. With such wild fluctuations in the forecast, you’d be just as likely to get a satisfactory mortgage rate outlook from a Magic 8 Ball: Cannot predict now. Ask again later.
Nobody knows what’s going to happen with rates. Just two months ago, US News thought rates would drop. Now, they’re expected to stay elevated. What are you supposed to do with that information?
I recommend you ignore it.
My advice is to buy a home when you’ve decided it’s the right moment in your life to do so. Make that decision regardless of what current interest rates are.
Why do I recommend you ignore mortgage rates?
There are really only three things that can happen to mortgage rates over time:
Stay the same.
Go up.
Go down.
In any of those three scenarios, there’s no point in basing your decision to buy a home only on the current rates. Let me explain.
Let’s say you have a crystal ball and can look three years into the future. Looking into your crystal ball, let’s play out each of the three scenarios mentioned above.
1. Your crystal ball shows you that mortgage rates stayed relatively consistent.
Since rates stayed the same, there would be no point in waiting to buy a home because of rates. The rates three years from now are the same as they are today.
By waiting, you’re likely going to experience that homes have gotten more expensive. The longer you wait, the more expensive they are going to be.
So, even if rates stay the same, prices are likely to go up and you shouldn’t sit around waiting for them to drop.
2. Your crystal ball shows you that mortgage rates went up.
If rates go up, it’s easy to conclude that it’s a mistake to delay your home buying decision. Higher rates, combined with higher prices, is… not good.
3. Your crystal ball shows you that mortgage rates went down.
This is the scenario that many people are waiting for. When rates go down, you can afford a more expensive home. That’s a good thing, right?
Not so fast.
Do you think you’re the only person sitting around waiting for rates to drop? For the same reasons that you’re waiting, many other people are also waiting.
So, what happens when lots of people are waiting to buy the same thing? Demand goes up. When demand goes up, you have more competition to buy that same house. That means prices go up. You’ll end up paying more money for the house, even with a lower interest rate.
Take it from me, bidding wars are not fun. I would much prefer to get the house I want without the added competition.
If mortgage rates end up dropping later on, I’ll refinance my loan into the lower rate. I may pay more on a monthly basis in the short term, but long term, I have the house I want at the best available current rate.
So, there you have it. No matter what happens to rates, in my opinion, you’re best off shopping for a home when the time is right in your life.
Forget about the rates. If rates do end up going down in the future, you can still benefit by refinancing.
My wife and I are considering buying a home that would be the most expensive home ever sold in the neighborhood. Is that a bad idea?
This is another great question. Opinions will certainly vary, so I encourage you to talk to your inner circle to get a variety of perspectives.
Personally, I have no problem buying the most expensive property in a neighborhood, under one condition: I plan on holding that property for at least 10 years.
Like the data above shows, home prices tend to go up historically. Since 1990, home prices nationally have appreciated on average at a rate of 4.4%.
If you’ve done your homework and are shopping for real estate in good neighborhoods, it’s only a matter of time before another home sells for a higher price.
The longer you hold the real estate, the more home appreciation works in your favor.
When we bought our first rental property in Chicago in 2018, we paid the highest price for any 4-flat in our neighborhood. At the time, we were a bit concerned that we were overpaying. Those worries were short lived. With seven years of appreciation working in our favor, numerous properties have sold since then for significantly more money.
Yes, there are always going to be dips in the market. Do not expect your home to steadily appreciate every year. This is why my one condition is to hold the property for at least 10 years. When you hold property (or any investment) for the long run, time is on your side. You can wait out any dips in the market.
As long as you’ve done your homework and are willing to hold a property for the long run, I would have no hesitations in buying the most expensive property in a neighborhood.
I’m fascinated by the concept of Parachute Money. My question is: how will I know if I have enough Parachute Money?
The idea of Parachute Money is one of my favorite concepts in personal finance. Check out our post here to learn more about how empowering Parachute Money can be.
To know how much Parachute Money you need, look back at your Budget After Thinking. All you need to do is add up your monthly Now Money and Life Money to figure out how much Parachute Money you’ll need to maintain your current life.
For example, let’s say your budgeting process taught you that you need $6,000 of Now Money and $4,000 of Life Money each month. Your Parachute Money target is $10,000.
If your goal is to walk away from your primary job, you’ll need to create $10,000 of income streams not counting that primary job. That could be from any combination of investments and side hustles. Once you hit $10,000 in parachute strings, you should be able to safely walk away from that job.
Note that for calculating your Parachute Money, you can ignore your Later Money goals. The reason why relates back to the purpose of Parachute Money.
The purpose of Parachute Money is to be able to choose to walk away on your own terms while continuing to support yourself.
Presumably, choosing to walk away from a bad situation accomplishes one of your primary goals for saving and investing money in the first place.
At this phase of your life, it’s OK to temporarily set aside your Later Money goals. If and when you choose to seek new sources of income, you can start fueling your Later Money goals again.
The exception to this rule is if you have debt obligations that are not accounted for in your Now Money. If that’s the case, be sure to include your debt obligations in your Parachute Money target.
One last thing about Parachute Money: achieving true Parachute Money is hard. Just remember, the payoff could be extremely valuable to you: not having to work your primary job if you choose not to. That’s the definition of financial independence.
Thanks again for all the great questions!
If we didn’t get to your question this week, we’ll do our best to get to it in an upcoming post.
We’ve all heard these common money phrases. If you were to ask someone older than you for one piece of personal finance advice, I’m betting you’ll hear one of these lessons. Let me know if I’m right about that in the comments below.
There’s a reason these phrases are so common. They’re simple and easily reflect some of our core personal finance principles. In fact, we’ve covered these concepts in detail in earlier posts:
It’s not that we want to have high debt and low savings. So why is this the reality for so many of us?
I have 3 main theories why we fall into debt.
There are countless theories on why people end up in debt. I have three primary theories. Looking at each of these explanations can help us understand and avoid common pitfalls that lead us into debt.
1. We fall into debt because we are simply careless.
Like many people, I failed to create a budget and assumed that my W-2 income was plenty. I ignored emergency savings and never even thought about creating Parachute Money.
The saddest part is that I didn’t even realize that I was slipping backwards. I had no idea because I didn’t track my net worth or savings rate. I worked hard all year long and just hoped things would work out.
By the way, if this sounds familiar, you should know by now I’m not judging anyone. I’ve been very open about my money mistakes. We all deserve a chance to learn about and talk about strong personal finance habits.
So, being careless with money is one common reason people fall into debt. Another common reason is that bad things happen in life.
This might include medical emergencies, home repairs or car troubles. It’s not our fault that these things happen. But, it is our fault if we’re not prepared in advance.
While these events are unfortunate, and maybe even tragic, they are not unexpected. We all need to expect that bad things will happen.
Preparing for the unexpected is part of every solid organization’s planning. In government, planning ahead means having a “rainy day fund.”
When managing properties, planning ahead for big repairs means having a “Capital Expenditures” or “Cap Ex” fund. For our personal finances, planning ahead means having an emergency fund.
Whether it’s government, business, or personal finance, the goal is to have options other than taking on debt to get through challenging circumstances.
3. Blame the Kardashians.
Besides carelessness and emergencies, there’s another powerful force that contributes to rising debt levels across the world. This force is nearly impossible to ignore. It’s become a part of our daily lives, whether we want to admit it or not.
What is this powerful force that contributes to our rising debt levels?
The era of social media and on-demand entertainment has made it harder than ever to avoid temptation. It’s everywhere we look.
Blaming the Kardashians realtes to another timeless, common money phrase: “Keeping up with the Joneses.”
The Kardashians are the modern day Joneses.
Once upon a time, “the Joneses” represented your neighbors, people you could observe from a distance on a regular basis. The idea behind the phrase is that you can see what your neighbors are spending money on and are either consciously or subconsciously tempted to do the same.
If your neighbors buy a new car, you buy a new car to keep pace. If your neighbors vacation in Australia, you research diving tours at The Great Barrier Reef. When you notice your neighbors hosting a backyard BBQ party with lots of happy looking people, you decide to host a party the next weekend.
As humans, it can be difficult to ignore the temptation to keep up with our neighbors. Whether we like it or not, we are concerned with our social status. Part of our self-worth gets tied to comparing ourselves to others.
Who better to measure up against than the people in our neighborhood who we probably have a lot in common with?
This same idea is oftentimes compounded in the professional setting. It is not uncommon to compare ourselves in the same way to our colleagues at the office.
Some professions heighten the pressure to keep up. Have you ever noticed that real estate agents seem to always drive nice cars? Or, big city lawyers wear fancy suits? It’s easy to get caught up in expensive tastes when you’re expected to fit in.
One of my favorite personal finance books, The Millionaire Next Door, discusses this concept in detail. I highly recommend you read this book if you are struggling with comparing yourself to others.
What does this all have to do with the Kardashians?
In today’s world dominated by social media and the internet, we’re no longer influenced just by our neighbors or colleagues. We’re now influenced by people throughout the world. That could mean friends or complete strangers.
Instead of just learning your neighbors went on vacation, now you know when anyone in your circle is on a trip. At any moment, you may be on the train in 12 degree weather heading to work. One look at your phone and you’ll see plenty of wonderful pictures of people doing cool things. It’s hard to not want that for yourself.
The byproduct of social media and the internet is the never ending temptation to spend money. Even if that means spending money we don’t have. That’s a powerful force pushing us deeper into debt.
I am fighting this temptation in my life right now. Having moved to a new home not long ago, there are so many things we want to buy and projects we want to do. I need to constantly remind myself to slow down so I don’t again fall victim to consumer debt.
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.
If you let that reality sink in, you’ll hopefully pause the next time you’re about to spend money on something you don’t actually care about.
This is where we circle back to money mindset.
To counteract social media and mass marketing, you need to have a competing force in your life that’s strong enough to overcome all the noise.
I’m referring to your ultimate goals in life. I mean the reasons you wake up every morning to go to a job or stay up late to finish a project.
Why are you working so hard?
When you can answer that question, you’ll know what your ultimate goals are in life. With those goals in the forefront of your mind, it’s much easier to make consistent, intentional money decisions.
Most importantly, you’ll stay on budget and avoid sinking into debt.
You’ll also be much happier when you stop worrying about what random strangers are spending money on.
Yup, 8 out of 10 of us have some form of debt. Put another way, just about everyone reading this post has debt. That’s why learning to effectively deal with debt is a core personal finance concept.
For the next couple of weeks in the blog, we’re going to focus on debt so we can continue our progress towards financial independence.
Those of us who don’t want to learn will remain debt’s financial prisoner.
As we begin our discussion on debt, let’s start with some scary statistics.
According to the Federal Reserve Bank of New York, total household debt in the United States grew to $18.04 trillion by the end of 2024. That’s such a big number, it’s hard to know what to do with that information.
Let’s break it down by the type of debt:
Credit card balances increased by $45 billion from the previous quarter and reached $1.21 trillion at the end of December 2024.
Auto loan balances increased by $11 billion to $1.66 trillion.
Mortgage balances also increased by $11 billion and reached $12.61 trillion.
HELOC balances increased by $9 billion to $396 billion.
Other balances, reflecting retail cards and other consumer loans, increased by $8 billion.
Student loan balances increased by $9 billion to reach $1.62 trillion.
While these numbers are still too big to comprehend, one powerful conclusion is hard to miss:
In every category, the amount of debt increased from the previous quarter.
48% of credit card holders carry a debt balance, an increase of 9% since 2021.
53% of the people have been in credit card debt for more than a year.
The main causes of credit card debt are unexpected medical bills (15%), car repairs (9%) and home repairs (7%).
According to another Bankrate.com survey, 33% of Americans report they have more credit card debt than emergency savings.
These last couple stats helps us begin to understand why so many people fall into debt in the first place. It goes back to our previous conversation about the importance of emergency savings. When we don’t have savings, the first place we turn is to our credit cards.
What can we learn from these scary debt statistics?
Whether we look at the national figures or per household numbers, the picture is clear.
Worldwide, we have a consumer debt problem. And, it’s getting worse.
For most of our conversation on debt, we’ll focus on credit card debt. Most everyone agrees this is the worst kind of debt to have. It’s also the type of debt that’s the most relatable to many of us, regardless of where we are in our careers.
Before we go any further, it’s important to understand the two main reasons why I share studies like these about debt.
1. If you are currently in debt, please know that you are not alone.
If your money mindset is not in the right place, it won’t matter. You’ll stay in debt, or worse, your debt will continue to increase.
2. If you think you are immune from falling into debt, think again.
When we are presented with statistics like this, it’s not uncommon for us to be in denial. We might say to ourselves:
“No, I understand that other people are in debt. But, that won’t happen to me.”
Or, “No, I make good money. I can pay off my credit card debt if I really wanted to.”
If it were really that easy, then why do half of Americans carry credit card debt? Why is our credit card debt growing instead of shrinking?
You may not currently be in credit card debt, and that’s a very good thing. But, what if one of those emergencies mentioned above surfaces in your life?
If you were hit with a large, unexpected medical bill, could you cover it without credit cards?
What if your roof needs to be replaced? Or, your furnace breaks during the middle of winter? Do you have tens of thousands of dollars saved to cover these necessary expenses?
Do you own a car? How awful is that annoying “Check Engine” light? A simple trip to the mechanic could be another few thousand dollars out of your pocket.
These types of financial emergencies do not discriminate.
Ending up in debt might come as an unpleasant shock to you. Knowing these statistics will hopefully put your mind at ease that you’re not alone.
So, even if you’re comfortable in your job and make good money, you may still end up in debt. If you do end up in debt, the lessons we’ll soon learn will ensure that your stay in the financial penalty box is as short as possible.
In our series on debt, we’ll soon learn:
How in today’s world of social media, “Keeping up with the Joneses” is really more like “Keeping up with the Kardashians.”
There is a difference between “good debt” and “bad debt.” When used responsibly, good debt can help you reach your financial goals faster.
Paying off debt is hard. It’s heavy. It’s stressful. There’s no shame in admitting that. Just because it’s hard, doesn’t mean we can ignore it any longer.
Whether you currently have debt or smartly want to be prepared just in case, our series on debt is crucial for anyone seeking financial independence. There is no faster way to undue all your hard work than to fall into debt.
