Tag: wealth

Don’t Buy a Cute Condo: Do This Instead to Create Wealth.
Have you ever dreamed about owning a cute condo in a bustling city?

You know, the type of place where you can have your friends over and everyone gushes over how great your condo is?

If so, you’re not alone.

Many young professionals follow a traditional path in hopes of buying that cute condo as a “starter home.”

First, they spend a lot of money for an education to get a good job.

Then, after a few years of working that good job, they think about buying a starter home instead of continuing to rent.

These young professionals go into the home-buying process knowing that the home they may purchase will only be a temporary fit.

Even though it may be years down the road, they tell themselves they can simply upgrade if a significant other or children enter the picture.

For professionals living in cities, the search for a starter home typically leads them to condo buildings.

This makes sense. Condo buildings are attractive for a number of reasons.

I get the temptation to buy a cute condo.

Condo buildings are usually in locations ideal for young professionals.

Condo buildings oftentimes come with enticing amenities.

Plus, condo buildings typically offer one or two bedroom units, the perfect size for an individual.

Because of these features, condo buildings tend to attract other young professionals, making the building even more attractive.

While I never owned a condo in Chicago, I happily rented directly from owners in condo buildings for 10 years before buying my first rental property. So, I certainly appreciate the allure of living in a condo.

All this being said, I highly encourage you to think twice before buying a condo, or any other “starter home” for that matter.

That’s because owning a unit in a condo building comes with two significant downsides: (1) the actual cost and (2) the opportunity cost.

Instead, I recommend you think about these two alternatives to buying a starter condo:
1. Continue renting until you’re ready to buy a more permanent residence; or
2. Buy a small multifamily building where you can live in one unit and rent out the other units.
Before covering these two alternative ideas, let’s talk about the (1) actual costs of owning a condo and the (2) opportunity costs of owning a condo.

What are the actual costs of owning a condo?

The actual cost of owning a condo is like owning any other property, with one additional cost to be acutely aware of.

Besides the mortgage, insurance, taxes, and maintenance, condo buildings involve an additional cost that can be very expensive:

HOA Dues and Special Assessments.

Remember all those attractive amenities that drew you to the building in the first place?

Those amenities come with a price. Oftentimes, a substantial price.

On top of the HOA dues, be aware of unexpected special assessments, which can wreak havoc on your finances.

Special assessments may be needed to cover major maintenance or renovation projects in the building. When special assessments are due, you don’t have a choice but to pay up.

Ask any former condo owner why they no longer own a condo. My bet is most of them will blame the HOA dues and special assessments.

Photo by Point3D Commercial Imaging Ltd. on Unsplash

The other reason you’ll hear from former condo owners?

They outgrew their place.

This should not come as a surprise to any single person who buys a condo while also seeking a significant other.

You know how the saying goes: first comes love… then comes marriage… then the condo’s got to go.

That means additional money to prepare your condo for sale, for closing costs, and for moving expenses.

By the time you add up all these costs, you likely won’t walk away with any profit from owning a condo as a starter home because you only gave yourself a few years to benefit from appreciation.

Even if you do make a profit, it’s a gamble. Owning any home for a short period of time is not a good investment strategy. The transactional costs are simply too high.

Besides these actual costs, you should also consider the opportunity cost of owning a condo early in your career.

What is the opportunity cost of owning a condo?

While you may be OK with taking on the risk and these actual costs, don’t ignore the opportunity cost of owning a condo.

The opportunity cost refers to what you are losing out on by choosing to buy a condo.

In this context, the opportunity cost is that whatever you paid for the condo could have been used to invest in other assets. For example, instead of a down payment on a condo, you could have invested in stocks.

Or, you could have purchased a rental property that generates long-term wealth for you and your family (or future family). More on that below.

So, before you opt for the cute condo, think about both the actual costs and opportunity costs involved.

There’s nothing wrong with renting until you are ready to buy a more permanent home.

Owning real estate is a long-term proposition. The conventional wisdom is that you should not buy a property unless you plan to hold it for at least 7-10 years.

If you are not planning on staying in your starter home for at least that long, just keep renting. Invest your money elsewhere.

