Zero
To Some
How To
Get Out Of Debt. Gain Financial Security.
Grow Your Wealth
YOUR FINANCES
UNFUKT
Professor B.T. Effer
UnFukt Your Finances
FORWARD – Who We Are:
You should always question who advice is coming from.
So who is this F’er and why should you take our advice on unfukting your finances?
Normally, this is where your typical gooroo makes an appeal to authority and names off a bunch of
credentials OR goes for the emotional frame of “I was just like you, in debt until I learned this 1 cool
trick!!!” (Spoiler: The trick was shilling low value advice to desperate people to make money.)
Always be wary of those tiring sales tactics.
Yes. I am credentialed in all sorts of finance and risk.
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A fully credentialed actuary which means we passed the 10+ exams in what is widely regarded
as the hardest credentialing exam series
A fully credentialed as a financial analyst
A fully credentialed as a risk analyst
A day job that is designing and pricing insurance products and have my name on numerous
state filings
Cool. But that doesn’t alone make you good at finance, it
just proves you can repeat back answers to questions. And
to be honest, most of the credentialing exams are pretty
easy to pass if you are willing to study. Anyone who makes
a huge deal about some letters after their name is really
saying “I am unimpressive so I fall back on these credentials
from passing slightly difficult exams”.
[Note – per all credentials, you can’t use the official
credentials anonymously under risk of getting them revoked.
But you can easily find which ones we mean with a google
search and figure it out.]
And yes, we had a lot of debt and got out of it.
But again, this appeal to your emotions doesn’t mean you
should listen to a gooroo. Hell, most gooroos didn’t actually
fix their finances until they started making big incomes by
selling to people. There is a well-known twitter gooroo who
went from 6-figures of debt to 7-figures of net worth in
under 10 years and claims it is all due to their budgeting
system. My brother in Christ, you didn’t ‘save’ your way to
millionaire status by being froogal, you sold 7-figures of
services.
Notes & Misspellings:
One of the hardest things about
writing a book is leaving things out.
If you put too much info in, it
distracts from the main points.
Especially fun, anecdotal, or
tangential facts.
Throughout this book I will use call
out boxes like this to add these types
of information.
You will notice I like to purposely
misspell both guru and frugal with a
‘oo’ instead of a ‘u’. This is a fun way
for us to add little extra “eww” to the
terms. When you see it, really
emphasize that eww for me.
There are other words and grammar I
played with for entertainment
purposes that you will see as you
work through this book.
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Always be careful with gooroos making big impressive claims or declaring their altruism.
Arguably, if your gooroo got themselves into 6-figures of debt to begin with, you should be wary of their
advice as what they are really saying is “I wasn’t smart enough to know better”.
But F’er, didn’t you say you had over $300,000 of non-mortgage debt in your mid-20s and in under 5
years you turned your net worth very positive with just a W2? So why are you any different?
Great question.
Unlike other “got myself into debt and got out” people in the space, we:
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Didn’t rack up a ton of bad debts
Didn’t just learn basic ‘finance’ from a single book to get out of debt
Aren’t going to just repeat the common kinda-not-really useful free advice repeated adnauseum
We actually married into all of our debt. But before jumping ahead, lets start at the beginning.
Our journey started growing up in a single-mother multi-child household. Mama F’er has a lot of
wonderful qualities – loving, empathetic, charitable. But ask her to do math or about money and be
prepared for 20 minutes of sobbing.
As a young F’er in middle school, we were already helping out with the family finances. We not only
handled most of the bill paying, but also worked to help provide income for the family.
It turns out we were pretty good at the whole math and finance thing.
Fast forward, and we went to school to get a degree in Actuarial Science which is a niche job that blends
finance, math, statistics, probability, and risk-management. To be credentialed, you need to pass a
series of 7-10 exams in what is the most difficult and intense post-school credentialing process there is
(doctor, investor, accountant, and lawyer exams don’t hold a candle to the actuarial exams). Most
actuaries work in insurance companies to price, design, do the accounting, and manage risks for
insurance products.
And even at 18, we knew student loans were a scam. Instead of a ‘dream’ school or even playing
football on a partial scholarship at an expensive school, we went to a college that we could graduate
with no student loans.
After college, we went into asset management where we got to deep dive into investing and assets,
while also picking up credentials for being a financial analyst.
In short, we didn’t read a ‘Rave Damsey’ book and base our advice off it like most personal finance
gooroos out there. We have gone through the most stringent series of schooling, exams, and work
experience on these topics. We honestly built most of our system before ever even knowing there was
a whole group of people out there offering personal finance advice.
So how did we get into debt?
Marriage.
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We married into over $250,000 of student loan debt in our mid-20s. Between taking on the student
loans, having a wedding & honeymoon, moving into a house, having children, and needing a larger car,
we were in our mid-20s and suddenly had a massive amount of loans to work through.
The student loans, the hospital bill and a new car had us looking at $300k in debt for a newly married
couple with a newborn. This is considered having fukt up finances in anyone’s book.
[Note – we didn’t try to pad our stats like many gooroos who include their mortgage in their debt
number. It’s a cheap trick. “I went from $300k in debt to wealth” when all they did was pay off a
mortgage like a regular adult. And then they try to ‘help’ you despite never actually having real debt.]
Luckily, we had the skills and knowledge to tackle the problem head on.
And now we want to share all the advice with you so you too can Unfuckt Your Finances.
Disclaimer: We aren’t communists, and fully admit this is mutually beneficial. If we help you get wealthy, it helps us
grow our wealth too as you continue to leverage our expertise to get financially better off.
Seriously, give yourself a pat on the back for taking the first step
What are we going to cover?
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How to figure out just how fukt your finances currently are
Best ways to systematically get out of debt as quickly, cheaply, and efficiently as possible
How to budget and track your spending to ensure once you are out of debt you stay that way
And how to do it all without having to live a stale monk-like life of poverty and mendicancy
If you have tried other programs before and failed, don’t worry this is not a rehash of ‘don’t ever buy
anything you want’. Getting out of debt to only slog through a meager life should not be the goal.
We are excited you chose us to make this journey with you.
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Table of Contents:
Contents
FORWARD – Who We Are: ............................................................................................................................ 1
INTRODUCTION: ............................................................................................................................................ 7
Choose Your Character: ............................................................................................................................ 9
SECTION 1: Why You Financially Fukt ......................................................................................................... 10
1.1 Psychology – It starts with YOUR Mentality ..................................................................................... 11
1.1.1 Short-Term vs Long-Term Thinking ............................................................................................ 12
1.1.2 Save First, Spend Second ........................................................................................................... 14
1.2 You Know Who Loves Your Big House & Fancy Car? Your Boss....................................................... 15
1.2.1 Your Car...................................................................................................................................... 15
1.3 Majoring in the Minor ....................................................................................................................... 17
1.4 Debt, Debt, Debt, and More Debt..................................................................................................... 20
1.5 No Plan .............................................................................................................................................. 21
1.6 No Consistency.................................................................................................................................. 22
1.7 No Scrap ............................................................................................................................................ 23
1.8 But Make It Easy on Yourself ............................................................................................................ 23
1.8.1 Habit vs Behavior ....................................................................................................................... 24
1.8.2 The 4 Laws of Changing Behavior .............................................................................................. 25
1.8.3 Environment & Systems ............................................................................................................. 26
1.9 Tracking ............................................................................................................................................. 27
Section 1: Conclusions ................................................................................................................................ 28
SECTION 2: GET OUT THE HOLE .................................................................................................................. 31
2.1 Avalanche vs Snowball ...................................................................................................................... 31
2.2 Types of Debt & How to Handle Them ............................................................................................. 34
2.2.1 Credit Card Debt ........................................................................................................................ 34
2.2.2 Personal Loans ........................................................................................................................... 37
2.2.3 Home Equity Lines of Credit (HELOCs) or Variable Rate Debt ................................................... 38
2.2.4 Student Loan (Not Federal/Private) ........................................................................................... 39
2.2.5 Car Loans .................................................................................................................................... 39
2.2.6 Student Loan (Federal)............................................................................................................... 40
2.2.7 Mortgage.................................................................................................................................... 40
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2.2.7.1 Why You Shouldn’t Pay Down Your Mortgage ....................................................................... 41
2.3 Refinancing........................................................................................................................................ 45
Section 2: Conclusion .................................................................................................................................. 46
SECTION 3: Budgeting ................................................................................................................................. 48
3.1 Assess Your Situation ........................................................................................................................ 48
3.2 You Budget Basics ............................................................................................................................. 49
3.2.1 Assessing Your Situation: Example............................................................................................. 51
3.3 Car and Home Buying Rules of Thumb ............................................................................................. 58
3.3.1 Home Purchase Rule of Thumb: 30/30/3 Rule .......................................................................... 58
3.3.2 Car Purchase Rule of Thumb: 20/4/10 Rule............................................................................... 61
3.3.3 Do These Rules ALWAYS Apply? ................................................................................................ 63
3.3.4 How Getting Your Home & Car Wrong Fukts You...................................................................... 65
3.4 Saving & Investing ............................................................................................................................. 66
3.4.1 Prioritize Savings & Investing ..................................................................................................... 67
3.4.2 Emergency Fund......................................................................................................................... 68
3.4.3 Don’t Miss Out On Free Money ................................................................................................. 69
3.4.4 Extra Debt Payments Count ....................................................................................................... 69
3.4.5 Order of Investing Operations ................................................................................................... 70
3.4.6 Why Do You Need To Invest?..................................................................................................... 75
3.4.7 What To Invest In ....................................................................................................................... 75
3.5 Discretionary Spending ..................................................................................................................... 77
3.5.1 Finances Simplified .................................................................................................................... 79
3.5.2 Where Should You Spend Your Discretionary Money? ............................................................. 80
Section 3: Conclusion .............................................................................................................................. 81
SECTION 4: Make More Money .................................................................................................................. 84
4.1) Why Making More Money Is Always Financially Better .................................................................. 84
4.1.1 More Money Makes You More Robust ...................................................................................... 85
4.1.2 Your Spending Inflection Point .................................................................................................. 88
4.1.3 Can Always Cut Expenses ............................................................................................................... 91
4.2 How To Make More Money .............................................................................................................. 93
4.2.1 Ask for a Raise/Promotion ......................................................................................................... 93
4.2.2 Change Companies/Careers/Jobs .............................................................................................. 95
4.3 Add Side Hustles ........................................................................................................................... 96
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4.4 Start a Side Business ..................................................................................................................... 98
4.4.1 How to ACTUALLY Get Wealthy ............................................................................................... 101
4.2.5 Diversify Income Streams ........................................................................................................ 102
Section 4: Conclusion ............................................................................................................................ 102
OUTRO: ..................................................................................................................................................... 105
Our Parting Thoughts ................................................................................................................................ 106
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INTRODUCTION:
There is a lot of personal finance advice out there, but Americans are more in-debt and more financially
fragile than ever. Clearly something is missing – both in readily available information and in your own
financial life.
Congratulations.
You getting this book indicates you are taking your financial situation seriously. That is a big step. The
easy route would be to continue doing what you, and most of your peers, do – continue to meander
along with high debt and low savings. When society as a whole is under-saved and over-debted, it is
easy for that way of life to be normalized.
But it isn’t normal.
And if you want to get out of the rat race, you need to do things different than the average person.
This means you need to:
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Make more than average
Save more than average
Pick where to spend your money to maximize your enjoyment
Learn how to invest & what accounts to use
Build multiple streams of income
Understand opportunity cost
And so much more
There is a lot of personal finance advice out there, but Americans are in worst financial shape than
anytime we can remember. Nearly 10 million people have student loans and a double-digit percent of
people in their 40s are still struggling to pay off those loans. Over half of Americans don’t have $500 to
pay for an unexpected expense. Clearly the personal finance advice circulating isn’t helpful.