You don’t need me to tell you that debt is a major barrier to reaching financial freedom. In fact, debt is oftentimes the exact opposite of financial freedom.
When you have debt, your choices are limited. It’s like you’re in financial prison. When you are free of debt, you are in control.
Maybe you feel like your airplane is a fighter jet, moving too fast to enjoy the ride. Maybe your airplane is a small regional carrier, boringly flying back and forth between the same two airports.
For whatever reason, you decide you need to get off this airplane. You decide to take control and make a change. 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. This 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.
This situation illustrates what I believe is one of the most empowering concepts in personal finance.
It’s what I call “Parachute Money.”
Before we move on to our next core personal finance topic, credit and debt, let’s take a few minutes to discuss this powerful money concept.
What is Parachute Money?
The central idea of Parachute Money is to create multiple sources of income so you are not beholden to any one source.
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.
With Parachute Money, if one of your sources of income dries up, you are more than covered with your other sources.
Picture each source of income as a string on your parachute. The more strings on the parachute, the stronger it is. Likewise, the more sources of income you have, the stronger your personal finances are.
Note that multiple sources of income does not have to mean multiple jobs. Even with one job, you can still pursue additional, or stronger, parachute strings.
Let’s say you earn a salary and also could earn commissions or bonuses. Each one of those income streams could be another string in your parachute.
Or, you could prioritize boosting your emergency savings even more than you normally would. You might even consider a separate savings bucket called “Parachute Money.” Besides boosting your savings, you could also focus on passive income streams, like investing in dividend stocks.
The central idea remains the same. Protect yourself with as many income sources as you can.
Think of Parachute Money as a way to visualize financial independence.
Parachute Money empowers you to confidently make big life changes. When you have Parachute Money, you are financially free to control your life, not the other way around.
Parachute Money is all about your intentional decisions. It’s for when you’ve decided, on your terms, that you’re ready to make that big change in your life. You’re excited to take matters into your own hands, but you don’t want to disrupt your entire life in the process.
To return to our airplane analogy, you could stay on the plane if you wanted. Nobody is forcing you to jump. But, you’re ready for something different. And when you do jump, you want a parachute that will help you land as safely as possible.
That’s what Parachute Money can do for your life. It allows you to make that leap while landing gracefully.
You could say it out loud like this, “I have Parachute Money. I am financially independent because I am not beholden to any single source of income. If one source of income goes away, because I’ve decided it’s time for a change, my other sources of income will protect me.”
Parachute Money is more than just emergency savings.
An emergency savings account is part of your Parachute Money, but there’s more to it.
Recall that an emergency savings account is what you turn to when life dictates your choices. If you unexpectedly lose your job or have a large bill to pay, emergency savings will keep you afloat. You didn’t choose for these things to happen, but you still need to be prepared.
So, emergency savings are for protecting yourself and your family from the unexpected. Like we talked about above, Parachute Money is about you dictating the course of events, not the other away around.
What are my current parachute strings?
My wife and I have worked hard to create multiple sources of income. We currently have the following strings in our parachute, in no particular order:
My primary job as a mesothelioma attorney
My wife’s primary job as an attorney
Rental Property 1
Rental Property 2
Rental Property 3
Rental Property 4
Law School Professor
Emergency Savings
Combined, these sources of money provide a solid parachute for us.
If you wanted to, you can break out some of these sources of income into further parachute strings.
For example, Rental Property 1 consists of 4 apartments. Each apartment could be a separate string. I teach multiple law school courses; each course could be another string. Like we talked about above, your job may include a salary, commissions, and bonuses. Each could be a separate parachute string.
What are some situations where Parachute Money can make big decisions easier?
Let’s look at three possible situations where Parachute Money can empower you to make the best choices for you and your family.
1. It’s time for a new job.
After working for the same company for 10 years, life around the office looks different.
Your direct supervisor left for a new job. You were passed up to take her place. New policies are rolling out, including a requirement to be in the office five days per week.
You feel stuck in place. You still like your job and most of the people you work with. And, you could hang around for the steady paycheck.
Or, you can take control and make a change. If you have Parachute Money, you can take your time looking for a new job that matches your priorities. Maybe you decide not to go back to full-time work at all.
2. It’s time to move.
You live with a roommate and have another 10 months on your lease. Things have gotten uncomfortable.
He doesn’t clean up after himself. He stays up late watching movies so loud you can’t sleep. He eats your favorite leftover Thai food you had saved for lunch the next day.
You could “tough it out.” He’s still a good friend of yours.
Or, you can take control and make a change. If you have Parachute Money, you can handle the costs of breaking the lease and finding a new apartment.
The problem is your parents have let it be known, in so many words, that they are to be consulted on how you spend their money.
You may think you are choosing where to live or where to send your kids to school. Deep down? You know your parents will have the final word.
You can continue letting your parents dictate your life.
Or, you can take control and make a change. If you have Parachute Money, you can tell your parents, “Thanks, but no thanks.”
Parachute Money gives you control.
These are just a few examples of how Parachute Money allows you to regain control of your life.
Notice that in each situation, you’re not dealing with a sudden emergency. Instead, you’ve reached a tipping point and decided it was time for a change. Without Parachute Money, your options would be limited.
In our example above about wanting a new job, Parachute Money allows you to make that leap. You may temporarily be without your primary source of income- that string on the parachute broke.
But, you’ll be more than fine because you have other parachute strings to land you safely, like an emergency savings account, a side hustle as a ghost writer for a blog, and a rental property.
Parachute Money is one of my favorite personal finance concepts.
The Simple Path to Wealth is a must read for anyone wanting to learn the power of investing on your own through index funds.
We’ll have plenty more to say about how Collins has influenced my own decisions in our investing series. I credit him for teaching me that investing does not have to be hard. It’s actually pretty simple if you follow his tips.
In his book and blog, Collins describes what he calls “F-You Money.” He tells the story of getting in a shouting match with his boss one day at work, shortly before walking away from that company. As Collins explains, nobody deserved an “F-You” more than that guy.
In Collins’ example, he had enough money saved up where he could say those choice words to his boss. His “F-You Money” empowered him to live on his own terms.
On your way to financial independence, don’t ignore Parachute Money.
The reason I love the idea of Parachute Money is because it encapsulates so many of the money wellness habits and goals we’re striving for with Think and Talk Money.
Think back to the image of the parachute with only one string. What happens if that one string breaks?
Likewise, what happens if your only source of money no longer fits into your best life?
As you think about these questions, picture yourself jumping out of the airplane.
What parachute are you reaching for?
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The only thing that’s taboo is avoiding your personal finances.
To help flip the script and convince you that talking money is not taboo, I plan to regularly post about the current money conversations that I’m having. Through my examples, I hope to encourage you to have similar conversations.
In our first “Great Talk” post, we’ll discuss what my wife and I decided to do with our Later Money throughout 2025. We’ll also talk about how really smart people I know have started budgeting. We’ll conclude with an empowering conversation I had with a friend about what you can do with your time if money wasn’t an obstacle.
What I’m doing with my Later Money in 2025.
Later Money is what you are saving, investing, or using to pay off debt. This bucket includes long term goals and investments, like retirement and college savings. It also includes emergency savings, paying off debt, or any other shorter term goals, like saving for a wedding or a downpayment for a house.
So, what are my wife and I doing with our Later Money in 2025?
We recently had a great talk about our options and came up with a plan that will guide us throughout the year. Before we talk about our 2025 goals, it’s important to keep in mind that your Later Money goals will change over time. That’s perfectly fine.
We purchased our first rental property in 2018, a four-flat in an up-and-coming Chicago neighborhood. Less than a year later, we bought a three-flat in the same neighborhood.
In 2021, we invested in a Colorado rental ski condo. In 2022, we purchased our fourth rental property, a three-flat, in the same (now booming) neighborhood in Chicago.
After living in our rental properties since 2018, we purchased a single-family home just outside Chicago in 2024.
During this timeframe, any spare dollar we earned went towards acquiring more real estate. We contributed towards other financial goals, like retirement and college, but our priority was investing in real estate.
Reading Small and Mighty Real Estate Investor helped my wife and I conclude that at this point in our lives, we have enough. If anything, we’re closer to having too much on our plate. 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. That tradeoff is not currently worth it to us.
So, if we’re not pursuing additional properties in 2025, what are our goals?
After talking it through together and weighing all our options, my wife and I came up with these three goals for 2025:
Our third goal is to boost our contributions to our kids’ college savings accounts. We use what’s called a “529 college savings plan.” 529 plans are state-sponsored, tax-advantaged investment accounts. We use Illinois’ 529 plan because we receive a tax break as Illinois residents. Just about every state offers a 529 plan. They are a great way to save for college.
With our plan in place ahead of time, we now know where every dollar is going before we earn it. This takes the anxiety out of trying to figure it out after the money has already hit our bank account.
At the end of each month, all we need to do is make our Later Money transfers to each account. We can rest easy knowing that we’re making progress towards our personal finance goals.
How Budgeting is Helping Very Smart People.
One of my favorite moments since launching Think and Talk Money occurred just last week. Walking down the hall in my office, one of my colleagues called me over.
She was very excited to share that she started tracking her spending so she can create a Budget After Thinking.
We chatted for ten minutes. She’s been reading the blog on her commute to work every Monday, Wednesday, and Friday. She used Think and Talk Money vocabulary, like “Now Money” and “Life Money.”
She showed me the app she’s been using to track her spending, one I wasn’t familiar with and am now looking into. The best part was that she’s been telling her friends about Think and Talk Money because she’s already learned so much.
This is exactly why talking about money is not taboo. She taught me something new and helped me think about my own budgeting process. She gave me new ideas to think about.
How could this type of conversation be bad?
We didn’t need to talk numbers. We talked strategy and habits. That’s what talking money is all about.
What would you do with your time if money was not an obstacle?
I had lunch with an old friend last week 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 when we talk about financial independence. It’s not an easy goal to accomplish, but I can’t think of a better goal to strive for.
You are financially independent when money is not an obstacle.
One of the biggest misconceptions in personal finance is that people that make a lot of money don’t have money worries.
I’m not saying that we should feel sorry for people that are high earners. I’m pointing out that personal finance education is important for all of us.
It’s not your fault if you’ve made poor money choices, up to a point.
I don’t blame anyone, high earners included, for making poor money choices (up to a point). Most people never learn basic personal finance skills.
Think about an emergency room physician. He was likely one of the top students in his class his entire life. He’s proven that he can learn complex matters. He can do the hardest things imaginable, like saving someone’s life.
The problem is he was never taught to use his brain to manage his own personal finances.
If that ER doctor is living paycheck to paycheck, he likely won’t receive much sympathy. He’s probably blamed for not making better money choices.
People will say he makes plenty of money. It’s his own fault. He must be irresponsible or selfish or craves expensive things.
Personal finance education is for all stages of our lives.
Personal finance education needs to continue throughout adulthood. So many of the concepts we talk about won’t resonate with high school kids who are still provided for by their parents.
One of my priorities with Think and Talk Money is to help you learn these core principles before you feel too much pain.
If you’re in the early stages of your career, there is no better time than now to develop strong money habits. It can be very difficult to correct bad habits as time goes on. A better plan is to work on developing good money habits now.
Don’t blame yourself or feel ashamed. Like the ER doctor, personal finance education wasn’t something you knew you needed. Now you know better. Time is still on your side, if you get started today.
Talking about money is not taboo.
One of my other priorities with Think and Talk Money is to confront the negative money stereotypes that dominate society. To start with, I’m on a mission against the common refrain that it’s taboo to talk about money with our family and friends.
Are we supposed to accept that it’s better to struggle alone?
That we should isolate ourselves in a constant state of worry?
That we are forbidden from seeking out help by talking to the people we trust the most?
I refuse to accept any of that.
Who even said talking about money is taboo in the first place?
I can keep going all day. I think you get the point. Talking money is not taboo.
Keep an eye out for posts about the current money conversations I’m having.
In the spirit of convincing you that talking money is not taboo, we are introducing a new post series this week. So in this continuing series, I will highlight the current money conversations that I’m having with my friends and family.
In our first of these posts later this week, I’ll share how my wife and I recently talked through our decision to split our Later Money between emergency savings, college savings and mortgage debt.
Let’s turn this simple question into a hypothetical scenario.
It’s time to learn one final (for now) important personal finance tracking metric, known as “saving rate.”
Congratulations on your raise!
Let’s say you’ve been at your job for a few years. Your current salary is $100,000.
It’s salary review time, and you set up a meeting with your boss. You want to make sure she remembers all your major contributions from the past year.
Prior to the meeting, you send her a letter setting forth your top accomplishments. It’s a hard letter to write. It doesn’t feel like a normal thing to have to brag about yourself.
You remember seeing a quote somewhere, “If you don’t advocate for yourself, nobody else will.” You push on and send your boss the letter.
On the day of your meeting, you’re nervous walking into your boss’ office. Why did I ask for this? She’s going to be so annoyed.
Before you even sit down, she puts your mind at ease. Your boss has a welcoming smile on her face.
She immediately thanks you for your thoughtful letter. She appreciates the reminder of all your accomplishments throughout the year.
Your boss tells you that you’ve always been a valuable member of the team. She thanks you again for reminding here of some of the specific projects you worked on that year.
It’s not a long conversation. Before you go, she asks what else the company can do to enhance your work experience. You walk out of her office feeling like a valuable member of the team.
You’re happy that you initiated the meeting, even though you didn’t enjoy the process.
A couple of weeks later, you receive an email that your salary is increasing by $20,000.
You couldn’t be happier. You earned it.
Wait, a raise?
Work continues as normal the rest of the week. By the time your next paycheck hits your bank account, you sort of forgot that you’re now making more money.
After taxes and retirement contributions, your biweekly (every 2 weeks) paycheck is now for roughly $538 more. That comes out to $1,166 more money per month, which of course, is a very good thing.
But, you need to figure out what you’re going to do with that money.
Ideally, you’ll have a plan in place before you receive the money. Whether it’s a raise, a bonus, or you switch jobs and earn a higher salary, the thought process remains the same.