Save yourself the headaches of being a homeowner while building your net worth through an increased saving rate and other investments.

This is not groundbreaking information. This is Personal Finance 101.

Yet, many young professionals can’t resist the temptation to finally own a property after years of school and finally earning an income.

It’s up to you to set aside your ego, keep renting, and build a strong financial foundation.

By the way, many smart people think it’s financially foolish to buy a primary residence instead of renting.

And, I’m not just talking about buying a cute condo early in your career.

These really smart people think it’s almost always a better idea to rent instead of own in any circumstances.

While it’s beyond the scope of this post, you can find an in-depth analysis on the question of buying vs. renting in this video from Khan Academy.

I believe in the power of real estate as an asset class, especially small multifamily properties.

Instead of buying a condo for a starter home, consider these four reasons to invest in rental properties:
When these benefits combine, real estate investors can generate significant wealth over the long run.

Below is a quick breakdown of each of the four main benefits.

For a more detailed description of each benefit, you can read my series on investing in real estate here.

1. Rental property cash flow is king.

With cash flow, you can cover your immediate life expenses. For anybody hoping to reach financial freedom, it is essential to have income to pay for your present day life expenses.

For my money, cash flow from rental properties is the best way to pay for those immediate expenses.

If your present day expenses are already covered, you can use your cash flow to fund additional investments.

That might mean buying another rental property or investing in another asset class, like stocks.

2. Long-term wealth through appreciation.

Appreciation simply refers to the gradual increase in a property’s value over time.

While cash flow can provide for my immediate expenses, appreciation is all about the long-term benefits.

Like investing in stocks over the long run, real estate tends to go up in value. The key is to hold a property long enough to benefit from that appreciation.

To benefit from appreciation, all I really need to do is make my monthly mortgage payments, keep my property in decent condition, and let the market do the rest.

Photo by Krzysztof Hepner on Unsplash

3. With rental properties, other people pay off my debt.

When I buy a rental property, I take out a mortgage and agree to pay the bank each month until that mortgage is paid off. At all times, I remain responsible for paying back that debt.

However, I do not pay that debt back with my own money.

Instead, I rent out the property to tenants. I do my best to provide my tenants with a nice place to live in exchange for monthly rent payments.

I then use those rent payments to pay back the loan.

As my loan balance shrinks, my equity in the property increases. Equity is just another way of saying ownership interest.

When my equity in a property increases, my net worth increases.

4. Real estate investors earn massive taxes benefits.

When you earn rental income, you must report this income on your tax return. Rental income is treated the same as ordinary income.

However, the major difference between rental income and W-2 income is that there are a number of completely legal ways to deduct certain expenses from your rental income.

Common rental property expenses may include mortgage interest, property tax, operating expenses, depreciation, and repairs. We’ll touch on a few of these deductions below.

With all of these available deductions, the end result is that most savvy real estate investors pay little, or nothing, in taxes on their rental income each year.

Yes, you read that right.

I’ll say it again, just to be clear:

Most savvy real estate investors legally pay nothing in taxes on their rental income each year.

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

When you buy a small multifamily property, you can live in one of the units and rent out the others.

If you pick the right property, you can end of living for free because your tenants pay your mortgagee.

The strategy of living in a building you own while tenants pay for it has been around for ages. Brandon Turner popularized the name “House Hacking” for this timeless concept.

You can read all about house hacking on BiggerPockets here.

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

My wife and I house hacked for years before buying our forever home.

Without a doubt, there is no better strategy for entry level real estate investors than house hacking. We talked about the financial upside earlier in this post.

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

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

Ignore them.

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

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

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

Before buying that cute condo, think about house hacking instead.

There’s no better time to house hack than at the beginning of your career. This one decision can pay massive dividends for years to come.

No, your friends might not gush over your cute condo.

But, you’ll be well on your way to generating long-term wealth for you and your family.

Even if you’re not just starting out in your career, house hacking is still an incredible wealth-building strategy.

My wife and I house-hacked until I was nearly 40 years-old with two kids. We wouldn’t be where we are today if we instead opted for a cute condo.

Did you buy a starter home in your 20s or 30s? Any regrets?