And why would it be?
You have Rave Damsey telling people to waste time putting cash in envelopes as a way to budget.
You have numerous gooroos going on about
skipping a $3 coffee to get rich.
The Twitter Budget Brigade is telling people to
waste their liquidity (aka-be financially fragile)
by paying off a 30-year 3% mortgage, when you
can earn 4% in a high-yield savings account
because…well we aren’t sure why…but it has
something to do with it being ‘more than
money’ and ‘freedom?’ (Apparently having a
$100k mortgage accruing $3k in interest a year
and a $100k in a high-yield savings account
(HYSA) earning $4k a year doesn’t give you even more freedom? Still working that out)
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And everyone tells you to use credit card balance transfers when there is a free way (which we cover
later) that saves you $1,000s while you pay off your credit card balance.
In this book, we will go over 4 main areas:
1)
2)
3)
4)
The mental – How you need to think about your finances
Getting out of debt & the types of debt
Budgeting & Spending
Making More Money
All 4 are important to fix your financial situation. They are your starting point. And they are presented
in the order that you need to approach them. If you don’t fix your unhealthy relationship with money
and you can’t budget, making more money won’t fix your problems.
For many people, the hardest part isn’t the math. It is getting over the mental impediments we set up
that put ourselves in situations that are impossible. Short-term thinking, justifying bad choices, poor
systems, and bad environments all contribute to increasing the difficulty level of reaching good finances.
Getting out of debt isn’t just a numbers game, it is just as much (if not more) behavioral. So before we
walk through how to attack your debt, we need to lay a strong foundation on how to get in the correct
frame of mind.
We believe everyone is capable of getting out of debt. All you need is a good plan, the right set-up, and
the will to live below your means.
And the best part? When you automate your finances like we lay out, you make it hard to fail.
Legitimately, once you set-up an automated system, you can go on cruise control and let it work for you.
The only way you fail is if you go and take extra steps to undo the automation.
So if you are ready, we will help you…
Get out of Debt. Gain Financial Security. Grow Your Wealthy.
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Choose Your Character:
It is helpful to compare different people’s habits in the context of financial decisions. We will use the
following 3 archetypes and wrap-up each section with how the person acts. Our 3 characters are:
Frugal Philmore:
Frugal Philmore is the life of the party…if by life of the party you mean
the guy walking around collecting empty cans and telling everyone about
how he is going to collect the deposit money and investing $4.20 into the
stock market at 10% return means $73.69 more toward his FIRE number
in retirement. Can you believe people are just throwing free cans out?
Philmore may only make $35,000 a year, but living that minimalist life
means he is projecting he can retire at age 43 and 4 months if he only
spends $13,690 a year using the 4% rule. You call it scarcity mindset, he
calls it Freedom!!!!...to sit in his 950 sq foot (Paid off) house and play
around with his budget spreadsheet.
Finance Chad:
Chad knows the secrets to success. Automate good behaviors. Increase
your income. Spend less than you make. Save aggressively. He did the
work upfront to set up a winning system and now he only needs quick
check-ins to ensure he is on track. By focusing on the big items, he has
freed up his time to grow side income, stay in shape, and unwind with
family. He weighs opportunity costs and diversifies not only his
investments, but his cashflows, and tax-basis. Credit card rewards are
free money since he pays off his balances and he is balancing staying
liquid with an emergency fund since it yields more than his debt.
Overspending Otis:
Otis has embraced the abundance mindset…”A-buncha-dis fancy stuff”
that is. He is frivolously spending without any idea of his financials. Is he
saving for retirement? Meh at some point he did something with a
401k…maybe? But Otis makes 6-figures, and he has been getting raises,
so he will grow into his spending…right? O well…YOLO bros…Lets ring
that credit card through the register, someone needs a pair of designer
sweatpants. Who has time to figure out finances when there is
sportsball to watch, IPAs to drink, sneakers to buy, and video games to
play.
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SECTION 1: Why You Financially Fukt
It is impossible to know how to fix a problem if you haven’t identified what the problem is and how you
got into trouble. Luckily, you aren’t alone. Many people are in a similar situation.
Taken from Debt.org
The statistics on debt are astounding, with household debt hitting over $14.6 Trillion in 2021 and no sign
of slowing up.
Surprisingly, the Baby Boomer generation still has massive amounts of debt despite decades of living in
one of the most booming economies and stock markets in history.
A quick internet search will turn up pages upon pages of statistics about how bad most people’s finances
are.
Let us be the first ones to say, “it is not your fault”. And we mean that whole-heartedly. Personal
finance is rarely, if ever taught. And when it is taught, the advice is unhelpful or outdated.
However, just because it wasn’t your fault, doesn’t mean you get a free pass. This is your life, and you
need to take ownership of it. Blaming others and saying you didn’t know better doesn’t undo the
damage. You need to own the situation, take responsibility, and forge a path forward to success.
Since many people are in a similar boat, we can speculate the causes of your current sub-par financial
situation. Most people are in debt because they:
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Took out a lot of student loans
o Usually in a major that resulted in an underwhelming income because no one showed
you how to do a cost-benefit analysis of your college choice
Bought a car that is outside their budget and have high monthly payments
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Don’t make enough money
Purchased more house than they should have
Racked up credit card debt chasing a lifestyle they didn’t earn
Rely on 1 income stream
Are under-saving & under-investing
Don’t have an emergency fund to deal with unforeseen expenses
o One car crash or appliance breaks and you need to take on high-interest debt to fix it,
leading to you paying way more for the item over time
Have never budgeted (yuck, we want to get you away from having to budget ASAP) and don’t
track their spending
Never set up an automated system to ensure they follow their plan
Don’t make enough money (not a typo – its just that important its here twice)
Were never taught about opportunity costs, time value of money, or investing
Grew up in a household with parents who didn’t talk about finances and likely didn’t understand
finances themselves
Stay in a job for too long and are underpaid relative their market value
Don’t have a long-term goal and live with a short-term mindset
Follow the advice of ‘gooroos’ who have them living in a scarcity mindset trying to scrimp and
save a few dollars
And don’t make enough money (did we mention you should make more money and the rest
tends to be a whole lot easier?)
That list is just off the top of our heads. If any item on the list resonates with you, then you are in the
right place.
“Sounds like my parents / society / school / government / diety of your choice / etc. failed me then”…
No.
Just because you got to this point without anyone coming to save you doesn’t mean you can blame
others. No one is coming to save you. This is on you and only you to figure out.
When you stop blaming others and focus on helping yourself it is both the scary and most empowering
thing you can do.
There is no hiding. If you take full ownership and you fail, you have no one to blame but yourself.
However, only by taking full ownership do you have the ability to actually enact meaningful change.
So what can you do?
1.1 Psychology – It starts with YOUR Mentality
Don’t worry, we aren’t going to pepper you with nice sounding but ultimately useless advice & hacks in
this book. But your mentality is the first place to start. If you don’t fix the way you think about finances
and the attitude you take to life, then all the math and planning will not be able to help you fix your
situation.
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Let’s start with a hard truth right off the bat…you don’t ‘deserve’ anything. Thinking in terms of
‘deserve’ is thinking like a child. If you don’t have kids imagine you will see it one day. The thought
process they use is “I want this, so I SHOULD get it…I deserve it”.
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“I work hard, I deserve a nice vacation”
“I have been keeping to my budget, I deserve blow it up on some purchase”
Or our personal favorite, “I’m going to start on Monday, I deserve to let loose with one last
hoorah before hunkering down ”…
No…That mentality is why you are still in this mess.
And of the 3, that last one is a real killer.
You haven’t even started yet and you are already rewarding yourself for planning to start… because you
deserve it. It is the same logic of people who plan to start a diet on the New Year, so they spend from
Halloween through the end of the year splurging, because they deserve it. They are rewarding the
vague plan to lose weight before even completing action. They gain 15lbs before they even start. Then
the new year rolls around and they stick to the plan for a few weeks and drop 5lbs. Then they are kind
of on plan for a few weeks and drop 3 more pounds. But ultimately, Valentine’s Day comes and they are
off the wagon. The end result, they gained a net 7lbs by rewarding themselves before they
accomplished anything.
Well, people do the same thing financially. If you want a nice luxury car, a big house, nice vacations, or
fancy clothes, you don’t get to buy those ahead of when you earn them. Just like splurging on huge
meals before your diet start, buying items you can’t yet afford is setting yourself up to fail.
You are robbing your future self to overspend today. You are saying “F off {Insert your name} of the
future…you are never make it out of the rat race.” Financial reckoning always comes a knockin’.
If your financial situation is fukt, you don’t get to splurge yet. No. You are fukt because you have been
spending more than you make. You have put yourself into a hole. And like the saying goes, if you want
to try to get out of a hole, the first step is to stop digging.
“The first step to getting out of a hole is to stop digging.”
1.1.1 Short-Term vs Long-Term Thinking
A major impediment to people achieving financial freedom is the time frame that they use when
thinking.
Delaying gratification and staying on a long-term plan is hard.
The world is becoming more and more dopamine-centric.
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We aren’t going to be Boomers and blame the twitter/Instagram/facebook/tik-tok/etc. We aren’t going
to point fingers at people looking for big instant wins, work-life balance, or a “you only live once (YOLO)”
mentality. We aren’t going to talk about the “attention economy” and how everything from influencers,
mainstream news, and entertainment sources are vying for your attention.
But we aren’t going to NOT mention all the above and more.
Planning for the long-term is hard.
But by focusing on the long-term you end up significantly better off. Having a long-term time
preference allows you to ignore near term fluctuations. Look at the below graphic – over the short-term
you may see dips, but if you zoom out over a longer period the overall trend is up.
It requires a major shift to start small with $50, $100, or $200 wins that you put into investments that
grow into a considerable sum of money over time.
If you put $100 a month into
investments that earn an
achievable 6% return. In 30
years, you would have over
$100,000.
That is the power of long-term
thinking. It is very easy to spend
$100, for most of us that is a
moderate dinner out.
But guess what, if you have
$100,000 invested in dividend
stocks that pay 3%, that is
$3,000 a year in income from
just your investments.
So you give up $100 a month now to get the ability to spend multiples of it later. You put in a total of
$36,000 of your cash, but grow your wealth to $100k.
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We would be willing to bet that you don’t even remember every $100 meal or item you purchased over
the years. You made the purchase or ate the meal and a few hours or days later the dopamine wore off
and you were no happier about your life.
And in this book, we are talking about saving a lot more than $100 a month. Be prepared to see your
wealth really take off when 25% of your income is going into your accounts. If you save $1,000 a month,
you hit $1 million in 30 years.
So by planning ahead and skipping the immediate dopamine hit, years later you are significantly better
off. Remember – if you want those nice things, you have to earn them. And you do it by making the
sacrifices upfront.
By sacrificing up front, the person who was investing now has so much wealth they can basically do
what they want. The person who didn’t make sacrifices early is left in the dust. Sure every year early on
the difference is small, but by spending now you never see your wealth get to an inflection point where
money is not a concern.
Read this book. Use these tips immediately and you will that inflection point. I promise.
Be a long-term thinker.
1.1.2 Save First, Spend Second
It is difficult to change your habits from “spending without thinking” to “spending thoughtfully and
saving for the long-term”. How do you get into the habit?
You need to build your budget and your thinking into a ‘save first’ mentality.
We will go through the step-by-step budget building process later in this book. In it, we start with our
savings goal ahead of our discretionary spending budget. You save your target amount first and spend
what is leftover. That way we will prioritize our savings.
“Save for yourself first, not pay yourself first”
-Professor B.T. Effer
Take your savings right off the top that way you know it gets funded. This is often referred to as ‘pay
yourself first’, but we find the phrasing subpar. Too many people hear ‘pay yourself first’ and bastardize
it to ‘buy what I want’ or ‘spend on fake improvements’ like dozens of self-help books.