Thinking about what to do with this new money is what I’m getting at when I ask, “What would you do right now with $20,000?”
No, it’s not coming in one lump sump payment.
Fine, you have to pay taxes on the $20,000 so it’s more like $14,000 in new money.
The point of the question doesn’t change. What are you going to do with this money?
3 options for what to do when you earn more money.
You now have more income coming in each month. Let’s talk through some of the options on what you can choose to do with that excess money.
Option 2: You tell yourself, “Man, I’m flush!” You start looking for a nicer apartment. And, you upgrade your plane ticket on your upcoming trip. You stop taking the train to work and instead opt for Ubers. Congratulations, you’ve become the real life, really lost boy.
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 pretty good. That’s a saving rate of more than 13%.
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. That’s a saving rate of only 1.3%.
Follow these tips for calculating your saving rate.
Just like we talked about when creating your budget, don’t overcomplicate this process. Here are some suggestions to help you easily calculate your saving rate:
When you calculate your saving rate, be sure to use your take-home pay for “Money Earned.” This means the amount of money that hits your bank account after taxes and retirement contributions.
This next part gets a little bit tricky to explain, but it’s important.
If you get paid biweekly (every other week), that means you will receive 26 paychecks every year (52 weeks / 2 = 26). If you are paid twice per month, like on the 1st and 15th of every month, you only receive 24 paychecks.
OK, so what?
To determine your monthly take-home pay so you can calculate your saving rate, you need to know the amount you earn for the whole year.
To figure out how much you earn in a full year, multiply the amount you receive in one paycheck by 26 (or 24). That’s your annual take home pay.
Then, to calculate how much you earn per month, divide your annual take home pay by 12. This is the amount you’re going to use for “Money Earned.”
For “Money Saved,” include all of the money you are putting towards your Later Money goals each month (except your retirement contributions through work).
I know it’s called “saving rate,” but for this purpose, include all your Later Money in the saving rate equation.
Of course, we know that “saving” is different from “investing.” Saving is also different than paying down debt or any other personal financial goal you’ve set.
It doesn’t matter. When calculating your saving rate, your goal is to see what percentage of your take-home pay is fueling our Later Money goals.
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.
Let’s do the saving rate math together.
Now that we know what our saving rate is and why it’s such a useful metric, let’s revisit our $20,000 raise to do some math together.
Going back to our hypothetical, you were making $100,000 before your raise. Let’s assume that your take home pay was $70,000 per year after taxes and retirement plan contributions.
Let’s also assume you were putting $1,000 per month towards your Later Money goals.
Using our saving rate percentage formulas above, we see that:
Money Earned = $5,833 per month ($70,000 / 12)
Money Saved = $1,000 per month
Saving Rate = $1,000 / $5,833 = .17
Saving Rate Percentage = 17%
17% of your take home pay to fuel your Later Money goals is great!
Now, let’s see what happens if you add your entire raise to fuel your Later Money goals.
Earlier, we assumed that after taxes and retirement contributions, your take home pay increased by roughly $1,166 per month. With your raise, your annual take home pay has now climbed to $84,000, or $7,000 per month.
Look what happens to your saving rate percentage when you add the full $1,166 to Money Saved (instead of spending it)
Money Earned = $7,000 per month ($84,000 / 12)
Money Saved = $2,166 per month
Saving Rate = .31
Saving Rate Percentage = 31%
You more than doubled your monthly savings contributions and improved your saving rate to 31%!
Think about how much more quickly you can reach your goals by planning out this one decision.
In this week’s Q&A, we talk about how the timing was right to launch Think and Talk Money, why you should consider a side hustle, and what comes next for the website.
As always, please email your questions or leave a comment below or on socials.
You have a lot on your plate. Lawyer, teacher, landlord, young kids… why launch Think and Talk Money now?
I had been thinking about writing a book or starting a website for a couple years. Over the holidays, my dad gave me the final push I needed.
We were casually chatting while the kids played in the other room. Out of nowhere, he said, “Matt, you should do it.”
Do what?
“You should write a book.”
Oh, no biggie.
I didn’t expect him to say that. He went on to explain how you get to a certain age and you look back on life and wonder where it all went. You think about all the things that you wanted to do but never got around to doing.
No regrets, blogging then book.
He knew I had been thinking about writing a book for a while and didn’t want me to regret not doing it.
I thought about it and realized he was right. I would never forgive myself if I didn’t take this chance.
Now that I’ve thrown this out there, I have to do it, right?
There’s never a perfect time in life. If I didn’t start Think and Talk Money now, I might never have gotten around to it. Something always comes up. It’s too easy to make excuses.
It’s true we have a lot going on. Fortunately, I had a system already in place that gives me time to write thanks to Hal Elrod’s The Morning Miracle.
I hesitate to say a certain book “changed my life.” This might be one of them.
For almost 10 years now, I’ve been waking up at 5:30 a.m. to read, journal, and relax. It’s so beneficial to have that time for myself, especially now with kids, before the day gets away from me.
Since launching Think and Talk Money, I use my mornings to blog instead of reading. I like teaching and writing about personal finance, so my mornings are still enjoyable.
We’ll spend some time in a future post talking about all the advantages of having a side hustle.
The obvious advantage is you can make more money. The important thing is what you do with that money to make the side hustle worth it. A side hustle is another time commitment, after all. If you’re going to take on the responsibility, make sure it counts.
Before you consider a side hustle, have a plan in place for why you want additional money. Are you looking to pay down debt faster? Save for a wedding? Invest in your first rental property?
One of my favorite experiences teaching personal finance to law students involved a side hustle. A couple of years ago, a student approached me during a break and told me about his credit card debt. It had been weighing heavily on him.
After our discussion about side hustles, he committed himself to driving for DoorDash and using the income to pay off his credit card balance.
Six months later he sought me out to share that the plan worked. His side hustle allowed him to pay off his credit card in less than six months. All while working a full-time job and attending law school par-time. I couldn’t have been happier.
To help you think through why you might want a side hustle, check out these three posts:
BTW, you’re not too busy or important for a side hustle.
Some people reading this will automatically think, “I’m way too busy to even think about another job.”
In my personal finance class for law students, 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.
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.”
Setting that conundrum aside, the ideal side hustle is something you enjoy doing that can earn you extra money at the same time. Some examples 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.
I’m reminded of another conversation my dad and I had when I was in high school.
Growing up, my siblings and I were busy kids. Sports, clubs, performances, classes, you name it. I made a remark to my dad about it at one point.
He responded that being busy wasn’t a bad thing because you don’t have time to fool around. When you have no choice other than to stay focused, you actually perform better in all facets of life.
You’re not thrown off by distractions because you’re locked in on accomplishing your goals.
After launching Think and Talk Money, I feel a heightened sense of focus. It’s benefitting me in all of my pursuits. I take care of business as best I can, while prioritizing my family and my health.
I can see your eye rolls through your screen.
This guys is nuts. He’s a workaholic.He has no life.
Have you ever used a HELOC to invest in real estate?
Yes, I’ve used HELOCs, which stands for Home Equity Lines of Credit, to scale my real estate portfolio.
This question leads to so many concepts we need to discuss, from debt and credit to investing. We’ll come back to HELOCs more fully in a separate post.
The bottom line is using HELOCs to scale your investment portfolio is a more advanced strategy that I would not recommend for everyone. I probably wouldn’t recommend it for most people, even experienced real estate investors.
I say that for good reason. When you hear HELOC, think debt. For many of us, debt is problematic and leads to negative emotions.
If you satisfy all of the above, a HELOC may be useful to scale your real estate portfolio. If you’re thinking about using a HELOC in the near future and want to talk it out, please feel free to reach out.
What’s it like being a blogger?
It’s only been five weeks, but I’m happy I took the chance to launch Think and Talk Money.
It’s been fun.
And, it’s been hard.
First, the fun stuff. I’ve enjoyed writing and talking about personal finance concepts that are important to me. I’ve especially enjoyed all the interactions with our readers.
One unexpected element I’ve appreciated is the sense of accomplishment that comes with publishing every post. This is very different from my experience as a lawyer where we typically work on a case for years before its conclusion.
I’ve also had fun writing in a new style. I haven’t ever blogged before. I haven’t done any writing other than legal writing since college. If you’ve ever had the pleasure of reading a legal brief or court opinion, first off, I’m sorry. Second, you understand how different legal writing is from blog writing.
Even though the writing styles are different, there is certainly some overlap in the fundamentals. My aim in both styles of writing is to be clear, concise, and informative. I hope to be somewhat interesting, as well.
As a blogger, I’m still finding my voice, as they say.
It can be challenging to make core personal finance concepts- like budgeting and saving money- educational, simple, and entertaining. If I’m doing my job, then my personal finance content should also be relatable and understandable.
Please let me know you have any feedback on what’s working (or not working for you)!
So, what’s hard about blogging?
Now, for the hard stuff.
My wife and I launched Think and Talk Money with zero knowledge, skills, or experience in starting a website.
Can you tell? Be nice.
We have no tech background whatsoever. Two months ago, I had no idea what SEO, caching, or plugins were.
If you’ve ever started a website, you know exactly what I mean. Creating the content is only the first step. So much more goes into it behind the scenes. We’re still only scratching the surface.
To sum it up, the tech stuff has been challenging and time consuming. We’ve learned so much already but have so much more to learn.
Thank you to everyone who has reached out with tips and suggestions!
What’s the end game for Think and Talk Money?
I completely understand why this is an important question to think about. The truth is we’re just getting started and haven’t thought about Think and Talk Money in terms of an end game.
I’ve always liked to teach and write, and this lets me do more of both. For now, our mission is to introduce the most important concepts of personal finance through the blog.
We post three times per week on Mondays, Wednesdays, and Fridays.
Some of the posts cover core personal finance topics in depth. Other posts are more targeted and address specific strategies or lessons.
There’s an intentional order to the way we’ve been introducing concepts. The order is important and mirrors the curriculum in my personal finance class for new lawyers.
On the first of every month, I wake up at 5:15 a.m., brush my teeth, and put on my robe.
I walk downstairs, pour a cup of coffee, and head to my favorite chair in the living room.
I then power on my laptop and open an Excel file called “Adair Family Balance Sheet.” Using this basic spreadsheet, my wife and I have been tracking and discussing our net worth for years.
It takes me about 20 minutes to update our family balance sheet each month. The hardest part is remembering all the passwords for our accounts.
When I finish entering the new account values, I study the spreadsheet for about two minutes.
I hope to see that our money efforts that month resulted in our assets increasing in value and our debts decreasing.
When I’m finished with the updates, my wife grabs her coffee and sits with me. She will likewise study the family balance sheet for about two minutes.
We’ll then spend about three minutes talking about the changes from the previous month.
And, that’s it.
It takes us less than 30 minutes each month to track and discuss what I consider the most important metric in personal finance.
That’s all the time it takes to know if we are progressing towards our most important goals. By tracking our net worth, we can quickly see if we are making good money decisions or need to make adjustments.
I recommend everybody, no matter where you are in your financial journey, track your net worth.
In this post, we’ll talk about what “net worth” means, how to track it, and why it’s so important.
Let’s start with what net worth means.
Going into hiding straight from a London pub.
One night when I was studying abroad in London years ago, my good friend, Kais, and I were talking in a pub. I don’t remember what we were talking about when he offered:
“If I was in trouble and needed to go into hiding, I could sell everything that I own, pay all my debts, put the leftover money in the bank, and be fine for a couple of years.”
Uhh, OK…
At the time, I had no idea what he was talking about.
Still, I had to admit that it seemed pretty cool that he had that kind of financial flexibility. I knew I couldn’t survive for a couple of weeks, let alone a couple of years.
Looking back years later, I now realize that he was talking about his net worth.
Kais, if you’re reading this, drop me a line to let me know you’re not hiding.
So, what is net worth?
Your net worth is simply all of your assets less all of your liabilities.
Net Worth = Assets – Liabilities
Yup, you only need those two numbers to calculate your net worth, the most important number in personal finance.
There’s no complicated math involved. Just addition and subtraction, which couldn’t be easier in a basic balance sheet (or spreadsheet).
Let’s start with understanding what counts as an asset.
What are assets?
An asset is anything that has economic value and can be owned or controlled.
In even simpler terms, an asset is just about anything you can think of that could be exchanged for money.
My family’s current assets include:
Retirement accounts for both me and my wife
College savings accounts for each kid
Health savings account (my favorite account… we’ll revisit)
Checking accounts
Savings accounts
Cars
Jewelry
Properties
Cash on hand
Other common examples of assets include:
Collectibles (artwork, coins, designer bags)
Furniture
Household goods (TVs, appliances, rugs, etc.)
Clothes
Tools
Recreational gear (bicycles, golf clubs, boats)
Toys
It’s up to you to decide what assets to include in your balance sheet. There is no strict science to it. That said, there’s no point in overstating (or understating) your assets. You (and your family) are the only ones who will be reviewing your balance sheet.
I personally don’t include all of our household items, but you are certainly welcome to. For me, it’s not worth the time and effort to determine how much I could earn by selling my TV or snowboard.
It’s perfectly acceptable if you want to tally up the value of your items. I think it makes sense to do so if you have a lot of nice things. If you choose to do so, aim for estimates, rather than precise values, to make your life easier.
Why it is so important to acquire assets.
Assets can, but don’t always, appreciate (increase in value) over time. For example, a property may appreciate over the long term, but a typical car will do the opposite and depreciate (lose value over time).
Assets can also generate income, but don’t always. A good rental property should generate monthly cashflow. A stock portfolio can generate dividends (payments from companies to investors).
On the other hand, a designer bag won’t generate income, unless you charge people to borrow it. Even so, a designer bag is still considered an asset because you could exchange it for money.
To state the obvious, owning assets is a very good idea. Especially assets that appreciate and assets that generate income.
When you own these types of assets, your net worth will increase over time without much extra effort on your part. You don’t have to specifically trade your time for money with these types of assets.
Think of it like this: the best way to achieve financial independence is to own assets that increase in value over time and generate income.
By tracking your net worth each month, you’ll know how your assets are doing.
Does my home count as an asset?