What do you think of house hacking?

Let us know in the comments below.
October 10, 2025
Spend Money Based on Your Wealth Not Your Income

Let’s say you are fresh out of law school working in big law.

At the current salary scale, that means you’re making $225,000 in salary, plus another $25,000 or so in bonuses. We’ll call it $250,000 in total compensation.

That’s a lot of money.

It’s so much money, in fact, that you convince yourself you can make some lifestyle changes.

For starters, you figure it’s time to leave the old law school roommates behind and move into a nicer, but smaller apartment by yourself.

Even though the tradeoff for living by yourself is paying more in rent, you justify it because your income is so high.

Besides paying more in rent, you can’t help but order in more meals now that you’re earning a high income. Plus, you’re working long hours, afterall. Who has time to cook?

Even though you survived on frozen chicken breasts in law school, that won’t cut it anymore now that you’re a practicing attorney.

Finally, you start taking Ubers to get around town. It’s only $15 per ride, and you make more than $20,000 per month.

Even though you took the bus or the “L” home in law school, you can afford a ride! Uber it is!

Does this sound familiar to you?

Maybe it sounds completely ridiculous?

Personally, this story is all too familiar.

When I graduated law school, I spent money based on my income instead of my wealth.

As soon as I started making money after law school, I started spending on things I really didn’t need.

About a year after I graduated, I moved into an apartment by myself. I started spending more freely. I took taxis (no Ubers back then) when I could easily have hopped on the bus or walked.

What made it worse in my case was that I was not even making big law money. At the time, I was a judicial law clerk making around $70,000 per year.

It was because I was careless with my money that I fell into credit card debt so quickly after beginning my career as an attorney.

On top of my poor spending choices, I had student loan debt. Because I had debt and hardly any assets to my name, my net worth was less than zero dollars.

That means I had negative wealth, even though I was earning a decent income.

This is all background for the main question behind today’s post:

Do you spend money based on your income or based on your wealth?

Let’s revisit our fresh big law attorney who’s earning $250,000 per year.

Earlier, I said “That’s a lot of money.”

And, it is.

But, what I should have said was, “That’s a lot of income.”

See, earning a lot of money is not the same as having a lot of money.

There’s a key difference.

Income is temporary. There’s no guarantee that your income will always be there. People lose their jobs all the time. People also switch careers, which can result in lower income.

Wealth is your financial foundation. When you have money, meaning you don’t spend it, you can build wealth.

Of course, when we talk about wealth, we are talking about all of your assets minus your liabilities. This is your net worth.

When your liabilities are greater than your assets, you have a negative net worth, like I did when I graduated law school. By the way, the same is true for most people when they graduate law school.

A high income is not a bad thing, but it can be a wasted thing.

A high income means you have a lot of money coming in.

That’s not a bad thing, but it can be a wasted thing.

What you do with that money is what determines your wealth and financial progress.

If you use your high income to acquire assets, you are winning the game. The same goes for paying off your liabilities.

If you use your high income to buy expensive things, you’ll be stuck in place. At the end of the year, you’ll likely be in no better shape than someone making a fraction of what you make.

That’s why I prefer to think about how much money I keep each year, instead of how much I make.

Photo by freestocks on Unsplash

But, I thought high earners deserve to splurge!

You may think that a new lawyer earning $250,000 per year should be splurging on life’s finer things.

Would your opinion change if you acknowledged that lawyer’s net worth is a negative number?

Think about it: most new lawyers leave law school with hundreds of thousands of dollars in debt. They also have little to no assets. That means they have a negative net worth.

Should someone with a negative net worth really be splurging on a fancy apartment?

If that person is looking to build a solid financial foundation, the answer is obviously, “No.”

This person should continue living like a law student and spending in accordance with his net worth, not his income.

I recommend you use your high income to acquire assets and eliminate liabilities.

Don’t get me wrong. I am not suggesting that earning a lot of money is a bad thing.

Having a high income is a major benefit.

In fact, I recommend that all of my law students take the high paying job right out of school, if they can get it.

A high income means you can pay off your debt faster. It means you can build up your emergency savings and fund your investment accounts sooner.