Its not ‘pay yourself first, it is ‘Save for yourself first’.
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1.2 You Know Who Loves Your Big House & Fancy Car?
Your Boss
Here is a hard ‘black pill’ for many people to swallow. Your boss & your company are not your friends.
When you tell your boss about your new car and new house and how much debt you took on, they
know that you just gave up flexibility to leave the job.
You may think it sounds cynical, but these are absolutely things that get considered during talent
retention conversations. We have seen firsthand how ‘ability to leave’ and ‘desire to leave’ both get
mentioned. And do you know who gets the bigger compensation consideration?
It is not the team player who is a company lifer.
It is the person with potential who has opportunity elsewhere.
There are 2 lessons here:
1. Don’t put yourself in a financial situation where you are ever ‘stuck’, and
2. If you do, don’t ever tell your boss
Just like you want to pay the lowest price for an item or a service, your company wants to pay the
lowest price for your labor.
It is one of the ironies you will find as you get your finances in order. When you needed a job and did
everything you thought you were supposed to do, you made less than when you got financially free.
Money flows to those who need it least.
1.2.1 Your Car
How much do you make a year?
How much did you spend on your car?
How much are your ongoing payments on your car loan?
While you get the answers to those 3 questions, we will
answer the one you should be asking. Why is there a big
focus on your car payments?
Because cars are where most people overspend.
And if you are overspending on the big, fixed expenses,
you are giving yourself little leeway for the rest of your
budget.
A fixed expense is one that doesn’t change month-tomonth. If you make $1,000 a month, but have $950 a
month of fixed expenses paying debts, that doesn’t give
you much leeway to do anything with your budget to
get ahead.
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Overspending on a car tends to be a signal that you are undisciplined in all your finances…Unless you are
an actual gear head who lives and breathes cars. (However, the opposite isn’t necessarily true. You can
still be undisciplined in your finances even if you have a cheap car….looking at you lady with $20k of
purses in her closet).
Do you have the answers to the above questions?
Let’s say your numbers are:
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Make $50,000 a year AFTER tax
Purchased a $25,000 car
And have a $450 car loan payment
Next you do 2 simple calcs.
First, you are going to divide your purchase price by your annual salary.
And second, take your car loan payment multiplied by 12 and divide that annual payment by your
annual after-tax salary.
Using the numbers in our example that is:
•
•
$25,000 / $50,000 = 50%
(450 x 12 ) = $5,400 and $5,400 / $50,000 = 10.8%
These above numbers are the ballpark of what many people’s real-life situation is. What do you think?
Too much on a car? Not enough?
Well, we tipped our hand saying it was many peoples ‘real-life’ financial car situation. These numbers
are higher than recommended. The general rules around cars are:
•
•
Purchase price of a car should be <30% of your annual salary
o The ratio in the above example is 50%
Your all-in monthly car costs should be <10% of your true monthly budget
o The all-in car cost would include car loan payments, car insurance, property taxes, and
gas
o In our example the ratio is ~11% for just the car loan, meaning it is way over 10% on an
all-in basis.
If you were making $50,000 a year, the most expensive car you should be looking at is ~$15,000. If you
are making $50,000 a year, your car payment should be closer to $350 depending on the taxes &
insurance costs.
One last note. If you were to search the internet you will find a host of rules set around car purchases.
Some will say 10% or 15% of your budget can be used on monthly car payments. Some will say anything
from 10% to 40% of your annual salary for purchase price (ie- you make $100k a year and you can spend
$10k-$40k on a new car).
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Down Payment & Loan Length
For your $15k car if you look at 2
loans (ignoring all closing costs)
1) A 4-year loan at 4% interest with
a 20% down payment ($3,000)
2) A 7-yr loan at 4.25% interest and
5% down payment ($750)
You would pay $1,000 vs $1,900 in
interest over the life of the loan
And your payment is $275 vs $225 a
month.
The extra $900 in interest is material,
but if you drive the car for 10 years,
that is $90 a year extra. In the larger
picture, $90 a year is not going to
make or break your budget.
If you have higher-interest debt,
taking the extra $2,250 down
payment and $50 a month to pay that
debt down is a better use of money.
(For example, credit card with 20%
interest). Like all things, rules of
thumb are good, but you need to be a
bit flexible if you want to optimize.
The 20/4/10 rule has been growing in popularity and it is
the one we like. It states that you need to put 20% down
on your car purchase, take out a max 4-year (48 month)
loan, and the payment needs to be 10% of your monthly
budget. There is a reason why each of the 3 pieces makes
sense and we dive deeper into it later in the book.
BUT…BUT…BUT….
If you read the above and immediately thought that you
‘deserve’ a nicer car because
•
•
•
•
•
Its safer
It’s a luxury car
I commute and spend a lot of time in it
I have a family and need X feature, or
[insert whatever excuse you have here]
Go back to section 1.1. That is exactly the reason we put
that section first. You need to earn the nicer and more
expensive vehicle by earning more money.
When we had to purchase a new car to fit kids, we followed
the car buying rule and purchased something significantly
less than we could afford. Why? There were other top
priorities like paying off other debt. Having a higher car
payment would have dragged it out. We didn’t earn it yet.
If you want something, you need to go earn it.
And if you have a car that is way over the calculated
amounts above? Honestly, sell it and downgrade to
something in your budget. Then take those $100s of extra income a month to fix your finances. Once
you earn it, you can go back to getting that luxury car. But for most of you, you will likely realize that
you don’t need that expensive car and no one cares if you are driving a $30,000 car or a $130,000 car.
People are way too caught up in their own lives.
1.3 Majoring in the Minor
There is an entire industry of gooroos who’s entire schtick is to show they ‘saved’ you money.
•
•
“Skip the $3 coffee”
“Clip coupons and save $15 on groceries”
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•
“Get rid of a $10 a month subscription”
This is not a green light to spend
frivolously
The reason why this type of advice
won’t ever die, is because there is an
element of truth to it.
Yes you should control your spending
so you are saving money.
Yes you should be investing that
money so it grows
Yes you can probably skip a lot of the
things you spend money on.
But this isn’t the path to getting your
finances unfukt. It is the path to
perpetually be in survival mode.
Most importantly, it is a huge drain
on your time and mental capacity. If
you are focused on every penny and
you are spending hours on small
payoffs, you are WORSE off.
What is the value of your time? If
you can make $25 an hour, spending
an hour clipping coupons to save $15
is a $10 loss.
On and on they go. Always pointing to some other minor
item in your spending that isn’t necessary. They usually
team this up with some long-term projection that makes for
a huge number.
“Philmore is saving an extra $3 a day by cutting out drivethru coffee and if he invests that money over his career in a
passive index fund, it will grow to $180k at retirement.”
This reminds us of being in school back when the D.A.R.E
cops came in and told us all how “smoking a pack of
cigarettes cost $3 a day and if you quit smoking you could
buy a corvette”.
Man, young F’er was so excited. We ran home to our
parents to let them know that they just had to not smoke
and they could be flush with wealth!!!
Except:
•Neither of our parents smoked
•Neither of them can afford a corvette 30 yrs later
This is a great example of real-life vs fantasy.
In theory, the numbers work out. But in real-life, a few
dollars here or there isn’t moving the needle. No one got
wealthy by clipping coupons. Sure you can save some
money. And you can even diligently take that money and
invest it. And you can wait 40 years and it will be some
larger amount of money. But small thinking doesn’t result in
wealth. The absolute easiest way to save more money is to
make more money.
The easiest way to SAVE more money is to MAKE more money
-Professor B.T. Effer
We are going to say it again, because this is likely THE most important message in this entire book (we
didn’t even make you wait till the end to read it).
Shockingly, if you pick up a side hustle, that is also time you aren’t spending money. Find a way to make
some income on your off days and now you have:
1. Less free time to spend money
2. More money coming in the door
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3. Something to focus on other than obsessing over the minor
Sure, you could go the budget gooroo path and
perpetually be agonizing over spending $4. Or
you can go out and make more money. There
is a floor to how much you can cut from your
budget, but there is no limit to the money you
can make.
In the last section of the book we go over some
basics about making more money, but it is an
introduction to the idea. There are infinite
ways to make money. A lady was making 5figures a month helping rich parents name their
kids and some B-list celeb was selling bottles of
their bath water. The only thing holding you
back is trying and coming up with ideas.
Caution though, there are a lot of ‘get rich
quick’ schemes, so let us just say that there are
only 2 ways to make legit side income money.
1) You spend a lot of money on market testing,
product development, and/or advertisement
buying. OR
2) You spend a lot of time building a website,
service, or program.
“But [Insert Famous Celebrity] does [Insert Silly
Froogal Activity]”
These stories never die and froogal gooroos love
to point to them as proof being froogal gets you
rich.
“Lady Gaga clips coupons”
“Ed Sheeran lives on $1,000 a month”
“Warren Buffet drinks Coke and lives in a 60 year
old house”
It is all psyops.
For starters, when you have Lady Gaga money,
you can do what you want with your free time.
Honestly, the only justification for her doing
something so [redacted] at her net worth, is she
finds it relaxing. Her pay off would be much
higher doing something else over the time she is
clipping coupons.
Buffet is just a PR master. He has infinite fan boys
who fall for the faux-folksy attitude that gives him
a pass to be a grifter and an absolute shark.
There is no way to quickly make a ton of money
And yes. I am one of the only people in finance
with little upfront effort…otherwise everyone
who isn’t a Buffet lover.
would be doing it. But this is a good thing.
Once you start earning, you have a natural
barrier around your business as most people won’t even try. That original hurdle you have to overcome
makes your business less likely to have competition.
However, you can go find a 2nd job and start making real extra money immediately. You can pull in $10k,
$20k, or $30k and more a year with a second job. That is significantly more than you will likely make
cutting expenses.
Now, exchanging your time for money is never going to get you rich. But exchanging time for money
can help you as you unfukt the situation you are currently in. (The only way to get truly rich is through
ownership where you are getting a percent of the profits and a big payout when you sell off the
business).
In the next section we are going to talk budgets, and there are 2 key takeaways to focus on:
1) Save for yourself first – then don’t agonize over minor purchases out of your discretionary
budget
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2) The big items move the needle - knocking out a high-interest debt and freeing up cash flow is
going to do a lot more for you than clipping coupons.
Avoiding overspending on your car (section 1.2.1) will save you $10s of thousands of dollars over your
earning years while having a small impact on your lifestyle. A $15k car gets you from point A to B as well
as a $50k car. And the $35k+ you saved is moving the needle more than your Netflix subscription.
[Note – there are a host of reasons to drop the Netflix subscription. But it has to do with most people
being unable to control their viewing and getting sucked into the algorithm. We think some people go
entirely too far in ‘optimizing’ life. You can’t be going full bore 18 hours a day for days on end. There is a
benefit to having some dead time. For instance, we typically watch an episode of something a few nights
a week. 30-45 mins a day of mindless entertainment.
If you are ‘binge watching’ entire seasons of shows over the course of a weekend, you could benefit from
removing the temptation.
And with those hours of free time, you can work on increasing your income. This is the real benefit of
dropping the subscription.]
1.4 Debt, Debt, Debt, and More Debt
Debt is a major hurdle to people being financially secure. We aren’t “no-debtors”. We think there is
nothing wrong with a reasonable and manageable amount of debt.
However, most people have entirely too much debt.
•
•
•
•
•
•
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Student loan
Car loan / car lease
Mortgage
Credit card balances
401k loan
Home Equity Lines of Credit (HELOC)
Financing for major purchases (fences, pools, landscaping, patios all offer financing…hell you can
buy now & pay later for pizza delivery nowadays – that is financing your pizza.)