Some people, like personal finance legend Robert Kiyosaki, don’t think you should count your home as an asset. The argument goes something like, “You can’t really sell your home because then you wouldn’t have anywhere to live. So, you shouldn’t count it as an asset.”
I couldn’t possibly disagree more.
For many of us, our homes are our most important purchase in our lives. Over the long run, most of our homes will appreciate in value, even if not as much as we hoped.
We spend years working to make money so we can pay down the mortgage. Each payment we make reduces our debt and increases our equity in the home, thereby improving our net worth.
Don’t overcomplicate it. Include your home as part of your net worth. Just don’t forget to include the mortgage as a liability (we’ll discuss below).
How do you determine the value of your home for purposes of tracking your net worth?
Make it easy on yourself. The goal is to obtain a reasonable estimate. If you’ve worked with a real estate broker, ask her for the current value of your home. She will use recent “comps”, meaning similar comparable properties in the area, to come up with a fair value.
You can also make a decent estimate of the value of your home by studying comps yourself. Platforms like Redfin or Zillow make it easy to see what homes have sold in your neighborhood.
Look for homes as similar to yours as you can find. Focus on size, the number of bedrooms and bathrooms, and the quality of the finishes.
Remember, this is not an exact science. We’re aiming for an estimate of your home value only for the purpose of measuring your net worth.
On our family balance sheet, I only update the estimated value of our properties once per year. That’s good enough for me, and all you really need to do.
Now that we know what assets are, we need to figure out what liabilities are to calculate our net worth.
What are liabilities?
A liability is any debt or obligation that you owe to someone else. Liabilities are most commonly found in the form of loans.
Unlike assets, liabilities diminish your overall net worth.
To speed up your path to financial independence, focus on reducing or eliminating liabilities.
My family’s current liabilities include:
Lines of credit
Mortgages
Other common examples of liabilities include:
Credit card debt
Student loan debt
Auto loans
Personal Loans
Consumer loans
When you are beginning your career, it’s common for your liabilities to be greater than your assets. This is usually because of student loan balances.
Don’t let that discourage you from tracking your net worth. Even if you’re in negative territory, each month is a chance to shrink that negative number, which means your net worth is increasing.
Whether you are paying down debt, or adding to your savings or investments, the result is the same: your net worth increases.
The reason for tracking your net worth also remains the same: individual progress, over time.
Now that we know what assets and liabilities are, we can create our balance sheet and determine our net worth.
Creating your own net worth balance sheet is very easy.
I’m happy to share the spreadsheet I currently use to track my net worth. Subscribe to our weekly email newsletter, and send me a reply to the next email asking for my net worth spreadsheet.
On the top of my family’s net worth spreadsheet, each row represents an asset, or something we own.
On the bottom of the spreadsheet, the rows represent the debts we owe.
Each of the 12 columns (one column for each month) in the spreadsheet indicates the value of each asset at the end of the month.
The reason I add a new column for each month, instead of just updating the values in a single column, is so I can easily see how our net worth has changed over time.
Once all 12 months for the year are filled in, I start a new sheet and repeat the process. This helps us track how our net worth has changed over the long run.
Since your balance sheet is for your eyes only (or your family’s eyes), feel free to design it however you want.
On our family spreadsheet, I use different colors to illustrate the different types of assets we own and liabilities we owe:
Turquoise for securities (stocks and bonds). Orange for checking accounts. Purple for savings and objects (like cars and jewelry). Green for properties.
I like color coding because it helps me quickly visualize what we own or owe in each broad category.
Here’s what a simple balance sheet looks like:
If you want to create your own balance sheet, here’s what it might look like:
Assets
January
February
March
401(k)
Roth IRA
529 College
HSA
Checking
Savings
Car
Home
Rental Properties
Total
Liabilities
January
February
March
Credit Cards
Mortgage
Student Loan
Auto Loan
Total
Once you input the amounts for each cell in the appropriate column, use the “sum” function to total your assets and separately total your liabilities.
Then, all you need to do calculate your net worth is create one final row labeled “Net Worth”.
In the “Net Worth” cell, simply use the “sum” function again to subtract the liabilities total from the assets total.
January
February
March
NET WORTH
That’s all there is to it. Now, you know your net worth.
Tracking your net worth is the best way to measure your personal financial progress.
By now, you should be thinking that it’s not too difficult to track your net worth.
It takes my wife and I less than 30 minutes each month to track and talk about the most important number in personal finance.
How can we spend so little time on the most important number in personal finance?
Because we’re only looking for progress compared to what our net worth was previously.
In our last post, we talked about the importance of fueling your savings and how savings differ from investments.
Here, we’ll discuss how to best optimize your savings so you are protected in times of emergency and can achieve your short-term goals.
We’ll also talk about whether you should automating your savings, and if it makes sense to start saving while you’re paying off debt.
Let’s begin with the most important savings account we all need: an emergency savings account.
The first savings account you need is an emergency savings account.
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 lose your source of income, your emergency savings will keep you afloat until you find a new source of income. 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 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.
Because 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.
Come on Matt, should I save 3 or 6 months of Now Money?
It depends! Personal finance is personal.
If you have no dependents, 3 months worth of savings is a good benchmark. In most circumstances, that should give you enough time to get back on your feet.
If you have dependents, that means you are responsible for additional humans, sometimes tiny humans. These humans are counting on you for support. Targeting 6 months of savings is a good idea so you can continue to provide for them.
You should also consider your source and consistency of income when deciding how much you’ll need saved for emergencies. If you are not paid regularly throughout the year, you should target a larger amount in your emergency savings to cover those longer gaps between pay.
When you are part of a dual-income household, you may be able to get away with less emergency savings since two people are contributing to the monthly bills. If one of you suffers a sudden job loss, the other person’s income can still be used to keep the household afloat.
One last thing: Building up to 3-6 months of emergency savings will take time. Don’t pressure yourself to accomplish this goal overnight. Each month, you can add to this account until you reach your target. Any and all progress is good progress.
Do not rely on credit cards for emergencies.
Unfortunately, many of us rely on credit cards to pay our bills. When we do this, our debt grows and cancels out any gains we’re making through our savings and investments.
Just as you shouldn’t pull from your investments in times of emergency, you should not rely on credit cards to protect you.
Savings is also for more fun, short-term goals.
We just talked about the first savings account you need, an emergency savings account. I agree with you that thinking about emergency savings is not exactly fun. Job loss… medical treatment… car repairs. Yup, not fun.
Let’s talk about more fun stuff. Savings is also for short-term goals, whatever those goals are for you. This is your Later Money in action fueling your life goals.
Remember, we said emergency savings was your first account. Not your only account.
Once you’ve identified your specific Later Money goals, it’s a good idea to create separate savings accounts, or buckets, for each goal. This will help you visualize the progress you’re making towards each goal. It will also help you not use your savings that was intended for one goal on something else.
What kind of savings buckets might you have? Before I got married, I had separate savings accounts for:
Engagement ring
Wedding
Down payment on a home
Travel
Cubs Season Tickets
Emergency Savings
Budget Busters
I had a specific amount in mind for each category and would make transfers each month into those buckets. Not each account received an equal amount.
For example, I knew how much I needed for Cubs tickets, usually payable at the end of the year, and divided that amount by 12 months.
The amount needed to purchase something like an engagement ring was more… fluid.
My students in recent years have suggested other savings buckets, as well. We’ve talked in class about saving for a car, saving for holiday presents, and saving for kids’ schooling.
Whatever your savings goals are, using separate buckets will help you stay on track.
Setting up separate savings accounts online is easy.
It’s easy to set up separate savings accounts online with most major banks. Once you create your initial account, you can create sub-accounts that will appear on the same landing page as your primary account. Each account will have an individual account number, and you can label them however you like.
When you do set up your savings accounts, it’s a good idea to have a different bank for your primary checking account and your savings accounts. This will help you resist the temptation to spend your savings. Out of sight, out of mind, and all that.
I’ll soon have a post on my favorite online savings accounts. There are a number of them out there that offer good interest rates and a solid user experience.
Automating your savings is a good idea, but I don’t personally automate.
I automate a lot of my money tasks, like setting up automatic bill payment for every bill that comes to mind. This includes my mortgages. I also have automatic deductions taken from my paycheck for my 401k plan.
Automating your money is a very good idea. In The Automatic Millionaire, David Bach explains how the single step of automating your finances can help you live rich and retire richer. You can learn more about Bach’s philosophy on his website.
I don’t disagree with Bach and implement many of his strategies in my own life. The Automatic Millionaire is definitely worth a read.
Still, I don’t automate my savings transfers.
I automated my savings transfers in the past and learned that I prefer the emotional high of manually making savings transfers.
I like how it makes me feel to go into my checking account and transfer that month’s Later Money to my savings. It makes me feel good to see the pop up on my computer: “Your transfer is complete!”
I like that feeling so much that I’m not worried about skipping a savings transfer. That moment gives me a lot of joy.
If you have debt, should you still build up your emergency savings?
During my money wellness class, I usually get a question like this:
“Should I build up my savings while I’m paying off student loans or other debt?”
My recommendation is different depending on the type of debt. That’s because interest rates are generally much lower for student loans or mortgages than for credit card debt.
In a future post, we’ll talk about what is commonly referred to as “good debt” and “bad debt.” Student loans and mortgages, in my opinion, represent good debt. Credit card debt is almost universally considered bad debt.
Typically, good debt has much lower interest rates than bad debt. You might be paying 20% or more on your credit cards and closer to 8% on your student loans (and probably even lower on your mortgage).
If you have high interest credit card debt, pay that off first before you prioritize savings. It doesn’t make any sense to pay 20% interest to a credit card company just so you can earn 4% interest in a savings account.
On the other hand, if you have student loan debt or mortgage debt, I recommend you start building your emergency savings account while you’re simultaneously paying down that debt.
Yes, paying 8% interest is mathematically worse than earning 4% in savings account. If you are driven strictly by the math, you should pay off that 8% debt before you start saving in a 4% interest account.
Never forget that money is emotional.
But, money is emotional. I think it’s worth paying the interest on your good debt so you can experience your savings growing.
Plus, if you do have an emergency that requires you to tap into your savings, you won’t have to rely on credit cards and pay the much higher penalty.
Keep in mind that if you go this route, you still need to make your required debt payments. We are only talking about extra money that you have available that could go towards additional debt payments or to savings.
The temptation to ignore your savings is real, especially when you have debt.
The temptation will be there to pay off whatever debt you have as quickly as possible and forego saving altogether.
I still feel this temptation every month. Should I contribute my next dollar to building up savings or paying down mortgages?
For most of the past year, I was laser focused on paying down mortgage debt. More recently, I’ve reassessed and have been working to build up my savings.
Having talked it over with my wife, we want to make sure we’re protected should something unexpected happen, even if that means temporarily slowing down our progress on our mortgages.
This way, we won’t end up in a cycle of using credit cards to cover us in times of need.
If you’re faced with a similar decision, know that you’re already ahead of the game by even thinking about how to use your Later Money to fuel your goals.
Whether you are paying down debt or increasing your savings, you are heading in the right direction.
Please drop a comment below if you have any additional tips to share!
Do you prefer automatic savings or manual transfers?
What are some of your favorite savings buckets you’ve used?
Only 10% of households are completely satisfied with the amount of money they have saved.
Only 20% reported saving more in 2024 than in 2023.
These numbers are scary. You can read more here. The scariest part for me is that these results aren’t surprising at all. They closely mirror the stats I first showed my students back in 2021 when discussing savings.
Why are these numbers so scary?
In the abstract, I can understand why these stats may not seem too scary to you.
Let’s look at another stat that illustrates what happens when we don’t have adequate savings:
About 33% of households would not be able to pay their bills or expenses for one month, if faced with a sudden loss of income.
This number rises to 38% of Gen Z and 41% of Millennials who report they could not pay their bills for even a month.
What do these numbers mean?
1 in 3 people currently reading this post, in the comfort of their homes they have worked so hard for, would not be able to afford those homes for even one month if they suddenly lost their jobs. It’s worse for Gen Z and Millennials.
Maybe you’re on the train commuting to work while reading this. How many people are in the train car with you? 30 or so? Pick out 10 passengers, really look at their faces.
They’re just like you, typically good people, working a job to provide for themselves and their families. If these 10 people suddenly lost their jobs, they wouldn’t be able to pay their bills next month.
Count me in the group of people not completely satisfied with their savings.
If you read these stats and are honestly not worried about your savings, you are in the minority and are doing a tremendous job managing your personal finances.
Keep up the good work and please let us know in the comments below what strategies are working for you.
On the other hand, if you’re being honest with yourself, you’re most likely in the 90% of people that are not completely satisfied with their savings.
We now have work to do to build our savings back up. Instead of presently shopping for investment properties, we are now focused on paying down mortgage debt and increasing our savings.
Most people attribute their low savings to rising cost of living.
What is the most common explanation given by people that have so little saved? Rising cost of living across the nation:
Nearly 66% of Americans believe that the cost of living for the average family is not affordable in their area.
Millennials and Gen X are the most worried about the cost of living, with more than 70% of each group feeling unprepared. 64% of Gen Z and 59% of Baby Boomers likewise feel unprepared.
Cost of living includes necessary expenses like housing, food, transportation, and healthcare. In other words, Now Money.
There are any number of reasons we can point to that are combining to drive up the cost of living, like limited housing inventory, higher interest rates, and more expensive groceries.
Whatever the reason for why costs are going up, I’m more interested in adapting and thriving in the current environment rather than making excuses.
So, what exactly can we do to improve our savings?
The next part, figuring out what to do with that money you generated for savings, is much easier. Before we talk about specific savings tips, let’s make sure we’re on the same page as to what we are trying to accomplish through saving.
Savings are for short term protection and short term goals.
When we talk about savings, what exactly are we talking about anyways?
Savings (pleural) means “the excess of income over consumption expenditures.” Much better.
That’s about as simple as it gets. Savings is the money you have left over that you didn’t otherwise spend. In Think and Talk Money vocabulary, it’s your Later Money.
In The Richest Man in Babylon, George Clason described savings with one of my favorite quotes in all of personal finance:
Actively saving money to fuel your Later Money goals is a non-negotiable step towards financial independence.