There can be no doubt that a high income can accelerate your progress to financial freedom.

You just need to use that income to acquire assets and eliminate liabilities.

As you take those steps, you’ll see your net worth climb, and you’ve earned the right to start spending more.

We all know that it’s bad to live beyond our means. The problem is we don’t evaluate our means properly.

You don’t have to be a personal finance expert to know that living beyond your means is a bad idea.

Most of us intuitively understand that we should live within our means. Actually doing so can prove to be more problematic.

Part of the explanation may be that we don’t think of our spending in terms of our net worth.

We may not appreciate that if we are spending extravagantly while our net worth is still low, or even negative, we are living beyond our means. It doesn’t matter what our income level is.

That’s why I recommend you spend based on your level of wealth (your net worth) instead of your income.

Of course, this lesson applies to all of us, not just recent graduates.

This is challenging for lawyers and professionals who feel compelled to keep up with the Joneses.

When you’re making $750,000 per year, you may think you need to buy the $100,000 luxury car. Or, you may not hesitate to spend $10,000 to upgrade your family’s plane tickets to first class.

But, can you really justify that level of spending when your net worth does not match up with your income?

What happens if that income goes away?

Instead, you should prioritize saving and investing until your net worth justifies that higher spending threshold.

Photo by Shutter Speed on Unsplash

Spending money based on your wealth does not spending from your wealth.

When I say spend money based on your wealth, I don’t mean that you should spend from your wealth.

In other words, this is not a post on spending down your wealth in retirement.

Rather, what I mean is that you should consider your net worth before deciding how much of your income you are comfortable spending.

For example, if you earn $250,000 per year from your job and have a negative or low net worth, you should continue living like a law student.

If you earn $250,000 per year and have a net worth of $1M, you would be justified in splurging from time-to-time.

If you earn $250,000 per year and have a net worth of $10M, you shouldn’t worry about spending extravagantly with all of that income.

Why not worry about spending so much?

The reality is that your investment earnings on $10M will far exceed your $250,000 income from work.

Even a 5% investment return on $10M would earn $500,000 per year, double what you earn from your job. You actually might start thinking about why you still have that job in the first place.

These numbers are just for illustration purposes. Still, the idea is that your spending decisions should factor in your net worth at least as much, if not more so, than your income.

Don’t ignore your wealth when it comes to spending.

Whenever you are evaluating your current financial position, especially your spending decisions, I recommend that you focus on your wealth at least as much as your income.

Income is temporary. It can go away at any moment.

If you are fortunate enough to earn a high income, use that high income to acquire assets and pay down liabilities. That means you’ll have to avoid spending extravagantly until your level of wealth can justify it.

Wealth is foundational. Yes, there will be drops in the markets and your net worth can decrease. That is to be expected.

However, if you focus on spending in line with your net worth, you’ll naturally adjust your spending if your net worth temporarily drops. When it rises again, you can justify spending more. The key is to be flexible.

If you can think in these terms, you will build a strong financial foundation that will give you choices down the road.

At the end of the day, financial independence is all about choices.

The people who create choices for themselves will be the ones who don’t have to worry about money as they move through life.

They will be the ones with true wealth that supports extravagant spending, if they choose.

That’s not a bad thing.

Do you know people who spend money based on their income instead of their wealth?

Why do you think people fall into that trap?

Let us know in the comments below.

October 7, 2025
Invest Early and Often for the Magic of Compound Interest
There’s an infamous slogan in Chicago politics, “Vote early and often.” My professional advice: don’t do that. Instead, I prefer: “Invest early and often.”

We’ll call it the new Chicago way.

When you invest early and often, you can take advantage of the power of compound interest.

There’s very little we can control when it comes to investing. One of the main things we can control is how early we prioritize investing.

In today’s post, we’ll learn what compound interest is and why it’s so powerful in generating long-term wealth.

Invest early and often to benefit from the magic of compound interest.

Compound interest is the interest you earn on interest.

How’s that for a confusing definition?

Fortunately, the idea of compound interest makes a lot more sense with a simple example.

Let’s say you make an initial investment contribution of $1,000. Let’s assume that you earn 10% interest each year on that investment. We will also assume that you re-invest your investment gains.