It is easy for the average person to quickly see their income get consumed from just paying off their
various debts from past purchases. If you are paying off things you purchased 5-years ago, you have
handicapped your ability to invest and grow wealth over the next 5 years. Stop acquiring meaningless
debt and F’ing {insert your name} of the future.
If you have very high fixed monthly costs from all your debt payments, you are going to have a very hard
time fixing your situation. You got yourself into a bad financial spot, you need to do a little ‘mea culpa’
and make a real shift to get yourself out.
BUT, don’t despair. Like most things in life, it is infinitely easier to maintain than it is to change. A little
bit of time and hard work to fix your situation and it will be much easier to maintain that new lower
level of debt. Focus, tighten down your lifestyle, fix your situation, and next thing you know you will be
in the clear.
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1.5 No Plan
Having no plan is how you got in this mess in the first place.
We are going to go outside finance for this next analogy and into one of our next favorite topics, fitness.
Have you ever met a person who is fat and yet swears they have a great diet…scratch that, they swear
they have a pristine diet. They list off what they consume and it is like the heavens parted and Arnold
Schwarzenegger himself came down with a holy scroll of what an ideal diet would be…that kind of
pristine diet.
Then you watch as they didn’t bring a lunch, so they go out and get a slice of pizza for lunch, and that
didn’t really fill them up, so you see them hitting up the vending machine later…Oh and Susan brought
in leftover cookies from her kid’s party, one cookie doesn’t hurt…or 2 or 10.
Yea, that is what not having a plan is. And that is why knowing what you SHOULD do is very different
than having a PLAN. And having a plan is very different from actually following a plan.
You need a financial plan. And you need to automate that plan so its easy to stick to it.
Otherwise, you are going to be haphazardly spending with no idea if you are making progress. Yes, you
know you shouldn’t spend $1,000 on shoes every month and if someone asks, maybe you can tell them
how to live within a budget. But you have no actual plan that you are following so one impulse buy
leads to 2 which leads to wondering where all your money went…again.
The current advice for plan setting is to make it “SMART” (Lord, forgive us for using corny acronyms, we
apologize).
Specific
Measurable
Attainable
Relevant
Time-bound
“Failing to Plan, is planning to be poor and fat”
(Ha, you thought I was going to go with the cliché “is planning to fail” threw a curveball)
“I am going to get out of debt” isn’t a plan.
“I am going to spend no more than $400 a month on discretionary items, to pay an extra $500 a month
towards debt and be debt-free in 15 months”…this is a plan.
Specific – Gives the exact amounts, the way it will be achieved, and is tailored to you.
Measurable – you can measure if you spent more than $400 a month and whether you paid an extra
$500 towards debt.
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Attainable – Let’s assume that is within the realm of achievable.
Relevant – The plan is relevant to your goal of improving your financial situation.
Time-Bound – you have 15-months to reach your goal of being debt free. You projected it out. And in
15 months you can see if you achieved your goal.
Acronyms tend to be corny, but the actual action of how to set your goal/plan is good. And now that
you have a clear goal with a clear timeline, it is time to make your plan and track it.
Perfect, but here comes the hard part….
1.6 No Consistency
You got a plan and you are all-in on it…for a while. But like most people you suffer from ‘shiny new
thing’ syndrome. You set up a plan, spent days meticulously laying out and optimizing it, and then hit
the ground in an all-out sprint. Man look at you go…annnnnnnddddd your fading…annnnnndddd you
just went on a 3 day spending bender.
Your consistency is lacking.
There are many tricks and tips out there to keep you on track.
Some people need planned limited outlets – kind of like a planned cheat day. You schedule 1 day a
month and give yourself more than your usual budget to go do something or get something. Call it a
self-allowance.
However, some people can’t ‘stop at one’ and a limited planned cheat leads to an out-of-control spiral.
Like an addict relapsing, some people are either 100% stringent or 0% and no in-between.
Some people can go for longer periods without needing positive reinforcement while others need
constant daily reminders.
One of the tricks I have used when chasing a goal is the ‘Seinfeld Hack’. Seinfeld would hang a large
calendar where it was most visible to him every day. He set a goal of writing down a joke a day. On
days where he accomplished the goal of writing at least one joke, he would put a big red X on the
calendar. After a while he would have a chain of Xs and that encouraged him. It now became a game of
“Don’t break the chain” of Xs.
This tends to work for near any goal you are primarily focusing on in life.
What should you do?
1)
2)
3)
4)
5)
Print and hang a large calendar with all 365 days of the year
Set a budget
Every day you stick to your budget you put a big red X on that day
Try to make the longest chain of Xs you can
Be brutally honest about if you stuck to the plan
Another way to stick to your plan is to automate as much of it as you can. We all suffer from decision
fatigue. Cognitively, your brain gets tired from making decisions. That is why many have the most
difficulty sticking to their plans later at night.
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Therefore, by automating good behaviors, you take any decisions or temptation out of the equation.
There is more on this later, but if you finish this book and spend a few days automating a system for
success, you don’t have to worry about fading off.
1.7 No Scrap
Growing up, being ‘scrappy’ was the nice way to say “you suck, but you never stop over-hustling despite
being undersized, uncoordinated, and unskilled”.
The quintessential pop-culture example of a ‘scrappy’ player is Rudy (real name Daniel "Rudy" Ruettiger)
from the accurately named movie Rudy. If you haven’t seen it, some small kid wants to play Notre
Dame Football (back when ND was good). He isn’t big enough to play football, not smart enough to get
into ND and dirt poor. He goes through absurd hoops to even get into ND, let alone make the practice
squad.
In the story’s conclusion, his Senior year of college, he gets to suit up on the last game of the season,
‘Senior Day’. With ND up 24-3 he finally gets into the game on the last play as a defensive end. And
(while all 21 other players are taking it easy since the play doesn’t matter), Rudy gets a sack. He gets
carried off the field because everyone has grown to love the scrappy underdog.
Anyway, more importantly to this point, most of the movie is just various ways that he gets beat down
at life and football, but never stops.
What’s this have to do with you and your fukt up financials?
1) Life is going to throw you unexpected expenses. Your car breaks down. An appliance breaks. A
medical expense surprises you.
2) If one thing goes wrong, you need to get back to the plan
Be scrappy. Don’t get discouraged if you experience a set-back. Remember, this is a long-term goal. In
the near-term there will be ups and downs, but the goal is to constantly trend in the right direction.
Don’t get discouraged if something goes not to plan. Honestly, the only thing you can 100% guarantee is
that something will absolutely go wrong at some point. You just can’t let it derail you. No ‘yo-yo’
financial progress here, you adjust and get right back on track.
If Rudy quit due to any of the 1,000s of setbacks he experienced, he never would have been carted off
the field and been a pop-culture icon. If he can spend years getting beat down and working
unglamorous jobs to hit his goal, you can spend a few months spending a little less money or earning a
side income.
1.8 But Make It Easy on Yourself
I know I know…we just said you need to have scrap and be consistent. What do we mean make it easy
on yourself?
Structure your financial life so that it is as easy as possible to stick to your plan. You do this with 2
overarching rules:
1) Make it easy to do good behaviors so you are more likely to do them
2) Make it hard to do bad behaviors so you are less likely to them
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When put that way, it is almost too simple ehh? It is painfully obvious, but so few people actually look
to set-up their situation this way.
You basically want to automate as many positive actions as you can. And consequently, you want to
make negative actions extremely manual and difficult to do.
What are some examples of making it easy to do good behavior and hard to do bad?
•
•
•
•
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If you want to save X% of your income, set your 401k contribution to that level
o You automated X% being invested and you don’t need to worry about remembering to
manually save or making contributions to your retirement accounts.
If you want to make extra payments towards a debt, automate it. First figure out how much you
want to pay. Then set-up a reoccurring deposit or transfer for that amount.
o Now you are automatically separating the money to pay your debt target from the rest
of your money. This makes is much easier to stick to your debt payoff plans.
If you want to stop impromptu spending, then 1) delete the shopping app from your phone, 2)
Make your log-in password a secure password for once (1CrZ5^2#kn1….sa^), 3) Don’t let your
browser autosave the password, 4) Never save your credit cards
o Now you can’t just “swipe right” and “insta-buy”. You need to sit at a computer, look up
your log-in, and type in a credit card manually. These extra steps will be a barrier from
making mindless purchases.
Do you make large expensive purchases that you regret? Keep only 1 credit card on you and call
the credit card company to put a low spending limit like $500.
o Now you can’t easily swipe for a $2,000 purse that catches your eye. You need to go get
a different credit card and make a specific trip to purchase the item.
Split your direct deposits into different accounts and/or set up a reoccurring transfer that
happens on the same day as your paycheck gets deposited. Most employers allow for you to
select more than 1 account to deposit to, take advantage of it and have your money go to
different accounts for different uses automatically.
o You don’t have to worry about manually transferring money to an emergency fund or
investments now and the money isn’t sitting in your one spending account where you
can overspend it.
You can get creative here. Take a look at your biggest spending problems and think of ways to make it
harder to fall into the traps. Then take a look at your financial plans and see what you can automate.
1.8.1 Habit vs Behavior
The great thing about implementing these positive behaviors? By implementing them consistently, they
become a habit. One of the easiest ways to succeed is to ingrain a behavior in your life as a habit. Here
are 2 relevant quotes:
“A habit is a behavior that has been repeated enough times to become automatic.”
“The ultimate purpose of habits is to solve the problems of life with as little energy and effort as
possible.”
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If you can turn an action into a habit, then it just becomes something you do. It is automatic. You don’t
need to think about the positive action, it just happens like clockwork… Like brushing your teeth at night
(you do brush your teeth at night right Anon?).
In fact, one of the best tricks to form a new habit is ‘habit-stacking’. This is where you take a new
behavior you want to turn into a habit and do it immediately before or after a habit you already have.
An easy example is back to toothbrushing. If you brush your teeth every night and want to incorporate
another daily practice, like let’s say being grateful. Then after you finish brushing, you stack the
behavior of saying 3 things you are grateful for. Now you have a daily habit trigger (brushing) that leads
to incorporating a new behavior (gratitudes) and eventually both are habits. And now you can stack
another one.
How does it work with finances?
One of the better automatic habit stacker ideas we have seen are with these ‘spend & invest’ cards.
(We don’t have a recommendation because all of them have at least one issue, usually related to fees).
These are the cards that will round up your purchases and put that money in an investment account for
you. If you link necessities like your utility bill, then you are automatically tying your investment
contributions to a monthly habit – paying your bill.
It is a good example, but unfortunately, that is small scale.
Another example is automatic 401k contribution increases. Every year your contribution goes up 1-3%
which corresponds with your annual salary increase. That way a portion of each raise goes to a higher
investing rate.
And if your salary doesn’t increase every year, you are actually losing income since inflation increases
your cost of living every year. This is probably a sign to look for a different job (don’t worry, there is a
section on this later).
But as of right now, habit stacking in financials is still fairly manual. The best we can offer is to set a
target amount of money to transfer to your investment account each month. And when you sit down
and pay your bills, after you pay the months bills you make the transfer. Or if you do a quarterly
budget/net worth calculation (which hopefully you be doing after this book), you make a transfer to
your investment account at that point.
Therefore, you are stacking a new behavior (putting money in your investment account) on top of a
habit (paying bills or calculating your net worth).
1.8.2 The 4 Laws of Changing Behavior
There are 4 laws of changing behavior by making it SEAN (lets agree to pronounce it SEEN not the name
‘Shawn’ since its catchier…o no, now we are making new acronyms):
1)
2)
3)
4)
Satisfying – You have to gain personal fulfillment from doing it
Easy – The easier it is, the more likely you are to do it
Attractive - The end result is pleasing and something you want
Noticeable – It has to be obvious what you have to do every time
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Setting up a satisfying and attractive goal that you make easy to achieve and obvious what to do every
day puts you in a position to follow through.