You can use your savings to protect yourself and your family in times of need. You can also use your savings for short-term goals, like paying for a wedding or a downpayment on a house.
Think of it this way, your savings make it so all those hours you spend on the job- the time away from your family or your passions- was not for nothing.
What is the difference between saving and investing?
Keep in mind that savings is different from investments, although both count towards your Later Money.
Savings is for (1) short term protection and (2) short term fuel for your life goals. Your savings is your security blanket for the here and now so you don’t have to take away from your wealth-generating investments at the wrong time.
Keep this money in a dedicated savings account (or accounts) so the money is readily available when you need it.
Investments are assets that you purchase with the goal of making a profit over time. That might be through the stock market, real estate, or any number of other options. Think of investing as the best way to supercharge your wealth over the long term.
Investing is a major component of overall money wellness, but investing comes with risk. As the saying goes, “you don’t get something for nothing.”
Because you can lose your money in any investment, it’s not a good idea to expect that money will immediately be there when you need it. That’s one reason why you should have savings distinct from your investments.
One way to counteract investment risk is to invest for the long-term, so you don’t want to interrupt those investments for short-term goals. This is another reason why we need savings in the short term.
One final point about saving vs. investing. There is a point when you will have enough saved in the bank that you can solely focus on growing your investments. This is a very comfortable place to be and where I am currently focused on returning.
Saving is an essential part of overall money wellness.
To recap, saving money to fuel our Later Money goals is crucial to overall money wellness. Sometimes, we’ll use our savings for protection, like in times of emergency. Other times, we’ll save with a clear goal in mind, like paying for a wedding or a house.
Saving is not the same as investing, although both are important. The reason we save money, rather than invest it, is so that money is readily available when we need it.
In our next post, we’ll discuss what to do with the money we are saving for maximum results. We’ll cover some key strategies for what to do with the money you have generated so your savings align with your overall money goals.
Let me know in the comments below if you’re not completely satisfied with your savings, like me.
Have you taken any steps to join the 10% of Americans who are completely satisfied?
My favorite teachers share a common gift of using analogies to make a teaching point more clear. My mentor and moot court coach in law school (he preferred we call him Sensei) was an expert at analogies.
Back in law school, after working for months on a brief for a moot court competition, my team messed up and submitted a brief with a bad formatting error on the cover page.
We knew we were going to get penalized, but after months of working on it, we still felt proud of our work. And, it felt good to be done.
We called Sensei in celebration that we were finished. When we told him about the formatting error, he was… not pleased.
“You fumbled the ball on the one yard line!”
I told you he was good with analogies.
Analogies can help us internalize key money concepts.
I’ve found that analogies work well when trying to implement key money wellness habits into our lives. Like the idea of generating fuel for our ultimate life goals through our budgeting choices.
I’m always on the lookout for new analogies to help make money concepts more relatable. It probably has to do with the common misconception that being good with money means knowing the ins-and-outs of the stock market.
Relating money concepts to other familiar areas of life can help with that.
This is one of the things I like best about teaching personal finance. Money touches all aspects of our lives, whether we like it or not. So, talking about money is really just talking about life. Sometimes that means using analogies.
Which leads us to Peloton.
See you on the leaderboard.
My wife and I bought a Peloton bike during the pandemic, probably like a lot of you. I’m still a big fan, especially because of the flexibility an at-home workout provides when juggling life with kids.
It occurred to me the other day that my friends and I talk about Peloton a fair amount. I pretty much know who all their favorite instructors are and what type of music they ride to. I’ve been accused of having a hot bike that juices my score, which I continue to deny.
There’s nothing better than doing a Peloton ride at home and seeing that your friend is doing the same ride. It gives you a jolt of energy to know your friend, in that exact moment, is doing the same thing as you.
You know where I’m going with this Peloton analogy.
It’s long been normal to talk about and motivate each other to exercise. But, it’s still considered taboo to talk about money.
Why can’t we talk about money the same way we talk about exercising?
I’m guessing that you know exactly what your closest friends and family members do for exercise. Weights? Yoga? Jogging? You also know which people do nothing at all.
I’m also guessing you have no clue what motivates each of these people to work 2,000 plus hours per year to make money.
Or, what their strategies are for using that money they make to fuel their life goals.
Exercising has long been made better with a personal trainer or a friend to keep you on track. Those days when you don’t feel like working out, having someone to push you is a great advantage.
Why shouldn’t we seek out that same great advantage when it comes to our money, something that touches every aspect of our lives?
This idea extends well beyond exercise habits. I’m sure you know your friends’ current favorite travel destinations, books, and food?
For me, it’s paying down mortgage debt on our rental properties.
What are you waiting for?
When we moved to our new neighborhood, the first people we met at the playground were a lovely couple that own a local fitness center. They’re also real estate investors and have young kids, like us.
We’ve become friends and have had some amazing talks about life and money. In one such talk, I mentioned that I was thinking about starting Think and Talk Money.
My friend heard me out and didn’t say a word until I finished. He then looked me square in the eyes, like only a coach could do, and said, “What are you waiting for?”
He was absolutely right. A few months later, I launched Think and Talk Money and sent him a message thanking him. I was grateful for our talk about life. He was happy to have motivated me.
Our friends can help with money just like they can help with exercise.
Lately, I’ve thought about how much my friends and I can help each other if we talked about money concepts just like we talk about Peloton.
One thing to mention, I don’t want to give you the idea that we’re constantly talking about exercise. It comes up from time to time, every once in a while. That’s enough of a reminder to pay attention to our fitness. Talking money is the same thing.
You don’t have to bring up money with your friends every week or even every month. How about just every once in a while when it’s on your mind? I think you’ll find your friends are the best people to help you stop worrying about money.
I think you’ll also find that you can be the one helping and motivating your friends. You don’t have to be an expert. Sharing any ideas can help jumpstart the thought process for your friends. That’s a really good feeling.
Always remember, the amount of money we have doesn’t matter anymore than our scores on the bike. There’s no reason to talk about numbers unless the people in your life are comfortable with that.
One caveat, I encourage you to talk specifics with certain people who are impacted by your money choices, like a spouse or partner.
The point of talking money is not to compare yourself to others.
Fitness instructors know that it’s not helpful to tell people to compare themselves to each other. We’re all built physically different and emotionally different. Instead, they encourage us to seek personal improvement, consistently over time.
That’s how we should be talking money with our friends.
We all basically agree with this concept, right? That it’s not helpful to compare ourselves to others. That’s a lesson that’s been drilled into our brains since we were kids.
Let’s remember that lesson when we start approaching our friends to talk money. It’s not how much money any of us have, it’s what we’re doing with that money to fuel our goals that matters.
Do you talk to your friends about paying for college?
Many of my friends have young kids like me and saving for college is a common goal we share.
Wouldn’t it be beneficial for us to talk about how we’re planning to pay for it?
By talking about paying for kids’ college educations with your friends, you may learn about education-specific investment accounts, like 529 plans, which is a common strategy we’ll soon discuss.
You may also learn less common, but potentially more appealing, strategies for your situation. An example is buying an investment property when your kids are young with the intention of selling it years later to pay for college. This is what Brandon Turner did, and he’s a very smart guy.
The idea is you may learn something that makes it more likely to achieve your goals, whether that’s paying for college or anything else, like saving up for a wedding or paying off student loans.
Is there a stronger motivation than helping your friends and loved ones?
You don’t have to talk numbers. Talk about the strategy and help each other stay consistent. You both will benefit.
Is there any stronger motivation in life than helping our friends and loved ones? On the same note, what better people to learn from than your friends, people you know and trust.
That’s what talking money is all about.
Leave a comment below if you’ve talked money with any of your friends lately.
How did it go?
Did you learn anything that you’d recommend when approaching the topic of money?
When people learn that I’ve been teaching money wellness to law students, I usually get a reaction like, “I need that class! I know nothing about investments and the stock market.”
It’s a fair reaction. Investing in the stock market can be complicated. Most of us never learn basic stock market principles, let alone how to manage an investment portfolio.
It’s also a reaction that has always fascinated me. Yes, wanting to learn about investing is important. But, it’s not where money wellness begins.
I often wonder, why do people automatically assume that money wellness means investing? There are so many things that we need to get right before we can focus on investing.
Learning about the stock market wasn’t going to help me when I was struggling with debt. I needed to first figure out how to make better spending choices and get out of debt. I needed to play defense before I could go on offense.
Yes, investing is important.
No, it shouldn’t be the first thing we think of when we hear money wellness.
We’ve hardly mentioned investing so far in this blog.
Have you noticed that so far in the Think and Talk Money blog we have hardly even mentioned the word “invest”?
That’s because in order to invest, we first need available money.
We will talk about investing once we have a plan to continuously generate money to invest.
We will soon talk about investing. A lot. Don’t worry. In my money wellness class, we discuss in depth the importance of investing to create wealth.
Here at Think and Talk Money, we will also talk extensively about investing, including in the stock market and in my preferred asset class, real estate.
Investing is not as hard as generating money to invest.
For now, our goal is to establish sound habits so we have real money to consistently invest over time. It doesn’t make sense to learn how to invest until we have a strong foundation in place.
I think you’ll also find that investing is really not that hard. If learning how to do it on your own doesn’t sound like something you want to do, there are professionals that can do it for you. Whether it’s a good idea to go that route is something we’ll discuss so you can make an informed decision.
If you do hire a professional to invest your money, you still need to know enough so you can talk to this person.
Plus, this person will likely tell you that your ongoing mission is to generate more cash to fuel investments. That’s what we’re focusing on now.
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.
You could be a terrific investor. If you only have $1,000 to invest a single time, your upside will be limited. If you continuously generate $1,000/month of Later Money to invest, your options (and your wealth) will grow exponentially.
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.
Maybe that’s not your path. Still, these skills are critical whether you are a consultant, a writer, or a teacher. Would you agree that having money issues and stress at home can distract you from performing your job at the highest level?
How many hours per year do you work to make money?
Lately, when people ask me why I’m so passionate about money wellness, I respond with a question of my own that goes something like this:
“Let’s say we 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 we spend getting dressed and commuting to our jobs.
We also will pretend we’re not looking at our emails in the evening and on weekends.
We definitely won’t count the hours we’re staring at the ceiling fan because we can’t sleep.
OK, so that’s 2,000 hours (plus) per year, to make money.
How many hours per year do we think about what to do with that money?”
Let that sink in for a moment.
How many hours do you work every year to make money? 2,000? 3,000? I’m guessing a lot of those hours are stressful.
Now, how many hours do you think about what to do with that money?
Do you spend any hours at all talking about what to do with 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 that little bit of time each week spent thinking and talking about money is just as important as the time you spent earning it.
Think and Talk Money is about encouraging each other to make purposeful money choices.
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?
Think and Talk Money is all about actively thinking and talking about money so we can help each other make informed choices with our hard earned money.
Whether you make a lot of money or a little money, it doesn’t matter. What you choose to do with that money is up to. It’s your life.
All I want is for you to make those choices from a position of informed confidence.
One response to “Better at Making or Keeping Money?”
Most of us humans are pretty good at avoiding things we don’t like. The things I’ve done to avoid mayonnaise…
Budgeting falls into this category of avoidance. Even though most of us can appreciate that budgeting is a crucial step in money wellness, we still avoid it.
Some of us give it a shot, and usually quit before we notice meaningful improvements. Just as problematic, some of us obsess over our budgets in an unhealthy and unsustainable way. This was me for a while. My obsession was mint.com.
I didn’t have a healthy relationship with budgeting apps.
If you used mint.com like I did before it ended, do you also have nightmares about those red tracking bars? Mint.com users know exactly what I mean. Overspend $11 on groceries? Red bar. One too many lunches downtown? Red bar! A last minute Saturday morning yoga class? RED! BAR!
It still pains me to think about how many hours of my life I wasted trying to recategorize expenditures so those red bars would turn green. If I just move this box of cereal from Groceries to Social Life, that Groceries bar will turn green. Oh wait, now Social Life is red. OK, move those movie tickets to Car Repairs.
When my wife was still courting me, I introduced her to mint.com. You might be thinking, “Matt, why on earth would you introduce her to something that drove you crazy!?” Valid question.
She was a good sport and gave it a shot for a little while. Thankfully, she was smart enough to realize tracking every penny wasn’t for her. The whole thing gave her more anxiety about money. Think about that. The idea was to create a plan for her next dollar so she didn’t have to worry about money. All I did was make it worse by introducing her to a budgeting app.
There’s an alternative to tracking every penny for the rest of your life.
That experience paved the way for my preferred budgeting method that my wife and I still use today. We discussed this method briefly in our recent Q&A post.
Please keep in mind this method is for people who have already created a Budget After Thinking and are honestly dedicated to creating fuel for their Later Money. Only when you get to that point will you no longer need to track every penny. At that point, your money motivations will be so strong that you’ll stay on track without needing to track every expenditure.
If you’re not there yet, don’t worry. You will be soon. Follow my top ten budgeting strategies until good habits become second nature. Then, move on to this simple plan.
My preferred tracking method is a version of zero-based budgeting.
Zero-based budgeting was first introduced in the 1970s by Peter Pyhrr. (I don’t love the name, either.) The main idea is that every dollar has a job, something we already talked about in our conversation about eliminating disappearing dollars.
In my version of zero-based budgeting, you don’t need to track every penny. You don’t need budgeting apps or complicated spreadsheets.
You’ll only need to focus on two numbers each month to know whether you are on track or falling behind. I’ll show you those two numbers below.
Before you get too excited, I need to reiterate this key point: if you want to succeed with zero-based budgeting, you still need to first create a Budget After Thinking. Otherwise, you won’t be able to figure out the key two numbers that you need to focus on.
This step is for those people who have already tracked their spending for at least three months, made thoughtful adjustments so their spending is in line with their values, and now know exactly how much fuel they can generate for their Later Money every month.
OK, so how does this all work?
I mentioned there are only two key numbers you’ll need to focus on each month:
Your checking account cushion.
Your Later Money transfer amount.
Let’s explore each number.
1. Your checking account cushion is your safety net.
A checking account cushion is the amount of money in your checking account that you don’t plan to spend. The purpose of the cushion is to give you a little breathing room so you can pay your bills, even if you overspend in one month.