After the first year, your initial contribution of $1,000 earns $100 in interest (10% of $1,000). That means after one year, you have $1,100 in your investment account.

Because we are re-investing our gains, that means that at the start of year two, yo have $1,100 to invest: $1,000 from your initial contribution plus the $100 earned in interest.

If you earn the same 10% interest on that $1,100 investment, you will have $1,210 at the end of year two.

Notice that in year two, you earned $110 in interest, whereas in year one you earned $100 in interest. That’s because in year 2, you earned interest on the interest your previously earned.

This is the key point about compound interest: you earned more money in year two, even though the interest rate remained the same and you did not contribute any additional money.

That’s how compound interest works. Compound interest is earning interest on interest you’ve previously earned.

So, why is compound interest so powerful?

Earning an additional $10 in interest year two may not seem like a lot.

Over the long run, those additional earnings add up.

Let’s look at an illustration from investor.gov of what happens to that initial $1,000 contribution over a 30-year period:

In 30 years, you will have a total of $17,449.40. That’s a pretty good result from total contributions of only $1,000.

However, for this example, that total is not the important part. The important part is to visualize how compound interest worked its magic to get that result.

Look closely as the two lines on the graph. The blue line that doesn’t change represents your initial $1,000 contribution.

The red line represents the amount of money you have over time.

Notice how in the first 10 years or so, the red line and blue line mirror each other pretty closely. Around year 12, you start to see some separation between the two lines.

While the blue line stays flat, the red line begins to arc upwards. That’s because all that interest you earned during the previous decade has been earning interest. Your investment begins to accelerate upwards without any additional contributions from you.

By the end of year 30, look at how steep the red line is jetting upwards.

We can look at the specific amount of money you’d earn each year in this hypothetical to really drive this point home.

As we mentioned earlier, you earned $100 in interest during year 1. Then, you earned $110 in interest during year 2. That’s a good, but modest, increase.

During year 12, you earned $285.31 in interest. That’s significantly more than you earned in the early years, all without any additional contributions on your part.

During year 30, you earned $1,586.31 in interest!

The more time that you stay invested, the more money you’ll earn as compound interest works its magic.

That’s the power of compound interest.

Invest early and often to be a millionaire with very little effort on your part.

Compound interest is so powerful that it can make you a millionaire with very little effort on your part. All it takes is time and consistency.

In other words, invest early and often.

Let’s look at another example to see how you can easily become a millionaire if you invest early and often.

Let’s say you begin your career after going to law school or grad school at age 25. During your first year working, you saved up $3,000 and decided to invest in a low cost index fund.

You also make a plan to contribute an additional $300 per month to your investment account for the next 40 years, setting yourself up to retire at age 65.

We’ll also assume you earn the same 10% interest from our prior example, and you don’t make any withdrawals from your account.

By the time you reach retirement age, you’ll have $1,729,110.97 in your retirement account!

That’s after contributing only $3,000 initially and $300 per month after that.

Put another way, your total contributions of only $147,000 turns into $1,729.110.97 by the end of your career.

Let’s look at the graph corresponding with these figures to once again visualize compound interest at work.

You’ll notice this graph looks almost identical to our prior example, even with the additional contributions that you make over time.

You can once again see that the blue and red lines mirror each other closely for the first 10-15 years.

Then, the blue line stays relatively flat while the red line gradually arcs up before skyrocketing towards the end.

Your personal investment picture should look similar in the long run.

Now, there’s no way to predict exactly when you’ll start to notice the magic of compound interest. There are too many variables at play.

The point is that given enough time, your personal investment trajectory should look similar because of compound interest.

You can play with the numbers in an investment calculator like the one available at investor.gov to match your personal situation.

If you’ve created a Budget After Thinking, you may be able to invest much more than $300 per month.

No matter what initial contribution you make and what interest rate you assume, you should notice a similar investment picture over the long run.

When I say investing is the easy part, this is what I mean.

I just showed you how an early contribution of $3,000 and regular contributions of $300 can turn into more than $1.7 million.

You don’t have to understand the math behind compound interest.