If you notice a theme, it is how we keep coming back to SEAN.
Making small, incremental changes leads to compounding over time. But on the day-to-day it can be
hard to notice and not very satisfying – which is why you need to be tracking your debt and net worth
over time. Eventually seeing your numbers go up becomes a source of satisfaction:
•
•
Adding another $100 to your account isn’t noticeable or satisfying unless you are tracking your
progress.
Setting up an automated system to achieve your goals makes it easy, but it is happening out of
view.
But if you are doing all the things we lay out, it will help you reach your goals.
1.8.3 Environment & Systems
The last 2 important aspects of modifying your behavior are your environment and your systems.
We are all creatures of our environment. There are dozens of folksy sayings about this – “you are the
average of your 5 closest friends”. If you are surrounded by spendthrifts and people living above their
means with debt, then it becomes normalized. You are influenced on the subconscious level by their
behavior, and it feels like ‘everyone is doing it’.
However, if you put yourself in an environment where other people are winning and succeeding. Then
these behaviors become normalized.
“Your net worth is a lagging measure of your financial habits.”
One of the most powerful aspects of the internet is you now have the ability to find other like-minded
people. You are no longer stuck with the group of people you know in your town. Your success isn’t
limited to the area you happened to be born in.
By far, one of the most effective things you can do to improve yourself is joining a culture with two
characteristics:
1) The behavior you want to implement in your own life is the norm for the group
2) You have commonalities with the group
We are social creatures, and the desire to fit in with your ‘tribe’ will typically overpower your own
wants. This can be positive or negative. If you surround yourself with losers, you will be drawn into
doing loser behavior. You’d subconsciously rather be wrong with the crowd than right on your own.
Similarly, surround yourself with positive people and you will be drawn to follow in positive actions.
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Second, setting up systems ensures you follow through on your goals. In times of stress or gradually
over time, we tend to revert back to our base actions. Therefore, you are only as good as the systems
you have in place.
Do you want to build an emergency fund? Set up a re-occurring deposit
Do you want to invest more? Increase your 401k contribution rate
Do you want to pay down debt faster? Set up an automatic excess payment
These things all happen automatically without you having to lift a finger. You go about your life and let
your system do the heavy lifting to keep you on track.
Lastly, a system and positive environment will keep you motivated. Changing habits today doesn’t
immediately lead to success tomorrow. It will take a while for all your actions to result in changes to
your situation. Your net worth is a lagging measure of your financial habits. This means you make the
positive changes, and then it flows through into your net worth over time.
But remember how compounding works. First it happens slow. Then it inflects and you experience
exponential growth. Your actions on any
given day may seem small, but over
weeks/months/years you make huge
leaps.
Remember, any positive action
compounds. Even a 1% growth will lead
to doubling over a long enough time
period. You just need to avoid 0 or
negative actions.
You change your behavior, and do the
right things. And then once those new
behaviors become habits, you change
more behaviors. It becomes a positive
flywheel where you keep improving at a
faster and faster rate.
Linear growth goes up by the same $ amount each year while exponential
growth goes up by the same percent. As the percent growth compounds,
it grows faster and faster.
Each time you make a positive change, your actions compound on the previous ones. And over time you
hit ‘lift-off’ and see huge jumps in your net worth.
“We first make our habits, and then our habits make us”
-John Dryden
1.9 Tracking
Finally, you need to track your progress towards your goal. You can only know where you are and how
far you have come if you are tracking your progress. If you aren’t measuring it, you aren’t managing it.
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I work in excel so it is second nature to us. But even if you have never used a spreadsheet, setting up a
plan is simple enough to do.
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You can do an internet search and find how to set up an amortization schedule in excel – there
are even templates and online tools that will do it for you
On a consistent basis you should be recording your assets and liabilities to calculate a net worth
You can project out your current situation or discount back from your goal to measure where
you are relative to your goals
It is vital to be tracking your progress. Not only to make sure you are measuring your success to keep
you motivated. But tracking helps to identify when you have missteps so you can formulate a plan of
correction.
Just don’t be a slave to your spreadsheet. Too many people start micromanaging their sheets and spend
valuable time they could be spending making real progress but are changing numbers in an excel sheet.
We go in at the end of the quarter to update our numbers. When you’re starting out, you may want to
do it more often. But no more than monthly.
And don’t worry about being exact. We know people who will go and get updated home & car prices
from Zillow and Kelley Blue Book to get an exact net worth. This not only is a waste, but can actually be
counterproductive. If your home price went up $10k based on some fairly arbitrary “Zestimate”, but
you added $5k of debt, it may show your net worth increased. However, you actually took a step back.
(We ignore car prices entirely in our net worth and haven’t changed our home price once in almost 10
years. The time to do it isn’t worth the slight increase in precision here, especially since you kind of need
a home and most of us need a car. Its not like you can go out tomorrow and sell both and realize the
value).
You want to look at your debt, your investments, your bank accounts, and other liquid things that you
are actively contributing to every month.
Section 1: Conclusions
“I thought this was a finance book, where is the finance?”
Great question – 80.69% of finance is behavioral. I could have just thrown a bunch of finance rules at
you right away. And you may have took a few and used them.
But for most people, the problem isn’t due to not knowing what to do. It is in actually executing on it
and having the right, long-term mindset.
I want to see you succeed and become financially free. This book isn’t for us to show the world how
much math & finances we know. It is to help you. Take these behavioral tricks and apply them and you
will find victory long-term.
Section 1 went deep into the behavioral and psychological aspects of improving your finances. Many of
you will blow through it, which we think is a disservice to yourselves. This section is likely far more
important than any of the number stuff. Relentlessly pursuing the worst plan will still lead to better
results than half-heartedly following the best plan.
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We deal with opportunity costs. An opportunity cost is unseen cost of a decision. Anytime you say yes
to one thing, you are implicitly saying no to others. If you put $1 into an extra debt payment instead of
your emergency fund, you see the lower interest on your debt, but what is invisible is the interest you
didn’t earn if you put it in your emergency fund.
A lot of gooroos are good at first order thinking – “$1 in debt payment is less interest I pay”.
But they fail at 2nd order thinking – “$1 in debt payment, means less interest I could have earned using
that money elsewhere.
Opportunity costs have a real expense though, and over time they add up.
Read and re-read section 1 and get your mind right. Then when you implement the strategies in the
remainder of this book (which is a great plan) you will see the best growth.
Now its time to get into the numbers.
“Relentlessly pursuing the worst plan will result in better results than half-heartedly
following the best plan.”
-Professor B.T. Effer
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Let’s revisit our 3 avatars again:
Frugal Philmore:
Frugal Philmore takes the above to an extreme. He is solely focused on
the long-term and lives a meager, unfulfilled existence waiting for the
day he can retire early. The FIRE forum is his joy where he gets to parade
around how little he spends. He may be consistent, saves a high percent
of his low income, and plans & tracks everything, but at what cost? His
entire life is majoring in the minor. His scarcity mindset means he is
eeking out pennies and spending so much time saving a buck his dollar
per hour benefit is way below minimum wage. He may hit his early
retirement target, but there is no joy in scraping by. You get one life and
he is spending it in excel tweaking some numbers.
Finance Chad:
Chad has balance. He has a plan, he is executing on it. And he is
enjoying himself in the meantime. He knows that saving an extra $3 a
day doesn’t move the needle but making an extra couple thousand a
month in side income does. Since he isn’t wasting hours to save cents,
he is able to focus on making more money and saving it aggressively. He
tracks his net worth and progress, but doesn’t tie his identity up in some
number on a spreadsheet. When life gives him lemons, he laughs,
because drinking a glass of lemon water before getting a nice walk in the
sun was on his list of to-dos anyway.
Overspending Otis:
Otis fails hard. No plans, no saving. He is racking up his credit card debt
which is burdening his future self with negative savings. He thinks he is
impressing everyone with his mid-tier tesla, and loves to make a show of
checking his entry level Rolex every 15 mins, but he is struggling to keep
up with the payments. Sure, he tells himself next year when he gets his
bonus it is the start of the new Otis. And for a week or two his finances
are on point. But the lifestyle switch is hard and having to do weekly
tasks is a drain. “I’ll just work till I drop” he nervously deflects when the
topic of retirement comes up.
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SECTION 2: GET OUT THE HOLE
Maybe you made a lot of bad choices.
Maybe life just dealt you a bad hand.
Maybe you stumbled into someone else’s financial mess.
Whatever the reason is, it doesn’t matter. You are where you are. So how do you go about fixing it?
This section is going to cover all the various debts and how to approach them.
2.1 Avalanche vs Snowball
There are 2 commonly recommended ways to pay off your debts in an organized fashion. The
Avalanche Method and the Snowball Method. Hot take – snowball is dumb and inferior in every way to
the avalanche method + an automated system.
No I don’t know why both methods are snow themed
Avalanche Method which recommends you focus all your excess payments to pay off the highest
interest debt first while paying the minimum payment on any other debt. Then you target all the excess
to the next highest interest debt, and so on until you are debt free.
The logic is that the highest interest debt is the most costly to have. If you have 2 loans:
•
•
$10k on a credit card at 20% APR and
$8k on a car loan with a 5% APR
The credit card costs you $2,000 a year in interest and the car loan only $400 a year in interest.
Therefore, you pay off the credit card first and it results in the least interest paid over the lifetime of the
loans and paying off your debt faster.
Snowball Method was made popular by Rave Damsey and it says to pay down your lowest balance debt
first. The argument is that there is a psychological benefit to seeing one debt go away. Therefore, if you
have 2 loans:
•
•
$10k on a credit card at 20% APR and
$8k on a car loan with 5% APR
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Under the snowball method you would pay off the car loan first because you could ‘get rid of it’ quicker.
And seeing the car loan ‘go away’ would ‘encourage’ you to continue on your debt paydown journey.
The clear downside to the snowball method is that you incur much more interest while paying down
your debt. Simple math says the $2,000 a year in credit card interest is bigger than the $400 a year of
car loan interest. By paying the minimum on your credit card, you continue to accrue more interest.
If you take a holistic view of your debt, you are actually paying down your total debt slower and paying
more in total to get out of debt. (See the following example as proof).
I think it is a no brainer that you go with the Avalanche Method and frankly find the Snowball method to
be stupid. If someone recommends the Snowball Method, I immediately discount anything else they
have to say.
“What about the behavioral aspects of paying off debt?” you may ask.
Well that is why we recommend automating your excess payments. That is the best way to take any
bad behavior out of it.
Additionally, since you will be tracking your progress, you should be looking at your total debt. So by
using the Avalanche Method, you will see more progress each month.
Snowball vs Avalanche Example:
We don’t want to be accused of cherry-picking anything, so we will use the example that was on
Rave’s site as of 2022.
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We then assumed you have $1,000 a month total to go towards your debt payments and put these
loans into a loan calculator to see roughly what the minimum payment might be on each:
•
•
•
•
•
$350 for Credit Card
$130 for Personal Loan
$120 for Student Loan
$250 for Car Loan #2
$60 for Car Loan #1
$910 total assumed minimum payments giving you $90 excess. Under the snowball method, you start
with the lowest balance. The $2,000 car loan #1 at 4%. Your minimum payment is $60, but you put
the extra $90 into loan #1 as well for a $150 total payment.
Once car loan 1 is paid off, you pay off the personal loan with $280 a month, the $130 minimum
payment and the $150 you were paying on car loan #1. You continue till you pay off all the debt.
You end up paying close to $30k in interest to pay off that $57k debt over the next 7 ¼ years.