Without the cushion, if you have a tough spending month, you either need to skip paying certain bills or skip making your Later Money transfer. Neither option is acceptable. The first option leads you into debt. The second option halts progress on your most important life goals.
The checking account cushion gives you protection.
How much of a checking account cushion do you need?
How much of a cushion do you need? It depends on whether you have consistent income (regular paychecks), or are paid inconsistently (commissions, freelance, contract, etc.)
If you are paid with consistent paychecks, I recommend your checking account cushion equal the amount you’ve planned to spend in your Now Money category from your Budget After Thinking (don’t worry, example below). This amount should give you a comfortable safety net without leaving too much money in your checking account that could be better used elsewhere.
If your pay is inconsistent, you’ll need a larger cushion to cover the larger gaps between pay days. I recommend you have double the amount of your Now Money. Note, you may have to tweak this amount based on your unique situation.
In our really lost boy example, he received paychecks biweekly. A good checking account cushion was $3,600 (equal to his Now Money).
This means that there should be $3,600 in his checking account to start each month. At the end of the month, after paying all of his bills and making his Later Money transfers, he should still have $3,600 left in his checking account. That’s his checking account cushion.
It’s OK if your checking account cushion temporarily dips below the amount you started the month with. This could happen during the time of the month when you pay certain bills, like your rent or mortgage. Don’t worry. The amount in your account will climb back up once you receive your next paycheck.
A final point: don’t spend this cushion. Fight the temptation to use your checking account cushion to pay off bills or debt. Without that safety net, zero-based budgeting does not work.
2. Your Later Money transfer is the main reason you’re budgeting in the first place.
This number reflects the whole purpose of budgeting in the first place: to create fuel for your ultimate goals in life. If you don’t know what your goals are, revisit our conversation on why you should want to be good with money. It all starts with what you truly want from your life and how you can use your money to get it.
When you’ve created your Budget After Thinking, you’ll know exactly what this amount is. In our really lost boy example, the total Later Money transfers added up to $2,050. In future posts, we will discuss where to transfer and what to do with this Later Money. No matter what, the goal is to put this money to work for you to progress towards your goals.
By focusing on just these two numbers, (1) your checking account cushion and (2) your Later Money transfer amount, you don’t have to track every penny. You’ll know if you are hitting your goals or falling behind just by looking at these numbers.
Now that we know the two key numbers to focus on, let’s see how this all works.
How to ensure you are on track with your money goals with just two numbers.
Sticking with our really lost boy, he predetermined that his checking account cushion is $3,600 and his Later Money transfer amount is $2,050.
At the start of the month, that means he had $3,600 in his checking account. Throughout the month, his checking account balance increased when he got paid (our really lost boy earned $7,500 per month). His checking account balance decreased whenever he paid for things like rent ($2,200) and any other bills.
The checking account cushion ensured that he had enough to cover all of his expenditures throughout the month. For example, if his rent was due on Wednesday, and he wasn’t getting paid until Friday, his checking account cushion ensured that he had enough in his account to pay the rent on time. His cushion might fall temporarily below $3,600, but his next paycheck would soon replenish his account.
As the month went on, various bills came due. Utilities may be due on the 7th of the month. Credit card bills on the 15th. These payments can all be automated so he didn’t have to actively worry about them. Again, his checking account cushion guaranteed he had enough in his checking account to pay them.
Towards the end of the month, in a perfect world, our really lost boy would have exactly $5,650 left after paying all of his bills. He could then transfer the predetermined $2,050 of Later Money to his various Later Money accounts. He’s then left with a checking account cushion of $3,600 and is ready to begin the next month.
This is not a “set it and forget it” budgeting method.
This is not a “set it and forget it” budgeting method. Think and Talk Money is all about exerting a little bit of mental energy on your money every week. This budgeting method is a good illustration of what that means. You don’t need to track every penny, but you still need to pay attention to your money choices.
To help you with that, I suggest that you glance at your banking or credit cards apps once a week to monitor your spending. If you use credit cards or electronic payments for most expenditures, it is quick and simple.
The reason it’s a good idea to glance at your banking apps is to make sure you are relatively close to your spending targets. If you notice that you’re overspending in the first half of the month, you can make the appropriate adjustments before the month ends.
This small amount of effort throughout the month is worth it. Every time you make that Later Money transfer at the end of the month, you’ll feel exactly what I mean.
Don’t strive for perfection.
I said above “in a perfect world” to highlight that we’re not striving for perfection. That’s an impossible standard. One month, our really lost boy might have only had $3,300 left after making his Later Money transfer. That’s fine. It’s a temporary blip that he could easily fix, if he’s honestly dedicated to his life goals. He had a couple of options.
His first option was to course correct the next month by spending $300 less. That could mean temporary adjustments in his Now Money or Life Money, such as skipping a couple dinners out, doing yoga at home, and buying chicken instead of steak at the grocery store.
His second option was to replenish his checking account cushion from his specific budget busters savings account. What is that, you ask? It’s a separate savings account to cover you if you have one of these higher-spending months so you can keep your money plan progressing.
In some months, you will actually underspend.
Where do you get the funds for such an account? Believe it or not, in some months, your spending will come in under budget. Let’s say our really lost boy had one of these good spending months in January. Maybe he did Dry January and ate all his meals at home for health reasons to compensate for all the holiday celebrations.
In this example, the result was he spent $500 less in January than he had budgeted for. Instead of leaving that $500 in his checking account (bringing his cushion up to $4,100) where it turns into disappearing dollars, he transferred it to his budget busters savings account.
Then, when he had a high spending month, he could make a transfer back into his checking account to keep his cushion at $3,600. All while continuing to make his Later Money transfers every month.
If you constantly run out of money before making your Later Money transfers, this method is not for you, yet.
Always remember the goal of your Budget After Thinking is to generate fuel for your life goals. If you’re not making these Later Money transfers, you’ve defeated the purpose of having a budget in the first place.
Don’t feel embarrassed or sad if that happens to you. Take it as a sign that you need to explore your Now Money and Life Money spending to see what adjustments you can make. Once you’ve found those adjustments, you can come right back to my version of zero-based budgeting.
If you want this plan to work, where you only need to focus on two numbers instead of tracking every penny, you need to be honest with yourself that you’re ready for this.
Decide for yourself what budgeting method works best for you.
If you’ve been successful tracking your spending in a spreadsheet or a budgeting app, and enjoy the process, you should continue to do so. If it ain’t broke, don’t fix it, right?
On the other hand, if you’ve created a Budget After Thinking and consistently hit your Later Money goals, you’re probably ready to stop tracking every penny, if you’d like.
To recap, my version of zero-based budgeting is for those people who want to continue to fuel their Later Money goals without the anxiety of the spreadsheet. Instead, focus on those two numbers: (1) your checking account cushion and (2) your Later Money transfers. This is what I’ve been doing for years and it has worked.
If your cushion falls short one month, that’s OK. We are not striving for perfection. Make up for it the next month or use your budget buster savings account to replenish your checking account. And, keep making your Later Money transfers.
Has anyone else experienced mint.com anxiety? Are you currently using a budgeting app? How do you like it? Has any tried zero-based budgeting?
In Part 1 of our series on budgeting, we learned how to eliminate disappearing dollars by creating a plan for Now Money, Life Money, and Later Money.
In Part 2, we used a real life example to work through the budgeting process together. We learned that even seemingly minor adjustments can add major fuel to your Later Money bucket.
Here in Part 3, we’ll take a deep dive into my top 10 strategies for making thoughtful adjustments so we can consistently win the budget game.
1. See the ball go through the hoop.
When I was playing basketball growing up, I learned the concept of “seeing the ball go through the hoop.” When I was struggling to make a shot, my coach encouraged me to drive to the basket and make an easy shot.
Once I saw that I could make an easy shot, I had my confidence back.
By seeing the ball go through the hoop, I subconsciously reminded myself that I could do it. There was nothing wrong with me. I was ready for more challenging shots.
Anyone who has been around young kids has witnessed this same phenomenon. My son is learning to swim. When he proudly drifted (with a life vest on) two feet from me on his own, he proudly exclaimed, “I’m swimming! I’m swimming!”
It didn’t matter that neither his arms nor his legs were moving.
Once he saw that he could enjoy the pool without holding onto dad for dear life, he wanted nothing to do with me. He knew for himself that he could do it.
This concept works in a lot of different money situations, especially when making thoughtful adjustments to your budget. In our really lost boy example, we made small adjustments to our grocery budget, phone and internet bills, and social life spending.
These adjustments were easy to implement and added major fuel to our Later Money. Just as importantly, there was an additional psychological benefit in proving to ourselves that we could make improvements.
Start small. See the ball go through the hoop.
2. Don’t cancel your social life.
The point of starting small is to identify beneficial adjustments that are relatively painless. Focus on the “relatively painless” part. Canceling your social life will not be relatively painless.
Your social life consists of ongoing experiences that bring you happiness. We always should strive for more of those experiences, not less. So, don’t cancel your social life.
Looking again to our really lost boy, you probably noticed that I made small adjustments to my Life Money. However, even those small adjustments did not result in less time with my friends.
This is a key point: I didn’t spend any less time with my friends than I did before. Instead, I thought and talked about alternatives so I could still see them without spending a lot of money.
In recent years, my students have thought and talked about some great examples of this concept in action. For example, say your friends are going out to dinner on Friday night. You know it’s going to be more expensive than what your Life Money permits.
Instead of going to the dinner (and wrecking your budget), or not going to the dinner (and being sad at home), what alternatives can you think of?
One student suggested you can meet your friends beforehand for happy hour. Another student suggested you take a pass on dinner and invite your friends over to your place later that weekend for coffee and bagels.
If you don’t want to spend your Life Money to go see Taylor Swift in concert, invite your friends over to watch the documentary on Netflix.
The common theme is that you still get to spend time with your friends, while keeping more money in your pocket.
3. Talk to your friends about Life Money.
Surprise, surprise! More talking! I recommend you talk to your friends about the thoughtful adjustments you’re implementing with your Life Money. Like in most life situations, communication is key.
Once your friends know that you are working on thoughtful choices in your Budget After Thinking, they will happily support you. They’ll know that you aren’t blowing them off.
In the rare instance that they don’t support you in striving for your dreams? You may need to question if these are the right friends for you.
The art of budgeting is not about cutting, especially when it comes to things you love. Budgeting is about thinking and talking to find solutions or alternatives.
You can keep doing the things that bring you happiness at the same time you’re making progress on your life goals. It just takes a little bit of mental effort.
4. Keep on traveling.
Making small adjustments works in all areas of your budget, not just your social life. Let’s look at travel, a major expense, but also one of the best sources of life experiences for a lot of people.
For our really lost boy, cutting out travel completely was a nonstarter. My sister lived in Los Angeles, one brother lived in Washington D.C., and the other brother studied abroad in Spain. Plus, my best friends from college lived in New York and Virginia. My grandma was in South Carolina.
If I wanted to see my people, traveling was part of the deal.
Traveling was also a huge expense, and paying for all that travel brought me a lot of stress. I needed to think and talk about a solution so I could travel for less money. You know where this is going, don’t you?
I researched the best credit cards for travel points and how to best use those points for free flights and hotels.
I learned the most affordable days of the week to fly and the best times of the year to visit certain places. Yes, this took mental effort. But, this was more preferable mental effort than worrying about money.
Even if you don’t want to take these steps, you can still make thoughtful decisions about cutting back on even one or two trips a year, which I also did. I spent less money, but the added benefit was that I appreciated each trip even more.
I had more time to look forward to that trip and more time to remember it before another trip distracted me.
Do not use credit cards just to earn points.
This is not a recommendation. It’s a requirement. Stay tuned for a future post on responsibly using credit cards to earn free vacations.
For now, the only rule that matters is to not overly spend on your credit cards just to earn points. That is a recipe for disaster.
Using credit cards to travel only works to your advantage if you can pay your bills, in full and on time, each month.
“Triple points!!!”
Years ago, my friend and I were out to dinner with our wives at a nice neighborhood spot in Chicago. When the check came, I pulled out my credit card. He pulled out a debit card. I nearly fell out of my chair.
It’s not that using a debit card is a bad choice. It’s a great choice for a lot of people. In this instance, however, I was shocked because I knew this guy very well.
We had travelled all over Europe together. We had just spent most of dinner talking about trips we had taken and trips we wanted to take. This friend is also one of the smartest guys I know, a statement that I will forever deny and insist that I was hacked, if he ever reads this.
I was shocked he wasn’t using a credit card to earn points so he could travel for free.
I couldn’t help myself and had to ask my friend about the debit card. (What do you want from me, I like to talk about money.) Turns out he just never really thought about using a credit card.
He wasn’t actively avoiding credit cards, he just didn’t know there were advantages to go along with the potential negatives (if you don’t pay your bills).
My friend was an instant convert. He was thrilled (maybe an understatement) to learn about how he could travel for free with credit card points. He began responsibly using credit cards and never looked back.
To this day, he won’t leave me alone any time he earns “TRIPLE POINTS!!!” or books a free vacation for his family. I love it.
5. Spark and cut.
Another one of my favorite tricks was inspired by Marie Kondo, famous for helping people de-clutter their houses by asking a simple question, “Does this item spark joy?” If it does, keep it. If it doesn’t, get rid of it. So simple, and so powerful.
Marie Kondo is an inspiration. In my opinion, there is no clearer display of brilliance than taking a complex matter (like organizing your house) and distilling into a simple, understandable idea.
We can apply the same strategy to any area of our spending. Does this subscription bring me joy? If yes, keep it. If not, cut it.
Does this health club membership bring me joy? This expensive clothing store? What about attending concerts? Sporting events?
If these things don’t honestly bring you joy, cut them from your life and your budget. Italian beef or unagi? Either one is fine, if you’ve determined for yourself that it brings you joy.
When you spark and cut, you’ll create more money to fuel your Later Money goals. Just as important, you’ll likely find that you don’t miss those things or activities.
You’ll value your newfound time and freedom to pursue those remaining parts of your life with more dedication.
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 your Life Money in December, make it a priority to underspend by $300 in January.
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.