You just have to trust that it works.

Then, invest early and often.

Given enough time, assuming normal, historical market conditions, your investments will gradually increase before shooting up in the later years.

Read that sentence again. “Given enough time” is the key phrase.

The magic behind compound interest is time.

The earlier you can start investing, the better off you will be.

Since we can’t control investment returns, I prefer to focus on what we can control when it comes to investing.

We can control when we start investing and how long we invest for.

By making regular contributions over a long period of time, compound interest ensures that your wealth will grow.

Invest early and often.

$3,000,000 today or a penny that doubles each day for the next 30 days?

Let’s look at one more fun example to demonstrate the power of compound interest.

At the start of each personal finance class I teach, I ask my students this question:

“Would you rather have $3,000,000 today or one penny that doubles each day for the next 30 days?”

Photo by Roman Manshin on Unsplash

Maybe the fact that I’m asking the question in the first place gives away the answer. Still, some students refuse to believe that the penny could grow to more than $3,000,000 in 30 days.

The real lesson in asking this question is not that the penny ends up being worth more. The lesson is that it’s not until the very end of the time period that the penny takes the lead.

Check out this graphic from TraderLion:

If you chose the penny, for the first 20 days, you’d be feeling pretty foolish. Even after 29 days, the penny still hasn’t outpaced the guaranteed $3,000,000.

Then, by day 30, you realize the full power of compound interest. The penny ends up being worth $5,368,709.12!

Just like we saw with our prior examples, it takes time for the magic of compound interest to do its thing.

When it comes to investing, time is the most important factor that we can control. The more time you spend in the markets, the better chance you have of significantly increasing your wealth.

People smarter than you and me preach the power of compound interest.

Warren Buffett, the world’s greatest investor, fully appreciates the power of compound interest. He’s famous for saying that his favorite holding period for an asset is “forever”.

Buffet’s not literally saying that there’s never a time or reason to sell an asset, like a a stock. He’s simply making the point that compound interest benefits people who stay invested over the long term.

Photo by Jorge Alejandro Rodríguez Aldana on Unsplash

If the world’s greatest investor isn’t impressive enough for you, how about the world’s greatest thinker?

Albert Einstein is often credited with this famous quote about compound interest:

Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.

You don’t have to be as smart as Buffet or Einstein to benefit from compound interest.

You just have to invest early and often.

The Chicago Way: Invest early and often.

Let’s recap:
- Voting early and often = bad idea.
- Investing early and often = good idea.
Whether you are new to investing or have been investing for some time, never underestimate the power of compound interest.

It will take time before you see results. But, the only way you’re going to get those results is by staying patient and staying invested.

When you’re tempted to pull out of the market, remind yourself that investing is a long-term game.

Picture the graphs that show how your money can skyrocket with enough time. Remember the question about the penny doubling for 30 days. Don’t ignore the words of Buffett and Einstein.

Let compound interest do its thing.

Invest early and often. It’s the new Chicago way.
April 25, 2025
How to Get Better Results with a Higher Saving Rate
Do you remember when I asked, “What would you do with $20,000 right now?”

Did you have a plan then?

Do you have a plan now?

Let’s turn this simple question into a hypothetical scenario.

It’s time to learn one final (for now) important personal finance tracking metric, known as “saving rate.”

Congratulations on your raise!

Let’s say you’ve been at your job for a few years. Your current salary is $100,000.

It’s salary review time, and you set up a meeting with your boss. You want to make sure she remembers all your major contributions from the past year.

Prior to the meeting, you send her a letter setting forth your top accomplishments. It’s a hard letter to write. It doesn’t feel like a normal thing to have to brag about yourself.

You remember seeing a quote somewhere, “If you don’t advocate for yourself, nobody else will.” You push on and send your boss the letter.

On the day of your meeting, you’re nervous walking into your boss’ office. Why did I ask for this? She’s going to be so annoyed.

Before you even sit down, she puts your mind at ease. Your boss has a welcoming smile on her face.

She immediately thanks you for your thoughtful letter. She appreciates the reminder of all your accomplishments throughout the year.

Your boss tells you that you’ve always been a valuable member of the team. She thanks you again for reminding here of some of the specific projects you worked on that year.