Under the Avalanche method, you pay the highest interest first. So you start applying the extra $90 a
month to the credit card earning 20% and make a $440 payment each month. (Note – later in the
book we will introduce our ‘infinite 0% loan cheat code’ that will save you $1,000s in interest).
Once the credit card is paid off you would put the $440 onto the next highest APR loan that is still
outstanding
Using the Avalanche method, you pay closer to $22k in interest and pay off all your debts half a year
earlier.
The difference is huge, you pay almost 1/3rd MORE interest under the snowball method.
The reason you pay so much less and payoff your debt so much quicker with the avalanche method is
you attack the most expensive debt first. Each year that 20% credit card loan is adding roughly
$4,000 of interest ($20k x 20% = $4k). Whereas Car Loan #2 costs $680 a year ($16k x 4.25% =
$680).
We can’t recommend a method that costs you $1,000s and adds significant time in your debt paydown journey.
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2.2 Types of Debt & How to Handle Them
There are many types of debt you encounter in your life. In general, we group them into 3 buckets.
1) Bad Debts: This is your high-interest debt that you gathered making purchases. This includes
both credit card debt and personal loans for consumer spending.
2) Less Bad Debts: This is your low to medium interest debt and variable debt. It is made up of
items like student loans, car loans, and home equity loans (HELOC).
3) Mortgage: Your home is the largest purchase most of us make in our lives. However, it tends to
be some of the lowest interest debt available. The high balance and low rates make this its own
category with a separate strategy.
In general, you want to pay off your highest interest rate debt. The rest of section 2.2 will explain some
of the different types of debt. If you already understand the difference between fixed debt, variable
debt, bad debt, etc you can read this this section fast and get to the proposed payoff order and how to
lower your costs. But it is important to understand the types of debt out there and how they differ.
But if you have debt, don’t miss our ‘transfer to
purchase method’ aka ‘unlimited free debt cheat
code’.
2.2.1 Credit Card Debt
Credit cards are some of the nastiest debts around.
The typical card has 15%-30% interest rates on it.
That is some of the highest interest rates currently
out there. You should NEVER carry a credit card
balance over and accrue interest on it (see sidebar).
It is way too expensive.
You need to pay off the card as fast as possible.
One of the biggest financial traps people fall into, is
having a credit card balance and then only making
the minimum payments.
Most cards set their minimum payment around 2%
of the balance. This means if your card has a 25%
APR, you are basically paying the interest ONLY. You
essentially NEVER pay down the principal, so the
amount never decreases.
You need to prioritize paying your credit card down
to $0.
Here is some big-time alfa. Most gooroos will
recommend you transfer from high balance credit
What does “carry a balance” mean?
There is confusion around what “carrying a
balance” means.
Credit cards give you a month-long grace
period. For example, if the statement period
is Jan 15 – Feb 15th, they will send you a bill
usually by end of the month Feb with a due
date of March 15th.
As long as you pay off your purchases from
1/15-2/15 by the due date on 3/15, you will
not incur any interest charges.
Let’s say you spend $500 between 1/15 to
2/15. You get your bill and log-in on 3/10 to
pay your bill. You see a balance of $800 on
your card ($500 from the 1/15-2/15 period
and $300 you purchased between 2/16 and
today (3/10)).
You ONLY need to pay what was on the
statement you received, or $500, to avoid
interest. The additional $300 will be on the
2/15-3/15 statement that you will receive at
end of March with an 4/15 due date.
In short, you only need to pay the statement
balance to avoid interest.
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cards to a 0% APR promotional offer (usually 12-18 months of the 0% APR).
WRONG.
Transfers always come with a transfer fee of 3-5%. So you get hit upfront for interest and add to your
debt load.
2.2.1.1 ‘Purchase to transfer method’ aka Unlimited Free Debt Cheat Code
DO NOT DO BALANCE TRANSFERS for 0% APR
At least not right away…
Here is one area where we are going to strongly go against the common advice. Mostly because it is
atrocious. Balance transfers require a 5% upfront charge often. If you have $10,000 of debt, that means
you add $500 to it right away.
I know that 20% APR on your credit card looks scary. And 5% is less than 20%. But that is a 20% per
year vs 5% today. The 20% per year is more like 1.5% per month. Your $10,000 debt is getting charged
$150 a month. For a 5% balance transfer fee, you are paying nearly 4 months of interest ($150 x 4 =
$600) right away. You are giving away a lot of the benefit you gain.
(It should be no wonder why credit card companies love offering balance transfers. They get a bunch of
money upfront from you).
What do you do instead?
You open a new card that has 0% introductory APR on new PURCHASES for 12-18 months, the same as
you would for a balance transfer. BUT, then you put all your life expenses on that card. While you are
doing that, you use your income to pay off the high interest credit card debt you have. Since all of your
purchases are going on your new 0% APR card, you can use all your cashflow to throw at your old debt.
You are basically transferring your balance to the new card through purchases instead of using the
balance transfer feature.
You’ll note in the snapshots of the terms & conditions below that there is 0% APR on purchases &
transfers for 15 months…BUT, transfers get a 5% fee, whereas new purchases have no fees.
Simple math, you have a card with $2,000 balance and you spend $2,000 a month on purchases. You
have been listening to gooroos like Rave Damsey so you pay that $2,000 of monthly purchases with
cash.
Well, instead you open a new card and put the $2,000 living expenses on it at 0% APR. Then, since you
have a spare $2,000 in cash you didn’t spend on living expenses (since it is all on the new card), you use
that $2,000 to pay off your old card.
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Below are 2 screenshots of currently offered credit cards to show you how common this opportunity is.
This is not a recommendation to use either of these cards and the promotional offers tend to change
over time, but it is showing you what to look for. You want to find a card with a promotional 0% APR, a
promotional reward bonus amount, and good regular points.
And if you look at the fine print around the balance transfer, you can see what the upfront cost is to
make a balance transfer
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In case you think this is a rare occurrence, here is a 2nd card with a similar offer.
Additionally, transfers aren’t eligible for any cash back bonuses or any promotional purchase bonuses.
The Bank of America card has a $200 promotional reward for spending $1,000.
As a reminder, we are assuming you had $10,000 in debt with $2,000 of monthly expenses.
So by using our ‘purchase to transfer’ method and making purchases to transfer your balance, you get:
•
•
•
2% cash back rewards on the $10,000 which $200 in rewards dollars.
$200 of promotional cash back on your first $1,000 spend
For a total of $400 of ‘free’ money.
That means by using our method of transferring through purchases, you save $500 upfront fees on a
balance transfer (5% on the $10,000 transfer) AND then make an additional $400 in points. The net
result is $900 of free money for you!!! (net of any interest you incur as you go through the process,
which will be <1 month of interest in most cases).
This method is a swing of nearly 10% of your initial $10,000 loan vs the outdated advice of doing a
traditional balance transfer.
And remember, you don’t need to wait till the end of the month to make payments on your card. Each
payment is effective practically immediately which means you could make 2 payments as your
paychecks come through and pay less interest.
2.2.2 Personal Loans
Personal loans are uncollateralized loans (see sidebar) and typically have higher rates than a
collateralized loan.
Most personal loans start at 5% higher interest than a similar loan that has collateral.
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For example, when car loans
were 3%, most personal loans
being offered were 7.99% to
24.99%. For those with poor
credit, the higher end of the
personal loan range was
equivalent to credit card APRs.
Therefore, after you have
eliminated your credit card
debt, you likely want to go
after any outstanding personal
loans you have taken out as
these will likely have some of
the next highest interest.
2.2.3 Home Equity
Lines of Credit
(HELOCs) or
Variable Rate Debt
Collateral/Secured
Collateral is a fancy term for “is there an asset backing the loan”. It
is also referred to as a Secured Loan. When you take out a
mortgage or a car loan, there is an asset behind the loan (the house
or the car).
If you were to default, the lender/bank is able to repossess the
asset and then sell it off to recoup most of the outstanding debt.
For instance, you take out a $20k loan for a car, you default a few
years later while owing $17k. The bank takes ownership of your
vehicle and sells it at auction for $15k. They only ‘lose’ $2k.
An uncollateralized loan, means the bank just gives you money. If
you default, there is no asset to repossess, so the bank would lose
all $17k of the outstanding money you owe them.
Why do you care?
Collateralized loans tend to have significantly lower interest rates
charged to you because there is less risk to the bank. Therefore,
paying off uncollateralized loans first (credit cards and personal
loans) will be a better result for you.
HELOCs are a collateralized
loan but they are variable and
other debt you have may also be variable rates. We put HELOCs & variable rate debt next because
variable debt means it can increase on you. This next bucket includes any variable rate debt, (outside of
a regular mortgage with an adjustable rate).
(Note – if you have a variable rate mortgage you may want to consider switching to a fixed rate. Interest
rates can change quickly, as shown in 2022 when reference rates for loans went up 4.5%. People with
variable loans who didn’t switch to fixed loans are now paying significantly more than they planned. But
most variable rate mortgages have a fixed rate period. For example, a 5/1 adjustable-rate mortgage
(ARM) will have a flat fixed rate for 5 years and then a variable rate that adjusts annually after that).
Typically, a variable rate loan has a lower starting ‘teaser’ rate than equivalent fixed rate loans. BUT
that rate will change over time and could wind up being substantially higher.
Variable rate means as interest rates change, the rate on your loan will adjust. Since we are just leaving
a historically low interest rate environment (the Federal reserve is starting to increase rates), there is a
good chance that your HELOC & other variable rates will be increasing and will soon be higher than
other loans, if it is not already.
Usually, HELOCs have a period where the rate is fixed before it moves to a floating rate that is a
benchmark rate plus a fixed margin. If you look at the HELOC loan document you will likely see LIBOR +
X.XX% or Prime Rate +X.XX% or Secured Overnight Financing Rate (SOFR) index +X.XX%.
The margin is based on your credit score & the loan information. Let’s use a 2% margin and assume
SOFR was 1% when you took your loan out, that means your total APR is 3%. If interest rates go up and
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SOFR goes to 4%, then you will be paying 6% on your HELOC (4% SOFR + 2% margin). Despite doing
nothing wrong on your side, your APR doubled from 3% to 6%.
This is why we would put variable rates as next on the list to pay off UNLESS
1) the variable rate is significantly lower than your other current debts AND
2) you pay attention to markets & your bills so when rates start rising you can refi to a fixed loan
Even at that, if your variable rate is significantly lower than your other debts, it may be a sign to explore
refinancing your other debts as it indicates the loan rate market is low.
This is one case where it may not be mathematically most efficient to pay off a 4% variable loan over a
5% fixed loan, but it is a risk-focused approach. The worst case would be you get in a financial bind (lose
job), interest rates go up, and your credit score goes down. Now you can’t refinance and your 4%
variable rate is something significantly higher and just draining the little savings left.
In short, taking a risk-focused view, you should look to pay off variable rate loans or refinance them to a
fixed rate.
2.2.4 Student Loan (Not Federal/Private)
We split our student loans into 2 buckets. Federal loans (loans made through the government like Sallie
Mae, Perkins, etc.) and private student loans (loans made through banks, and consolidated or
refinanced with a lender (like SoFi)).
There is a lot of societal pressure to ‘forgive’ student loans or do something to help borrowers (iesuspend interest indefinitely, aka 0% APR). The Federal government is likely going to implement this
change to federal loans long before touching private loans.
Therefore, it is likely a relatively safe bet to pay off private student loans. But we would keep our
federal loans till later just in case the government does something.
Most private student loans have decently high interest rates due to being uncollateralized which makes
them high on our payoff priority list.
2.2.5 Car Loans
We addressed cars already – namely we recommend the car you purchase be less than 30% of your
annual after-tax income (or <20% of your total gross income should be roughly equivalent).
