Tag: personal finance

  • Money Question: What Would I do with $10 Million?

    Money Question: What Would I do with $10 Million?

    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.

    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.

    🚨If you know anybody who would benefit from thinking and talking about money even just a little bit, please share the Think and Talk Money blog with them! I post 3 times every week. 🚨

    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.

    palm tree near sea shore illustrating that life on a beach may get lonely after a while, which is why I would not disappear with $10 million.
    Photo by Maarten van den Heuvel on Unsplash

    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.

    Hiker on a log illustrating what I would do with $10 million, like hiking with my family.
    Photo by Jon Flobrant on Unsplash

    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.

    What do you think of my plan?

    Would you do anything differently?

    Let us know in the comments below.

  • Invest in Real Estate Because Cash Flow is King

    Invest in Real Estate Because Cash Flow is King

    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.

    Those are nice short-term trends.

    On the other hand, in the past 25 years, home prices in Chicago have only doubled, which actually lags the national average. That’s not so nice.

    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.

    African lion photography by Bisakha Datta symbolizing that cash flow is king when it comes to financial freedom.
    Photo by Bisakha Datta on Unsplash

    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.

    Photo from Zach Angelo created for his church symbolizing that cash flow is king when it comes to financial freedom.
    Photo by Megan Watson on Unsplash

    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?

    Let us know in the comments below.

  • Real Estate has Accelerated my Journey to Financial Freedom

    Real Estate has Accelerated my Journey to Financial Freedom

    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.

    Summer in Paphos representing creating more experiences with family.
    Photo by Natalya Zaritskaya on Unsplash

    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.

    The Professor set me straight.

    door key symbolizing how investing in real estate can accelerate your journey to financial freedom.
    Photo by Maria Ziegler on Unsplash

    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.

    One of my favorite BiggerPockets books is Chad “Coach” Carson’s book, Small and Mighty Real Estate Investor: How to Reach Financial Freedom with Fewer Rental Properties.

    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.

  • What if You Woke up Tomorrow with $10 Million?

    What if You Woke up Tomorrow with $10 Million?

    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. 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.

    The way to the cabin lady with arm out her window symbolizing what you can do with $10 million in the bank.
    Photo by averie woodard on Unsplash

    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.

    So, let us know in the comments below.

    What would you do with $10 million in the bank?

  • How to Prioritize Investment Account Types While in Debt

    How to Prioritize Investment Account Types While in Debt

    Recently, we’ve been talking about some tricky money questions related to investing.

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

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

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

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

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

    This is another great question.

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

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

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

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

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

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

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

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

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

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

    Think about that for a moment.

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

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

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

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

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

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

    2. Pay off all credit card debt.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    The current average HELOC interest rate is 8.27%.

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

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

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

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

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

    That brings us to my next suggestion.

    4. Max out your 401(k) plan.

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

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

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

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

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

    changed priorities ahead illustrating the options you have as an investor with different account types.
    Photo by Ch_pski on Unsplash

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

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

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

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

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

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

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

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

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

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

    My 4 Favorite Investment Accounts for Long-term Wealth

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

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

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

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

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

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

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

    Let us know in the comments below.

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

    To help you start thinking about your choices, you could:

    • Invest in a traditional brokerage account;
    • Invest in real estate; or
    • Pay down your primary mortgage.

    If you’ve already made it to step 5, reach out and I’d be happy to help you think and talk about your options.

    The best way to reach me is to sign up for my weekly email and reply to any email.

  • How to Think About Investing for Retirement and College

    How to Think About Investing for Retirement and College

    We recently talked about the tricky question of whether you should invest while you’re in debt.

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

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

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

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

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

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

    Investing for retirement is a good thing.

    Helping our kids is a good thing.

    So, what should we do?

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

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

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

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

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

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

    I want to be free to retire on my terms.

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

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

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

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

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

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

    What does the math say about paying for college?

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

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

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

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

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

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

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

    Graduation with woman with purple gown on because her parents saved for retirement and college.
    Photo by MD Duran on Unsplash

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

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

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

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

    That comes out to $900 per month.

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

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

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

    There are two key reasons for that:

    1. Your child can take out student loans.

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

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

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

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

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

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

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

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

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

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

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

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

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

    The key is to start with the 4% Rule,

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

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

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

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

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

    The 4% Rule also works in reverse. 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    woman on hammock near river relaxing because she invested for her future retirement while saving for college.
    Photo by Zach Betten on Unsplash

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

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

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

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

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

    Let us know in the comments below.

  • Money on My Mind: Bears, Net Worth and Exercise

    Money on My Mind: Bears, Net Worth and Exercise

    On my journey to financial freedom, I’m consistently striving to learn as much as I can from others who have done it before me.

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

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

    What to do in a bear market.

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

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

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

    You can read my full review of The Simple Path to Wealth in my post here.

    Back to the question at hand:

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

    Nothing!

    Easier said than done, right?

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

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

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

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

    Survival experts, we are not.

    Doing nothing in a bear market is easier said than done, like not running away from a black bear when you see one on the trail up ahead.

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

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

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

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

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

    What if the market doesn’t recover?

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

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

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

    The Rise of Middle Class Multi-Millionaires

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

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

    You can read my full review of Millionaire Milestones here.

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

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

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

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

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

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

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

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

    Why is that?

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

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

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

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

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

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

    Does early retirement negatively impact your life expectancy?

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

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

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

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

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

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

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

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

    Does retiring early negatively impact your physical health?

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

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

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

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

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

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

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

    Let us know what you think about these posts.

    What do you think about these posts from popular personal finance writers?

    • Are you brave enough to do nothing in the face of a bear?
    • Have you been tricked into thinking a high income is more impressive than a high net worth?
    • What are your thoughts about the physical side of retiring early?