7. Make a game out of it, like the $500 Challenge.
When I veer off track and have a bad spending month, I try to not get down on myself. I’m human. It happens. So, lemons to lemonade. I make a game out of it called “The $500 Challenge.”
My wife and I started playing The $500 Challenge years ago. The game was simple. Each of us had to limit our Life Money for the month to just $500. Whoever spent the least that month, won the game.
I’ve never won the game. My wife is… competitive. I cope by lying to myself that she wins because I enjoy paying on date nights.
We’ve played this game several times to course correct after a high spending month. January is the perfect time of year for this game since the holidays in December often result in overspending.
The $500 Challenge has many benefits. When we succeeded, we’d be right back on track for our goals. Even if we couldn’t quite stay under $500 (never an issue for my wife), this game still reminded us to to prioritize the experiences and things in life that truly mattered to us.
Get creative with nights out.
My favorite part of the game was it forced us to get creative with our nights out. One of my favorite date nights was a product of the $500 challenge.
We had just moved to our new neighborhood. It was a Friday night. People were out and the city was bumping, per usual in summertime Chicago. We set out for a walk to explore with only one rule: we had $20 to spend or less on dinner for two.
We weren’t going to waste that money on an Uber, so we just started walking. A couple miles later, having learned all about our new surroundings, we ended up at a casual restaurant we had never been to.
We ordered a plate of nachos to share off the happy hour menu. We even had enough money left for one of us to wash it down with a cold beer. The nachos were great and the vibe was perfect. The check, with tip? 19 bucks.
We walked home, which helped digest our dinner, and went to bed feeling light in the belly and heavy in the wallet.
8. Buy it if you want it, but not 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.
9. You don’t have to go big or go home.
We’ve been focusing on smaller adjustments, but of course, bigger adjustments can have a bigger impact on your overall budget.
Making bigger adjustments means examining your biggest expenditures, which for most people is housing and transportation.
If your life situation allows for big changes in these areas, you should by all means consider them. After all, reducing your housing costs by $500 by switching to a less expensive apartment opens up a lot of dollars to deploy as fuel elsewhere. That one decision can make a big impact.
The challenge that I have personally experienced with big adjustments and continue to observe in my students today? Making big adjustments is not realistic for everyone.
Let’s talk about switching up your housing situation. By going big in this scenario, you are giving up your home.
This may be a realistic and intelligent decision for someone in their 20s, with no dependents, and living somewhere with ample housing units available.
On the other hand, moving to a new home may not be realistic for someone with children in school and strong roots in a particular community.
To advise that family to pack up their home and move away could be counterproductive. While they’ll save money, they’re giving up a part of their lives that may be very important to their overall happiness. That tradeoff might not be worth it.
The same rationale applies to transportation costs. Like our really lost boy, if you live in a city with public transportation, you probably don’t need a car (or an expensive parking spot).
If you have kids and regularly drive them to dance class, swimming, soccer, gymnastics, piano, music class, ski lessons, and grandma’s house (yes, this is my life right now), giving up your car is not realistic.
How can I adjust my rising housing costs without giving up my home?
It’s because of these complicated tradeoffs that I encourage everyone to start with small adjustments while you’re thinking about bigger adjustments.
As you think and talk about the bigger adjustments, you may unlock other solutions that don’t require you to move.
For example, if you’re renting an apartment, you could negotiate with your landlord about locking in a longer term lease at a fixed rent. That way, you keep your largest Now Money expense consistent and avoid paying more each year as your lease renews.
I employed this strategy with great success when I rented an apartment in Chicago, generating a lot of fuel for my Later Money by staying in the same apartment for seven years.
This strategy works for families, too. A buddy recently moved to a new state with his wife and two kids. Instead of buying a house right away, he signed a four-year lease on the perfect home for his family. He has a wonderful place to live and his costs are fixed for the near future.
What can I do if I’m a homeowner?
If you’re a homeowner, what can you do to reduce your expenses without giving up your home? You may not want to re-finance your mortgage in today’s environment, but could you address other rising home ownership costs?
As an example, I recently re-caulked and re-grouted my shower. I had never done that before, but I watched a lot of YouTube videos like this one. The project took me a while, in small bursts, but doing so saved me close to $1,000.00.
I also felt satisfaction for learning something new and getting a job done despite my many frustrations along the way.
In the long run, is $1,000 saved going to pay off my mortgage? Of course not. This is just one example to illustrate that we can all use our mental energy to think about solutions, without giving up our homes.
This thought process can be repeated endless times, and does not only apply to DIY projects. From your couch, you can work on lowering costs related to home insurance, maintenance, and utilities by making phone calls or sending emails.
When you’ve trained yourself to exert mental energy to solve your rising home ownership costs, those savings will add up. You can lower your expenditures without giving up your house.
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. 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.
We’ve covered a lot of ground here to help generate fuel for your Later Money. To recap:
My Top 10 Budgeting Tips for Lawyers and Professionals
See the ball go through the hoop.
Don’t cancel your social life.
Talk to your friends about your life money.
Keep on traveling.
Spark and cut.
It’s OK if you occasionally exceed your spending.
Make a game out of it, like the $500 challenge.
Buy it if you want it, but not right away.
You don’t have to go big or go home.
Plan ahead for budget busters.
These are the strategies that have worked for me in the past and continue to work for me today.
I hope you’ve see than budgeting does not have to be hard and nasty. It just takes a little mental energy, exerted ahead of time.
Whether these specific tips work for your personal situation isn’t the point. I promised you before that I won’t tell you what to do with your money.
Review my tips and focus on the thought process to identify solutions that might work for you.
Have you used any of these strategies? What about other strategies that worked for you?
Drop a comment below or on the socials to keep the conversation going.
In Part 1 of our series on budgeting, we learned that the art of budgeting is having a plan for your next dollar before you earn it. That way, you avoid having disappearing dollars. It’s not a good feeling to work hard all month and then realize you have nothing to show for it.
We also learned the three steps to get started with a realistic budget based off your current personal situation:
Step 1: Track your spending for at least 3 months.
Step 2: Separate your spending into 3 main categories.
Step 3: Make adjustments so your spending better aligns with your true motivations and desires in life.
Here, in Part 2 of our series on budgeting, we’ll use a real life example to work through the budgeting process together. Through this example, you’ll see how even seemingly minor adjustments can make a big impact to your budget.
In Part 3, we’ll take a deep dive into my top 10 strategies for making thoughtful adjustments to our budgets so we can add more fuel to our financial and life goals.
Before we get ahead of ourselves, let’s meet a real life, really lost, boy.
Learning from a real life, really lost, boy.
In today’s budgeting example, we’ll look at real numbers from a real life, really lost, boy: 26-year-old Me. Remember when I told you I started a money journal in 2010? The dollar amounts below are what my actual income and spending looked like back then, adjusted for today’s dollars and rounded for easier math.
For some context, I was 26-years-old, living by myself in Chicago (no dependents, no pets), and working as a slasher. Not a joke, that was my actual job title. I worked for a judge with the Appellate Court of Illinois, and as the junior member of the team, my responsibilities included lawyer duties and secretarial duties. I was a judicial law clerk “slash” secretary. Hence, slasher. Lawyers are funny, huh?
In today’s dollars, I earned an annual salary of $90,000.00. That means I earned $7,500.00 per month. We did not have bonuses at the courthouse, so the $90,000.00 salary was my full compensation.
How to benefit from this budgeting example.
The benefit of going through an example like this is not to compare your situation to mine. Your income might be much higher or much lower. Same with your expenses. Instead of the numbers, focus on the thought process so you can start to think about adjustments that suit your current life.
Below, you’ll see charts showing that I completed each of our three budgeting steps:
Step 1: I tracked my spending for 3 months and reflected the average monthly amount for each expenditure in the column labeled “Baseline Budget.”
Step 2: I created a separate chart for each of the three main categories: Now Money, Life Money, and Later Money.
Step 3: I made thoughtful adjustments to better align my spending with my true motivations in life. I illustrated my decisions in the third column labeled “Budget After Thinking.”
Now Money
Now Money is what you need to pay for basic life expenses. These are expenses that you can’t avoid and should be relatively fixed each month. If you have expenses for kids, pets, and other fixed life expenses, be sure to include them in your Now Money category.
Now 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’s $7,020 per year of fuel for my Later Money.
Life Money
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.
In Part 3 of our series on budgeting, I’ll show you my favorite strategies for adjusting your Life Money without sacrificing the things and experiences you love.
As we saw with Now Money, with some thought and very little effort, I reduced my Life Money Budget After Thinking by $250 per month. That’s another $3,000 of fuel for my Later Money.
Some bonus tips for tracking Life Money
Life Money is the most annoying category to accurately track. These expenses vary month-to-month. You may buy concert tickets or have a trip planned some months, but not every month. So, how do we get an accurate picture of our Life Money?
This is why I recommend you track your spending for at least three months. You’ll get a more accurate picture because you can average your Life Money spending over those 3 months and balance out any inconsistencies. Of course, if you have the patience to track your spending for even longer, you’ll get an even more accurate picture.
Fortunately, it is easier to track our spending today with the availability of apps and online banking platforms that can automatically track your spending. We’ll review some of these tracking options in a future post.
Keep it simple when tracking your Life Money.
I highly recommend you keep it simple when tracking your Life Money. Many of my students give up on budgeting because they make this category more complicated than it needs to be. I really struggled with this at first because I was so concerned about doing it right.
What I learned was that it doesn’t matter. If you go to happy hour with friends, don’t agonize over whether that goes into your “Dining Out” category or your “Drinks” category? It doesn’t matter. Make it easy on yourself. Have one category called “Social Life” and move on.
Don’t forget that the point of budgeting is to learn your current habits so that you can make thoughtful adjustments. Don’t let yourself become so obsessed with the details that you get stressed and give up on budgeting.
Break down large, annual expenses on a monthly basis.
One last tip, when you have large expenses, like season tickets or a big vacation, it’s helpful to break down those expenses on a monthly basis. That way, you can see how much those individual purchases are impacting your overall monthly goals.
I’m not suggesting you actually pay for that trip over 12 months (like on a credit card), or that you can only spend that much on travel in a certain month. Think of it this way: you likely will not take a trip every month of the year.
Using my Budget After Thinking figures, let’s say I did not take a trip in January, February or March. That would mean that for my planned April trip, I now have $1,600 available that I can use, assuming you didn’t let those dollars disappear. In Part 3, we’ll talk about what to do with the money you didn’t spend in the first three months to make sure they don’t disappear when April rolls around.
Later Money
Later Money is what you are saving, investing, or using to pay off debt. This is the fuel for your most important goals.
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.
What I learned tracking Later Money.
This is where all your efforts in tracking your spending and making thoughtful adjustments starts to pay off, IF you have a plan for your next dollar before you earn it.
In my baseline budget, I was very good about paying my student loan debt in full every month. I knew enough not to mess with student loans. The consequence was my credit card bills were the last to get paid each month. This usually meant only paying the required minimum since I had run out of money by this point. It also meant no money for savings or investments.
In my Later Money Budget After Thinking, because of the thoughtful choices I made with my Now Money and Life Money, I created $800 of fuel.
With that fuel, I had committed myself to paying off my credit card debt as quickly as possible. I also wanted to start the habit of saving each month. So, I added $750 of fuel to my credit card bills and $50 of fuel to my savings. I stayed true to my plan and put that money to work. Otherwise, what was the point of budgeting?
Some bonus tips for tracking Later Money.
When I run through this exercise with my students, I usually get a question along the lines of, “I’m aiming to save 20% of my income each month. Should I count the pretax money I’m saving for retirement towards that 20%?”
It’s a sneaky question. Think about it: the rest of your budget relates to your take-home paycheck, meaning your after-tax money that hits your checking account. Your retirement savings are typically withdrawn from your paycheck before taxes and before you ever see the money.
How to account for your pretax retirement savings can be another one of those tricky areas when you start budgeting. In my example, you may have noticed that I contributed $300 of pretax money through my employer’s retirement plan, but I did not count that money in my budget calculations.
Should you count that money if you’re aiming to save a certain percentage each month? Setting aside that this question demonstrates how a standardized framework, like 50-30-20, can be very confusing…
Yes! Give yourself credit where credit is due! Contributing to your retirement plan is a good choice. If you are aiming to save 5% or 10% or 20% each month in Later Money, count your pretax money towards that goal.
Make budgeting as easy as possible for yourself.
That said, I want to encourage you to make budgeting as easy as possible for yourself so you stick with it. In my example, I excluded the $300 pretax retirement savings because I am creating a plan for the $7,500.00 that hit my checking account each month. These are the dollars in jeopardy of disappearing.
The entire point of your budget is to create a plan for your next dollar before you earn it. You already wisely chose to save your pretax dollars by enrolling in your employer’s retirement plan. Those dollars are already accounted for and working for you. They are not disappearing dollars. You did your job!
Like in my example above, you can exclude the amount you’re saving for retirement in pretax dollars from your budget calculations. Feel good knowing that you’re saving that money. It’s icing on the cake. No need to worry about it when budgeting.
The real life, really lost, boy was starting to figure it out.
Let’s look at the complete picture before and after I started the budgeting process:
Baseline 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 for my Later Money goals.
Taking these first steps may seem like minor steps on the way to financial independence, but they were the most important steps I ever took on my personal financial journey.
The real life, really lost, boy was starting to figure it out. The spark was lit. There was no turning back.
Imagine it’s a $20,000.00 bonus that was unexpectedly deposited into your checking account.
No strings attached. It’s your money to do anything with.
Answering this question should be fun.
It’s a free $20,000.00!
But, my guess is that if you thought seriously about it, you didn’t have much fun at all.
Many of us likely struggled with what to do. We want to do the right thing, but we don’t know what that right thing is.
Should we pay down debt?
Should we invest?
Take a vacation?
Do nothing?
Do you have a plan for where your next dollar is going?
The reason we struggle with decisions like this is because most of us don’t have a plan for where our next dollar is going. What ends up happening is we do nothing.
Our money hits our checking account, we spend it on this or that, and pretty soon that money has disappeared. We haven’t used the money to advance any of our priorities. It’s just gone.