Car loans fall after any uncollateralized debt and variable debt as they tend to be fixed rates, lower APR
(since collateralized), and shorter periods. And worst case, you can always sell the car for something
cheaper to help with the loan which is our recommendation if you really overspent.
Most car loans are 4-7 year loans. Lower periods mean you are paying the principal down faster than
longer loans even while making the minimum payments.
The obvious caveat is that if your car loan has a higher APR you can bump it up to higher on the list to
payoff sooner.
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2.2.6 Student Loan (Federal)
Here is another area we may differ than most gooroos, but I
think federal student loans come last, right before your
mortgage. There is a chance that you get some politically
motivated assistance on federal loans and the current APRs
are still relatively low.
Depending on your situation, I may even go as far as to
recommend paying the minimum on your federal student
loans and start investing & saving. If all you have left for
debt is a mortgage & federal student loans, putting excess
cash flow into maxing out a Roth IRA is likely a good
decision. Roth IRAs have annual contribution limits, so if
you miss a year there is no way to go back and ‘make it up’.
There was a recent announcement of a $10k student loan
‘forgiveness’ and it is yet to be seen if this actually happens.
However, we wouldn’t want to pay $10k into a loan and pay
it off just in time to miss a large government bailout.
The decision is yours, but if I had federal loans with APR <5%
and an income that falls below the thresholds typically used
(around $125k for single and $250k for married tax filers), I
would likely keep paying the minimum on student loans and
shift to investing heavily.
At this point, the only debt you should have left is federal
student loans and your mortgage. Since you followed our
advice in the next section and your mortgage payment is
less than 30% of your total after-tax salary, you should be in
a strong financial position now (Congratulations). But
digging yourself out of the hole means you likely have not
been investing 25%+ of your income.
You have some catching up to do on your savings. And I
recommend you start doing it now.
2.2.7 Mortgage
Is college worth it?
There is a lot of bad information
around college. College can
absolutely help you be successful.
BUT so many people are lead astray.
Going to some resort of a dream
school and racking up 6-figures in
debt to pursue your passion of
puppetry to make $30k a year is not a
good choice.
We could write pages about
optimizing college – and likely will.
But to keep it simple here since this
book isn’t aimed at high school kids,
you should do the following:
•
•
•
•
Choose the cheapest colleges
(99.9% of people) – this may
include doing your gen-eds at a
community college and often
means going to your in-state
state school.
Apply for EVERY loan, grant, and
scholarship – there are $1,000s
sitting there that almost no one
even tries for
Choose a major that results in a
high salary
Keep your total student loan
amount under 3 months of your
starting wage – otherwise it will
be a huge burden.
o If you will make $40k
after school, no more
than $10k in loans
Mortgage…We will call this one optional.
We disagree heavily that you should put extra payments into your home mortgage.
Yes, we understand how amortization schedules work.
Yes, we understand you can knock years off the loan.
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Yes, we understand your total interest paid will be significantly less.
But, most mortgages are the cheapest debt you can have. And the extra money you put into your
mortgage immediately becomes fairly illiquid. And equity returns over the 30-year loan should
outperform the interest on your mortgage.
I would recommend you save & invest well before making extra mortgage payments.
If, at some point in the future, you have saved enough that you are approaching ‘financial freedom’,
then it makes sense to pay OFF your mortgage. Note – we didn’t say pay extra to pay it DOWN. Paying
down your mortgage just lowers your liquidity and doesn’t change your monthly expenses. We would
rather have $20k extra in a high-yield savings account for added protection than have a $20k lower
mortgage. If you lose your job, it is hard to take cash out of your mortgage.
Let’s use $1 million for simplicity here. If you have $1 million portfolio including 6 months of expenses in
an emergency fund AFTER paying off your mortgage, then you can consider paying off your mortgage.
Having no mortgage and no-debt means you are essentially bullet-proof. You can’t go bankrupt. You
have no fixed expenses. You just need to be able to afford your lifestyle.
What you don’t want is to be a ‘house rich but cash poor’ person. If you have a paid-off house and no
personal savings or investments, you are overly concentrated to the housing market and don’t have cash
available to pay for any large, unexpected expenses.
Additionally, the stock market has historically outperformed
mortgage rates. Paying extra into a 4% mortgage is the
equivalent of earning a 4% return. We would rather see
people maxing out their Roth IRA, 401k, and other
retirement accounts where the expected return is higher
than 4%.
This advice does depend on your mortgage rate. If you have
a higher mortgage rate, like over 6%, then it may make
sense to make some extra payments. The historical equity
return of the market is around 8%, but that comes with
volatility and risk. Paying extra on your mortgage is a riskfree return. A risk-free 6% return good compared to history.
But remember, any money you put towards your mortgage
is now illiquid, so make sure you have ample emergency
savings before you pay anything extra to your mortgage.
Why is paying off a 4% debt the
same as earning a 4% Return?
If you have $1k in debt at a 4% APR,
at the end of the year it grows to
$1,040. If you invested it and earned
a 4% return, the $1k would also grow
to $1,040. So you could pay you’re
your $1,000 debt today or invest
$1,000 at a 4% return and pay off the
$1,040 balance in a year. They are
essentially the same.
Therefore, when you are debating
making an extra payment on your
mortgage, the ‘return’ on that extra
payment is your mortgage rate.
2.2.7.1 Why You Shouldn’t Pay Down
Your Mortgage
I am going to let you in on a little secret. Make sure no one is looking over your shoulder, we don’t want
this getting out. One of the biggest grifts seen in the personal finance space comes from the no-debtors.
They like to play a ‘heads I win, Tails I don’t lose’ little sleight of hand when it comes to mortgages.
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Pay extra on your mortgage and you save “$XX,XXX in interest over the lifetime” and “if you pay off your
mortgage it’s like giving yourself a raise”, or our favorite “pay off your mortgage and you can never lose
your house”…
That last one is 100% incorrect by the way. You still owe taxes on your home. And since most mortgage
lenders will charge you for your taxes monthly and hold it in escrow, people don’t realize how much
their taxes are. In real life, I personally know a family who paid off their mortgage, and then when the 6month tax bill on their house came, they didn’t have the money for it and did indeed ultimately lose
their home.
So what is the sleight of hand the grifting gooroos are playing? Well there are a couple.
1) Paying extra on your mortgage is NOT the same as paying off your mortgage
2) The interest you save completely ignores the opportunity cost of extra payments
3) Paying off your mortgage can decrease your credit score and cost you more long-term
Let’s work through each of these items.
Paying extra on your mortgage is NOT the same as paying off your mortgage:
One of the big reasons to pay off your mortgage is it lowers your monthly expenses. If you don’t have a
mortgage, that is one less large, fixed expense and if you lose your job, you have a lower cost of living.
But paying down your mortgage actually makes you significantly more fragile.
Let’s say you have a monthly mortgage payment of $1,500. You pay an extra $10k into your mortgage.
What is your new monthly mortgage payment?
It is still $1,500.
You haven’t actually lowered your monthly payments. You have the same fixed costs.
Now what if you get hit by a bus and get a $9,000 medical bill? You can’t call your mortgage lender and
say “Just playing, can I have that $10k back?”. The extra equity you put in your home is hard to access.
You can apply for a HELOC or a cash-out refinance. But if your financial situation has deteriorated to the
point you need to pull money out of your home, that likely means the lender is going to view you as
risky. Risky borrowers get bad rates.
And both loans have issues. HELOCs are typically floating rates, which means the future rate you pay
can reset to be much higher. And cash-out refinances always have higher rates than regular refinances.
So you paid extra into your 4% mortgage, and now you are paying:
•
•
Closing costs of a few thousand to take out a new loan
A higher rate than 4% on the money you took out
The alternative is you put the $10k into your high-yield savings account. Now you get hit by a bus, but
you have liquid assets right there you can use.
So the entire time you are paying extra into your mortgage instead of building a big emergency fund, it
puts you in a worse spot financially.
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If you want to pay extra for a mortgage we only recommend it IF the following 2 conditions are met:
1) Your emergency fund is yielding less than or equal to your mortgage rate
2) You would have 6-months of expenses in your emergency fund AFTER you paid your mortgage
off
If you owe $100k on your mortgage and you have $130k in a HYSA ($100k for the mortgage and $30k for
6-months of expenses) and your mortgage is 4% but your HYSA is yielding 3%, then paying off your
mortgage makes sense.
You can now pay off your mortgage, lower your monthly costs by getting rid of your $1,500 payment,
and still have security in case you need to access your emergency fund.
The Interest Saved Ignores Opportunity Costs
And the no-debtors are one trick ponies. Even when mortgage rates were at all-time historical lows of
sub 3%, no-debtors were encouraging people to make extra payments. Guess what that cost you?
Future optionality.
No-debtors do 1st order thinking. “I am paying interest on my mortgage and paying extra saves
interest.” They will typically use lifetime interest saved to support this, “With your $300,000 mortgage
at 4% you will pay $215k in interest over 30 years, but if you pay extra and pay off your mortgage in 20
years you only pay $135k in interest saving you $80k!!!!”.
That sounds impressive. $80,000 of interest saved is a lot.
But it ignores the 2nd order impact of the opportunity cost of the decision. Every dollar extra you spend
on your mortgage is a dollar you are not using elsewhere. If you can invest that money and earn 8%
returns, you are actually worse off overall.
Paying a 4% debt is the equivalent of a 4% annual return.
The extra payments needed to pay off a $300k mortgage with 4% APR in 20 years instead of 30 years is
~$400. If you invest $400 and earn 8% per year over 20 years, you would have over $230k in that
investment account.
So yes, you save $80k, but the opportunity cost you give up from not investing in potentially higher
returns over the same 20 years could be $230k. Your net benefit is a $150k loss in net worth by paying
off your mortgage early.
Granted, stock returns are not guaranteed and have their own risks. And this assumes you are diligent
with putting the extra money into investments. But the point is, you can’t just focus on the interest and
ignore the opportunity cost of the decision.
“There are lies, damned lies, and statistics.”
-Mark Twain
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But we can go even a step further. In 2023, interest rates on HYSA are above recent mortgage rates.
But people are still calling to put extra money into your mortgage.
Hindsight is 20/20, but if you have a 30-year mortgage at historically low rates, if interest rates go up
towards their historical average at any point in the next 30 years, you have the option to put your
money in a HYSA and earn more than you pay in your mortgage.
And this is exactly what happened. You can currently deposit your money in HYSA at 4% while having a
30-year fixed mortgage at 2.5%. This means on that $10k deposit you are making more money holding
it in cash-equivalent than you would have saved in interest. Suddenly paying extra on your mortgage
doesn’t seem so great.
Remember, there are lies, damned lies, and statistics. That quote means you can get statistics to
support anything you want. And people use statistics to bolster their weak arguments, often by
omitting opportunity costs and counterarguments.
Downsides of paying off your mortgage
Something that doesn’t get discussed is the downsides of paying off a mortgage early. Interestingly, the
people who are drawn to this tend to also be people who despise credit cards and are in the no-debtor
camp. Their credit score is largely only from having a mortgage. But once you pay off your mortgage, it
eventually gets removed from your credit score.
I know people who are strident no-debtors and paid off a mortgage and then were surprised to find out
they were viewed as poor borrowers. Their credit scores were terrible since the biggest drivers of your
credit score is payment history on open lines of credit, the ratio of your credit card balance vs available
credit, and age of your credit.
When you have no credit cards and your mortgage gets removed from your report, all those big drivers
of a good credit score are gone and you will end up with a bad score.
Having debt just for a good credit score isn’t smart, but before you make a major financial decision like
spending years paying off a mortgage, you should know the downsides.
Additionally, you still need to pay your property taxes and homeowners insurance. If you have a
mortgage, your lender will typically charge you 1/12th of the annual fee for both these items every
month. The cash sits in an escrow account and then your lender pays the bills when they are due (either
annually or semi-annually).