It’s not a long conversation. Before you go, she asks what else the company can do to enhance your work experience. You walk out of her office feeling like a valuable member of the team.

You’re happy that you initiated the meeting, even though you didn’t enjoy the process.

A couple of weeks later, you receive an email that your salary is increasing by $20,000.

You couldn’t be happier. You earned it.

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Wait, a raise?

Work continues as normal the rest of the week. By the time your next paycheck hits your bank account, you sort of forgot that you’re now making more money.

After taxes and retirement contributions, your biweekly (every 2 weeks) paycheck is now for roughly $538 more. That comes out to $1,166 more money per month, which of course, is a very good thing.

But, you need to figure out what you’re going to do with that money.

Ideally, you’ll have a plan in place before you receive the money. Whether it’s a raise, a bonus, or you switch jobs and earn a higher salary, the thought process remains the same.

Thinking about what to do with this new money is what I’m getting at when I ask, “What would you do right now with $20,000?”

No, it’s not coming in one lump sump payment.

Fine, you have to pay taxes on the $20,000 so it’s more like $14,000 in new money.

The point of the question doesn’t change. What are you going to do with this money?

3 options for what to do when you earn more money.

You now have more income coming in each month. Let’s talk through some of the options on what you can choose to do with that excess money.
- Option 1: You do nothing. You leave the money in your checking account. Maybe you treat yourself to some extra lunches out or some concert tickets. Before you know it, these excess dollars have disappeared.
- Option 2: You tell yourself, “Man, I’m flush!” You start looking for a nicer apartment. And, you upgrade your plane ticket on your upcoming trip. You stop taking the train to work and instead opt for Ubers. Congratulations, you’ve become the real life, really lost boy.
- Option 3: You choose to put that money to work to fuel your Later Money goals. Even before you earned the $20,000, you decided that you wanted to be good with your money so you have the power to choose how to lead your life.
Spoiler alert!

I recommend you think long and hard about Option 3.

Make more money, spend about the same.

The odds are that you will make more money as your career progresses. Statistics show that the average salary for Americans tends to increase as we get older, up until about our mid-50s.

Your career trajectory may be different, and you certainly may continue to make more money well-beyond your 50s.

The takeaway is that you are most likely going to make more money. It’s up to you to make sure you put that money to good use.

The best way to supercharge progress towards your ultimate life goals:

Make more money, spend about the same.

It’s easier said than done. But, this is the key to getting ahead in life with your personal finances.

How can you measure whether you are saving more as you earn more?

By tracking your saving rate.

What is my saving rate?

Your saving rate is simply the amount of money you save each month divided by the amount of money you make.

Saving rate = Money Saved / Money Earned

Just like staying on budget with two simple numbers, you can monitor your saving progress with this simple formula.

I find it helpful to measure your saving rate based on your monthly income and savings. This way it matches up with your Budget After Thinking.

I also find it most useful to express your saving rate as a percentage. To see your saving rate percentage, all you need to do is multiply your saving rate by 100.

Saving rate % = (Money Saved / Money Earned) x 100

Moving forward, when I refer to saving rate, I will be talking about your saving rate percentage. It’s more informative to see what percentage of your money you are saving, rather than an amount with no context.

What I mean is this: if someone asked me if saving $10,000 per year was a good target, I wouldn’t be able to comment with more context.

If that person was making $75,000 per year, I would say that seems pretty good. That’s a saving rate of more than 13%.

If someone told me they were making $750,000 per year, and only saving $10,000, I would recommend that person revisit their Budget After Thinking. That’s a saving rate of only 1.3%.

Follow these tips for calculating your saving rate.

Just like we talked about when creating your budget, don’t overcomplicate this process. Here are some suggestions to help you easily calculate your saving rate:

When you calculate your saving rate, be sure to use your take-home pay for “Money Earned.” This means the amount of money that hits your bank account after taxes and retirement contributions.

Like we discussed before, you’ve already made a terrific choice by investing it for retirement. Feel good about that. For calculating your saving rate, ignore it. We are only concerned with tracking how much we are saving each month from our take-home pay.