    Let us know in the comments below.

  • How to Think About Investing While in Debt

    How to Think About Investing While in Debt

    One of the most difficult money decisions people have to make is whether to invest while in debt. That’s because it can be challenging to plan for the future while worrying about past debts.

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

    Debt can be bad.

    Investing can be good.

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

    You can see why it’s a tricky question.

    The way I see it?

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

    You can invest while in debt.

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

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

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

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

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

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

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

    Trust me, I get it.

    I know firsthand how heavy debt can feel.

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

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

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

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

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

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

    Four main reasons to invest while in debt.

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

    Muir Woods trails illustrating the tricky choice between investing and paying off debt.
    Photo by Caleb Jones on Unsplash

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

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

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

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

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

    2. Invest while in debt to develop the habit.

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

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

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

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

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

    3. Invest while in debt because of compound interest.

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

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

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

    4. Invest while in debt because of the math.

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

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

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

    Close up of man hand using calculator to figure out whether to invest while in debt.
    Photo by Towfiqu barbhuiya on Unsplash

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    Great Talk: Money and Cheeseburgers

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

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

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

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

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

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

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

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

    Paying off debt is great.

    Investing for the future is also great.

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

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

    You have already done the hardest part.

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

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

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

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

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

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

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

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

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

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

    That’s why I allocate 75% of my available funds to debt and 25% to investments. When my debt is gone, I’ll put the full 100% to investments.

    • So, what do you think?
    • Are you currently investing while paying off debt?
    • What other factors went into your decision besides the four main reasons discussed above?

    Let us know in the comments below.

  • Best Money Mindset Book? My 9 Favorite Picks

    Best Money Mindset Book? My 9 Favorite Picks

    On my journey to financial independence, I’ve read close to 100 personal finance books. My favorite books motivate me to think about the relationship between life and money. I think of this type of book as a “money mindset book.”

    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.

    1. Rich Dad Poor Dad by Robert Kiyosaki

    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.

    2. The Psychology of Money by Morgan Housel

    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.

    3. Think and Grow Rich by Napoleon Hill

    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.

    Books on a brown wooden shelf, which includes a money mindset book to help learn about the balance between life and money.
    Photo by Susan Q Yin on Unsplash

    Hill’s book is so good because of what he reveals about these legendary figures.

    The secret?

    There was nothing mystical about any of them. Before they became legends, they were just like you and me.

    You can be successful in any walk of life if you just stop sleepwalking through life like everyone else and do something.

    Read Think and Grow Rich. This money mindset book will motivate you to do that thing you’ve been saying you would do, but haven’t yet.

    4. The Richest Man in Babylon by George S. Clason

    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.

    5. Your Money or Your Life by Vicki Robin and Joe Dominguez

    Your Money or Your Life is the complete package when it comes to money mindset books.

    Vicki Robin and Joe Dominguez are often credited for laying the groundwork for the Financial Independence Retire Early (FIRE) movement.

    While I prefer the term Financial Independence Pivot Early (FIPE), I share their viewpoints on the relationship between money, work, and time.

    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.

    6. The Millionaire Next Door by Thomas Stanley and William Danko

    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.

    7. Die with Zero by Bill Perkins

    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.

    8. Millionaire Milestones by Sam Dogen

    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.

    Girl reading a money mindset book to learn about the balance between life and money.
    Photo by Joel Muniz on Unsplash

    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.

    You can read my full review of Millionaire Milestones in my separate post here.

    Read Millionaire Milestones. This money mindset book is the Goldilocks of personal finance books.

    9. The Simple Path to Wealth by JL Collins

    The Simple Path to Wealth by JL Collins is the best money mindset book on investing I’ve ever read.

    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.

    You can read my full review of The Simple Path to Wealth in my post here.

    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.

    • Have you read these money mindset books?
    • What money mindset books am I missing?

    Let us know in the comments below.

  • Why Target Date Funds: The Easy Way to Invest

    Why Target Date Funds: The Easy Way to Invest

    Don’t be fooled. The easiest option can also be the best option.

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

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

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

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

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

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

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

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

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

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

    And, that brings us to target date funds.

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

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

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

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

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

    You do not have to do a thing. 

    It simply cannot get any easier than this.

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

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

    Learn the Language to Make Investing Easier

    What are target date funds?

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

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

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

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

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

    What types of investments are typically in target date funds?

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

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

    As explained by Vanguard:

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

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

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

    Hit your Target by investing in target date funds, whether that target is saving for retirement or something else, like your child's college.
    Photo by Artur Matosyan on Unsplash

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

    What are the advantages of investing in target date funds?

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

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

    By the way, you already know 7 things I love about index funds:

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

    For a more in depth look, check out my post here:

    7 Things I Love About Index Funds

    Target date funds automatically rebalance

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

    automatic rebalancing

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

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

    What do I mean by rebalancing?

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

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

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

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

    Target date fund or build your own?

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

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

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

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

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

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

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

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

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

    In the end, both options are good ones.

    Investing with target date funds is the easiest choice.

    How can you invest in a target date fund?

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

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

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

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

    My 4 Favorite Investment Accounts

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

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

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

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

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

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

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

    I personally invest in target date funds.

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

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

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

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

    Why target date funds?

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

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

    Are you doing things the easy way?

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

    You’ll always have people that look down upon target date funds as too basic. Ignore them. Let them stress about picking the next hot stock, rebalancing, and timing the market.

    • So, are you doing things the easy way? Are you a target date fund investor?
    • Do you agree that target date funds are an easy and effective way to invest for the long term?
    • Has anyone ever looked down on you for investing in target date funds?

    Let us know in the comments below.