To me, this is one of the most important money mistakes that we need to fix right away. 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.
And, that leads us to budgeting.
Budgeting is having a plan for your next dollar before you earn it.
Here, in Part 1 of our series on budgeting, we’re going to learn that the art of budgeting is having a plan for your next dollar before you earn it. That way, you avoid having disappearing dollars.
We’ll learn how to create our baseline budget based off of our current personal situation. Wherever you currently are in life, you can then make adjustments to your spending based on what you truly want.
In Part 2 of our series on budgeting, we’ll use a real life example to work through the budgeting process together. Through this example, you’ll see how even seemingly minor adjustments can make a big impact to your budget.
In Part 3, we’ll take a deep dive into my top 10 strategies for making thoughtful adjustments to our budgets so we can add more fuel to our financial and life goals.
In the end, I’ll show you how to use the information you’ve learned about yourself to create a lasting money plan that does not require you to track every penny.
I teach my students that to create a budget, 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.
That’s all there is to it.
Let’s take a look at three steps to take when first creating a budget.
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 think about adjustments.
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. Remember, 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?”
Talk to your people as you go through the budgeting process.
One last thing, budgeting is one of those areas where it can really help to talk with our people along the way for support and encouragement.
You don’t have to budget in secret. We’re all in this together. Put the mental energy into this step, so you can stop wasting mental energy worrying about money and start getting energized thinking about money.
In Part 2 of our budgeting series, we’ll talk about the different ways you can track your spending. I’ve used apps, spreadsheets, and even the notes function on my phone.
The good news is, tracking your spending is easier today than it’s ever been.
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.
One quick 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.
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.
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.
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.
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. Like me, some experts have also recognized a 60-30-10 framework may be more appropriate today.
While I agree the 60-30-10 framework is 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. What kind of adjustments?
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?
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. Money is 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 our Life Money and Later Money, the buckets that represent the things we love the most (Life Money) and our most important life goals (Later Money).
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.
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.
As we wrap up Part 1 in our budgeting series, keep the three initial steps in mind.
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.
And, the next time you’re asked what you would do with $20,000.00, you’ll know the answer ahead of time because you have a plan in place.
Answering the $20,000.00 question will be fun. No more anxiety-inducing, disappearing dollars.
I hope you’ve started thinking about why you want to be good with money. This will be personal for all of us and may change with time. The more you think and talk about why you want to be good with money, the clearer your motivations will become.
Three powerful reasons why I want to be good with money:
Money can give you choices.
Money can give you personal power.
Money can give you time.
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. 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.
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. You can spend your working hours at a job that is meaningful to you. You can spend more time with people who are meaningful to you.
It’s been said many times, “time is our most precious resource.” When you have money, you can buy your time back.
From the time we’re in diapers, we start learning by observing people older than us. As my family prepares to leave the house, my son has recently started chanting “Let’s roll! Let’s roll! Let’s roll!” Yup, that one’s on me.
The same idea applies when it comes to life and money. I’ve mentioned before how much I’ve learned about life from listening to my clients suffering with mesothelioma. I’ve learned even more by listening to my family, friends, and mentors.
When you listen to enough people with more years behind them than you, certain themes continue to surface, like the importance of family. You’ll hear about creating experiences and memories, usually involving vacations or time with friends.
One thing I’ve never heard? Someone saying “I wish I spent less money on doing the things I loved.”
You don’t have to agree with everything you hear, but the act of listening will start turning the wheels in your own mind. And when your wheels start turning, you can’t be afraid to spend money on the things that make you happy.
Why do we need to actively think about the things that make us happy?
A sneak peak of how I look at budgeting.
I said we weren’t going to discuss budgeting yet, and we won’t. “Budgeting” is kind of a nasty word. Nobody likes to say it out loud, let alone aggressively do it each month. This is why we spend so much time in the beginning talking about our money mindset.
A budget is worthless if you are not motivated to stick to it. Sure, you may stick to your budget plan for a month or two, but you’ll fall back into old habits if you haven’t prioritized what matters most to you.
We’ll save the particulars for another day. A sneak peak at how I teach my students:
Like it or not, everyone needs a budget… for a little while. Once we’ve identified what we spend money on and made some thoughtful choices, most of us don’t need a rigid budget.
If you’ve thought and talked enough about your true motivations, you won’t need a budget either. Each month, you will take care of your obligations, grow your net worth, and use the rest of your money to buy things you love and to create experiences.
Talking money should be emotional.
If you’re being honest with yourself, talking money should be emotional. Remember, most of us exert mental energy pretending we’re not worried about money. My challenge to you is to exert that same energy into figuring out why we behave in certain ways when it comes to money.
The reason it matters is because we’re soon going to be talking in detail about budgeting, which is just the process of making thoughtful choices about how we spend our money. If we don’t know why we choose to spend in certain ways, we won’t be able to make lasting adjustments to our budget.
Let’s look at an example to start prepping ourselves for the budgeting process. This is a good time to revisit one of the main principles when talking money with your people: no judgments allowed. We’re not looking to shame ourselves or each other. We are aiming for understanding so we can make thoughtful decisions.
Say you’ve looked at your monthly spending and realize that you’re spending a lot of money dining out. The key to creating a budget you will actually stick to is actively thinking about why you spend so much money dining out. You might learn that dining out is an essential part of your best life. You might learn it’s really not.
Ask yourself these questions:
Is there an emotional reason you dine out frequently, like it makes you feel successful? Or, you like spending time with friends? Do you get joy out of trying new dishes?
Maybe it’s something else entirely and unrelated to your emotions. Maybe you don’t have time to cook at home because of your work schedule? Maybe it’s just laziness?
It might have nothing to do with how often you eat out, but where you choose to eat and what you choose to order. Do you order a bottle of wine with dinner? Could you have drinks at home beforehand instead?
When you honestly think about and answer these questions for yourself, you can start to make thoughtful decisions on whether that spending matches your priorities. If it doesn’t, then it’s an area for adjustment.
And, that’s really all that budgeting is. Not so nasty, right?
Too many of us are really good at pretending not to worry about money.
“Credit card debt?” Everyone has it.
“Emergency savings?” My job is secure.
“Retirement?” I have so much time.
Accept money for the tool that it is.
Instead of honestly assessing our relationship with money, we actively ignore it. Yes, actively ignore. We don’t passively hide from our credit card bills. We all have the credit card apps on our phones and receive multiple emails about our bills. We know what the numbers are, and we bury that knowledge. We exert mental energy to not think about our money.
Let’s stop doing that and re-frame how we think about money. Instead of convincing ourselves that we’re not worried about money, let’s accept money for the tool that it is. Let’s get energized thinking about what money can do for us.
Thinking about money does not make you a bad person.
Thinking about money does not make you a bad person. Always remember what money is: a tool. You are not a bad person for wanting to use that tool to build the best life for you and your family.
Remember, the goal is not to fall in love with or obsess over the dollars in your bank account. The goal is to think about how you can use those dollars to maximize your life experiences. When you start thinking like that, money is energizing.
A higher income won’t cure your money worries.
You are not immune from worrying about money just because you have a high income. Ask people further along in their careers if earning more money magically solved all their money worries. A lot of times, the opposite is true.
The more we earn usually means the more we spend. We tell ourselves that we deserve to spend more. Or, we need to spend more to match our neighbors or colleagues. You can see this through the clothes people wear, the vacations they take, the restaurants they eat at. This habit of spending more, even as we earn more, explains why credit card debt in America continues to surge.
The other thing about earning more? It also usually means we’re working more. If you were worried about money when you had more available time to think about it, what’s going to happen now that you’re working longer, harder hours?
Vicki Robin, often credited for laying the groundwork for the FIRE movement, has a lot to say about the relationship between money, work, and time. Her book Your Money or Your Life is a must read.
Years ago, my friend came to Chicago to visit. He loves good food and treated me to one of the premier restaurants in the city. Very fancy, Japanese menu. 12 courses. Sake pairings. At one point, my friend spilled some sauce on his shirt. Having noticed his predicament, the waiter walked over and discreetly handed him a stain removal pen folded in a napkin. Classy, right?
It was one of the best dining experiences I’ve ever had, but it had nothing to do with the food. I loved being there with my friend, and he knows it wasn’t about the food.
Towards the end of the meal, I got up and went to the bathroom. I returned to my friend and the couple at the table next to us gushing about the meal. Turning to me, one of them asked, “Did you absolutely love the food, too?” He choked on his Unagi when I responded, truthfully, “I could really go for an Italian beef.”
I want you to spend your money.
OK, so what’s the point? I am in no way saying we should all stop spending money. Or, that we shouldn’t use our money to enjoy what we want in life. Quite the opposite, actually. I want you to prosper. What I really want is for you to define for yourself what a prosperous life means.
If that means you want to use your money to eat Japanese delicacies instead of Italian beef, please do! Just do it because you put some intentional thought into how spending your money that way fits into your overall life experience.
Get energized thinking about money.
If you’ve read this far, I’m assuming that you’re tired of pretending not to worry about money. You’re tired of treating money just like everyone else. You’re tired of fooling yourself that if you just made more money, everything would be fine. You want the worrying to stop.
Now, you want to feel like you’re moving forward. You’re ready to be energized about using money as a tool to reach your hand selected goals, regardless of how much you make.
To start moving forward, we need to change how we exert our mental energy when it comes to money. In the beginning, many of us exert mental energy into making excuses about our money. Or maybe worse, we actively ignore our money. We convince ourselves that we’re just like everyone else. We pretend not to worry.
Let’s flip that around. Instead of exerting mental energy to ignore our money worries, let’s get energized thinking about how we can use money as a tool to build our lives. It starts with discovering what truly motivates us. Only then can we talk about strong personal finance habits. Without the motivation, we’ll slip back into that existence of pretending not to worry.
There’s no dress rehearsal in life.
Life doesn’t come with a dress rehearsal. There’s no practice game to test out new plays. We need to think about our motivations now and continue to think about those motivations as we go.
You’ll soon hear all about my Tiara Goals, my made-up name for what truly motivates me. At this point, I’ll share the simple recognition that we each only get one life. I don’t say that to be morbid or depressing. I don’t say it to be inspirational, either. I’m saying it simply because it’s true.
Bill Perkins, author of Die with Zero, makes a very convincing argument that most of us wait too long to start using money to create life-changing experiences. You should read Die with Zero and talk about it with your people. This book has led to more money conversations with my friends and family than any other book I’ve read.
This truth is a powerful reminder for me to use money as a tool to accomplish my Tiara Goals. That truth helps explain why I work hard for my clients with mesothelioma, own rental properties, teach law students, and now write this blog.
I encourage each of you to start thinking about what truly matters to you. Not in a theoretical sense. Not what you expect other people would say should matter to you. What you, after deliberate thought, believe truly matters. You won’t have all the answers right away, but you need to start somewhere.
For now, let’s start by helping each other. Let’s stop pretending that we aren’t worried about money, so we can do something about it.
“Credit card debt?” Yup, and I’m attacking it.
“Emergency savings?” Growing each month.
“Retirement?” Not a problem.
“Unagi?” Eh, I’ll have the Italian beef. Dipped, hot peppers.
4 responses to “How to Think About Money and Italian Beef”
Kevin
This really hit home for me! I read the book Die With Zero, and loved it.
So, is the Italian beef like a ‘steak & cheese sub’ in Boston?…if so, then , hell yes… Italian beef over Unagi every time. It is great to see you tackle the topic and attempt to make money a candid discussion. I suspect your teachings, and this blog will inspire more people to do the same.
I named my financial freedom blog “Think and Talk Money” because most of us don’t do enough of either.
I believe we can make it easier on ourselves to make consistent, good money choices if we just spent a little time each week thinking and talking about money.
Wouldn’t most of us agree that doing new things, and especially doing hard things, is easier when we have a partner?
Someone to bounce ideas off. And, someone to keep us accountable. Or, someone to pick us up when we aren’t at our best.
Have you ever talked about money or read a financial freedom blog?
Who is the person that knows the most about you?
Your best friend? Significant other? Brother or sister?
This person knows your most embarrassing stories. She has seen you cry. She has been there for you through thick and thin.
But, have you ever talked to this person about money?
Have you ever shared what drives you to wake up at 6 a.m. for work?
Have you mentioned that you’re worried about how you’re going to pay off debt?
Or, have you ever talked about how you’d like to use money as a tool build your life on your terms?
You might be surprised how powerful these conversations can be. It’s likely the person you’re talking to will be relieved you started the conversation.
If you don’t know where to begin with conversations like this, a financial freedom blog is a good place to start.
I didn’t read a financial freedom blog or talk about money in 2010.
I certainly didn’t think to have conversations about money in 2010 when I fell deeper and deeper into debt.
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 wonder if I would have had these feelings for so long if I had read a financial freedom blog. Or, what if I was more willing to discuss my money choices with the people I trusted?
I likely would have saved myself a lot of worry, frustration, and time if I hadn’t struggled alone. Perhaps I would have learned that so many others were struggling with consumer debt like I was.
I made it harder on myself by not talking.
I unnecessarily did it the hard way, but I figured it out. Right then and there, 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 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.
Easy, right?
Not exactly.
Money is about continuous choices.
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?”
For some reason, though, most of us choose to deal with money on our own. I’d like to change that with my financial freedom blog. There’s a stigma that we shouldn’t talk about money. I’d like to change that, too.
Get comfortable talking 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 in this financial freedom blog. 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.
What topics will we cover in this financial freedom blog?
In this financial freedom blog, we’ll talk about the importance of money mindset and why you should want to be good with money. Money mindset touches every aspect of personal finance, so it’s a theme we’ll keep returning to.
There’s no reason to embark on your journey to financial freedom alone. Share your accomplishments and struggles with your friends and loved ones. You’ll only be better off for it.
I certainly will be doing that with my financial freedom blog.
Please share in the comments below if you’ve ever benefited from talking about money with a friend or loved one.
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2 responses to “A New Financial Freedom Blog for Lawyers and Professionals”
Kevin
I’ve been learning from Prof. Adair for the past decade. Not only that, I’ve followed his advice, and it is one of the reasons I am financially independent today. I could not be more excited for this website – there’s so much more left to learn!
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