This next part gets a little bit tricky to explain, but it’s important.

If you get paid biweekly (every other week), that means you will receive 26 paychecks every year (52 weeks / 2 = 26). If you are paid twice per month, like on the 1^st and 15^th of every month, you only receive 24 paychecks.

OK, so what?

To determine your monthly take-home pay so you can calculate your saving rate, you need to know the amount you earn for the whole year.

To figure out how much you earn in a full year, multiply the amount you receive in one paycheck by 26 (or 24). That’s your annual take home pay.

Then, to calculate how much you earn per month, divide your annual take home pay by 12. This is the amount you’re going to use for “Money Earned.”

For “Money Saved,” include all of the money you are putting towards your Later Money goals each month (except your retirement contributions through work).

I know it’s called “saving rate,” but for this purpose, include all your Later Money in the saving rate equation.

Of course, we know that “saving” is different from “investing.” Saving is also different than paying down debt or any other personal financial goal you’ve set.

It doesn’t matter. When calculating your saving rate, your goal is to see what percentage of your take-home pay is fueling our Later Money goals.

What can I learn from tracking my saving rate?

Tracking your saving rate will help you understand if you are making progress over time. It’s not about comparing yourself to someone else.

Whatever your current saving rate is, the goal is to seek personal improvement. Just like with tracking your net worth, the purpose is to see if you are making personal progress over time.

When it comes down to it, there are really only two ways to improve your saving rate.
1. You can spend less, and save more, of the money you’re currently making.
2. You can make more money and save most of that money, all while keeping your expenses the same.
Combining those two ideas is even better. Like we just said, make more money, spend about the same.

Use the excess money you make to fuel your Later Money goals.

If you can do that, your saving rate and your net worth will steadily climb. You’ll experience that your Later Money goals are closer to becoming reality than you think.

Let’s do the saving rate math together.

Now that we know what our saving rate is and why it’s such a useful metric, let’s revisit our $20,000 raise to do some math together.

Going back to our hypothetical, you were making $100,000 before your raise. Let’s assume that your take home pay was $70,000 per year after taxes and retirement plan contributions.

Let’s also assume you were putting $1,000 per month towards your Later Money goals.

Using our saving rate percentage formulas above, we see that:
- Money Earned = $5,833 per month ($70,000 / 12)
- Money Saved = $1,000 per month
- Saving Rate = $1,000 / $5,833 = .17
- Saving Rate Percentage = 17%
17% of your take home pay to fuel your Later Money goals is great!

Now, let’s see what happens if you add your entire raise to fuel your Later Money goals.

Earlier, we assumed that after taxes and retirement contributions, your take home pay increased by roughly $1,166 per month. With your raise, your annual take home pay has now climbed to $84,000, or $7,000 per month.

Look what happens to your saving rate percentage when you add the full $1,166 to Money Saved (instead of spending it)
- Money Earned = $7,000 per month ($84,000 / 12)
- Money Saved = $2,166 per month
- Saving Rate = .31
- Saving Rate Percentage = 31%
You more than doubled your monthly savings contributions and improved your saving rate to 31%!

Think about how much more quickly you can reach your goals by planning out this one decision.

I know what you’re thinking.

This guy’s no fun!

I earn a raise and he wants me to save it all.

This is just an example. I’m not suggesting you have to, or even should, save your entire raise. I want you to spend your money on things and experiences that are meaningful to you.

My point here is show you how dramatically one decision can accelerate your progress towards your goals.

If you don’t want to save the full $1,166, can you save $600 each month while enjoying the rest? That’s still an incredible improvement.

It’s your money and the choices are yours.

Before you spend the whole raise though, think and talk it out with your people.

Maybe you just need to ask yourself:

“Is spending more money right now on things I don’t really care about going to make me happier?”

“Do I even want to go out to more restaurants? Or fancier restaurants?”

“Do I despise my home/my car/my wardrobe so much that I must replace it immediately?”

Only you can answer these questions.

Maybe you’ll realize that your life is pretty good right now as it is.

You might just decide that you don’t need the extra money at this moment.

You’d rather use the money as fuel for what you really want in life.
February 7, 2025