If you pay off your mortgage, you need to make sure you have cash to pay these potentially large
payments when they come due.
If some high-cost areas of living, your escrow payment can be over 40% of your total monthly mortgage
bill.
This is another reason why we say to only pay off your mortgage when you have a big emergency fund,
so if a $5,000 property tax comes due, you have money available to pay it.
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2.3 Refinancing
Here is another area that we differ from many gooroos. People like Rave Damsey recommend taking
the shortest loans you can. So instead of a 30-year home loan gooroos recommend you take a 15-year
fixed loan and instead of a 7-year car loan they recommend you take a 4-year car loan.
Yes, the lower maturity the loan is, the lower the APR on the loan is, marginally. But you are forcing
yourself into a higher monthly payment.
We don’t like being forced into higher fixed expenses. It gives you less leeway.
Looking at current rates on a 30-year fixed vs 15-year fixed mortgage it is about 0.50% more expensive
to have a 30-year mortgage. Let’s assume you have a $300,000 mortgage and a 30-year rate is 5.5% and
a 15-year rate is 5.0%. Then you are paying:
•
•
•
$2,375 per month on a 15-year
$1,700 per month on a 30-year
$675 more per month for a 15-year over a 30-year
Over 15-years you would pay over $125k in interest on the 15-year loan but nearly $315k on the 30year. Yikes.
But if you made a $2,375 payment on your 30-year (ie- pay the $1,700 required payment and a $675
excess payment) you would pay off your 30-year mortgage in 180 months and pay a total of around
$150k in interest. So you would only have the mortgage for 9 extra months and pay $25k more over 15years (this averages to $1,700 extra interest a year for 15 years).
However, if you lose your job and chose a 30-year, you could have an extra $675 in expense cuts that
you couldn’t with the 15-year. The 0.5% extra interest is the fee you pay for having optionality.
If you look at recent times, you could get a 30-year for 2.5% and a 15-year for 2%. But now savings
accounts have 4% yields. That means you can put that $675 excess amount into a savings account and
earn MORE money on it (4%) than it costs in interest (2.5%) which means you make money.
Here are 2 examples of why paying a little extra for additional flexibility makes sense:
1) You can have a lower fixed expense if finances get tight
2) You have the ability to use the extra money for better return opportunities if they arise
When we refinance, we typically look to also push out the maturity date on the loan. Sure we may pay a
marginally higher APR, BUT it gives us max flexibility. Again, you can always opt to pay excess into a loan
and make your longer-loan short. But the inverse isn’t true – you can’t pay less than the minimum
payment on a shorter loan if you lose your job or if you want to use the cash for a better opportunity.
And nearly all debt nowadays has no prepayment penalties. Meaning you can still make the higher
payment and pay down the principal just as fast.
Lastly, if interest rates come down, you should consider refinancing all your outstanding debt at lower
rates. And you should consider re-extending the maturity if it makes sense.
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If you had a 5% mortgage from 2015 and refinanced it to a new 30-year in 2021 at 2.5%, your payment
could have dropped from $1,600 to $1,100. That is giving you an extra $500 of flexibility each month.
You could always choose to keep paying the $1,600 and pay off your mortgage in a little over 15 years
but refinancing down and out (lower rate and longer maturity) made a lot of sense.
Section 2: Conclusion
Section 2 we went in depth about the various types of debt most people have. You should now know
the differences between your debt and a general order of payoff to use:
1)
2)
3)
4)
5)
6)
7)
Credit cards
Personal loans
HELOCs & Variable loans
Private student loans
Car loan
Federal student loans
Optional - Mortgage
This is a generalized list though. For instance, if you graduated during a low-rate environment and took
a car loan in a high rate environment, you may pay the higher fixed APR car loan before your lower fixed
APR private loan. Or if your variable loan is really low and doesn’t reset for a while, you may pay fixed
car loans before your variable loan switches to variable.
The reason we put the avalanche method up front was to highlight that you should look at APRs.
However, in a steady interest rate environment, the above ranking of the 7 debts should suffice.
Lastly, remember to consider refinancing loans. In 2020-2021, you were able to refinance:
•
•
•
At lower APRs
With extended maturities
And lowered monthly payments
Locking in low rates and low payments gives you maximum flexibility.
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Frugal Philmore:
Philmore’s mental disorder…err…frugality started when he graduated
college with student loan debt. $169k in loans for a degree in his passion
of puppetry didn’t work out as planned. Now he is a proud no-debtor.
He pays for everything in cash. Despite all his planning, Philmore is a
Rave Damsey acolyte and snowballed his debt. It may have cost him
$1,000s extra in interest, but FIRE forum told him snowball is superior.
Sure his wife left him for being insufferable pinch-penny, but he paid off
that 2.25% mortgage loan. Yeah, he could have invested money over the
last 10 yrs in a stock market that increased 12% a year…but that would
have cost the smug satisfaction of being able to rhetorically ask “Is there
anything better than having no mortgage payment?”...Grandma’s funeral
isn’t the place Philmore
Finance Chad:
Debt is a drag. But Chad knows being singularly focused is suboptimal.
He strategically refinanced all his debt to low rates and used the
‘purchase to transfer’ method to float some at 0% APRs too. Equity in a
home is hard to access, so he makes sure he has ample emergency funds
before even considering paying extra on the mortgage. Then he realizes
high-yield savings accounts are earning 4% so it’s a no brainer what to
do. Since he has a manageable debt-load with low interest, he spreads
his excess money between getting out of debt and investing aggressively.
All that extra income means his debt-to-income ratio is low and his
robust emergency funds mean he is liquid and secure.
Overspending Otis:
Debt? Debt is Otis’ middle name (actually it is Gladys after his great
aunt…maybe the kids making fun of his old lady middle name was the
start of the burning insecurity that has his him seeking the attention of
strangers)…any who, Otis is in debt up to his eyeballs, and that isn’t
figurative, he got some sweet designer glasses on a 10-yr buy now pay
later plan with a floating rate. It seemed like a steal at the time, but now
that interest rates are up he is paying 14% APR on those, who knew that
floating rate meant it could go up after the teaser period? Otis kept
hearing about refinancing when rates were low, but never got around to
it. O well, time to open a new credit card and pay 5% for a balance
transfer to keep his head above water another month.
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SECTION 3: Budgeting
I view budgets as a short-term stop gap, not the saviors that many gooroos make them out to be. We
will go over the exact system of automation and spending tracking that I personally use and think is
infinitely better than a life-long budget (belch).
However, when you are in a hole, you need to do different things to get out of the hole.
If your finances are fukt, there is a good chance you haven’t ever set a budget up. You can’t fix a
problem until you have identified what it is you are trying to fix. And you won’t know if you are on track
unless you have a way to monitor your progress compared to your plan.
So how do you do a budget?
3.1 Assess Your Situation
I think budgets have a very limited use and most people are better off without them. It reinforces a
scarcity mindset and takes up so much of your mental capacity worrying about your budget. This isn’t a
prescription to frivolously spend, there are just better ways to do it over the long-term.
That said, you can’t fix what you don’t know. If your financial situation is fukt, step 1 is to assess your
situation so you can make a plan to clean it up.
This is going to require a bit of work upfront on your end, but it will be very much worth it in the end.
(Don’t worry, we will walk through an example after we layout the steps)
Scarcity Mindset vs Abundance Mindset
These are overused and under-understood terms.
Abundance mindset has morphed into “When I stopped being frugal and started spending money,
that is when the universe gave more money back to me.” You may have seen some 24-year old
twitter “marketing gooroo” tweet about “buying a house I couldn’t afford to motivate me to hustle
more to pay for it”…what?
If spending money made you money, no one would be in debt.
When we use scarcity mindset, it is people who have a very small slice and think that is all they will
ever get.
So Budgetors who make $50k a year and spend all their time trying to move numbers on a
spreadsheet and cut expenses more. You have a small slice, and are just going to eat it slow so it
feels bigger.
Abundance mindset means you see that there is a lot of money out there and you are going to get
some. You spend your time increasing the size of your slice.
As such, we view budgeting as an exercise you need to do as you unfukt your finances, but longterm your goal should be to increase your income, build a system to automate your finances, and
never have to look at a budget again.
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3.2 You Budget Basics
Before we lay out the steps to calculating a budget, first we are going to lay out the general framework.
Here are the things that are important to succeed:
1) Automate taking your savings right off the top – “Save for yourself first”
2) 50/25/25 – This rule says to spend 50% of your income on non-discretionary, essential items like
mortgage, utilities, and minim payments on debt; Save 25%; and use 25% on discretionary
spending
3) Use after-tax money in your calculation as that is the income you actually bring in
So how do you do this?
Step 1: Gather All Your Re-Occurring Essential Expenses
What are re-occurring essential expenses?
Things like rent or mortgage, student loans, minimum payments on credit cards, car loans, property
taxes, insurance, etc. These are the items you have to pay every month or quarter.
Notice that we are looking only at the minimum payments that you must pay at this point.
Put them all down in a spreadsheet.
Step 2: Get Your True Monthly Income
You want to look at your after-tax take home pay, but before any optional deductions for savings.
A deduction like health insurance is not optional in this case. A deduction like a 401k contribution or
employee stock purchase plan (ESPP) contribution are optional retirement deductions however.
If you are a W2 salaried employee, this is easy, you have your salary. You can look at your paystub and
just subtract your tax withholding and non-optional deductions from your gross payment. Assuming you
get paid every other week like most salaried employees, you multiply this number by 2. If you get paid
weekly, multiply this number by 4.
(This will actually under calculate how much you make a year, don’t worry it’s on purpose…keep
reading).
If you are an hourly employee, you should look back at the last 6 months and see how much you made
each month. Assuming there wasn’t anything unexpected or out of the ordinary over that period, the
next step is to take the lowest month’s after-tax earnings.
Again, we want to set our plan to work for every month, so you want the lowest month’s earnings. If
you use an average, then there is a chance that you end up over budget when a slow month happens.
And then we can use the extra money on good months or the extra paycheck months for W2-ers to
make leaps in our progress.
We distinguish between this ‘true’ monthly income above vs the typical monthly income calculation that
takes your annual pre-tax (gross) salary divided by 12 months. If you ignore taxes and you ignore that
49
most months you make LESS due to how the pay cycle lands, you are planning to overspend right out of
the gate. That isn’t a good way to start.
So now you have your true monthly after-tax income.
Step 3: Calculate your Savings
Your savings is going to be the bucket of money you use to build an emergency fund, pay off debt faster,
and invest to grow your wealth. We want to target at least 25% of our pay for this bucket.
Ideally, you want to get to the point where you are investing more than 25% of your after-tax pay that
we calculated in step 2. But we likely aren’t there yet. However, you can take the number from step 2
and multiply it by 25% to see what it is to motivate you.
If you want to see how powerful investing 25% of your after-tax pay is, take a look at the box below:
How Much Can You Save At 25% Savings Rate
Age
25
30
35
40
45
50
55
$
$
$
$
$
$
$
(Assuming 8% Annual Return & Retirement at Age 65)
After-Tax Monthly Income
$2,000
$4,000
$6,000
$8,000
1,757,141 $ 3,514,281 $ 5,271,422 $ 7,028,562
1,154,588 $ 2,309,175 $ 3,463,763 $ 4,618,350
750,148 $ 1,500,295 $ 2,250,443 $ 3,000,590
478,683 $
957,367 $ 1,436,050 $ 1,914,733
296,474 $
592,947 $
889,421 $ 1,185,894
174,173 $
348,345 $
522,518 $
696,690
92,083 $
184,166 $
276,249 $
368,331
$
$
$
$
$
$
$
$10,000
8,785,703
5,772,938
3,750,738
2,393,416
1,482,368
870,863
460,414
Look up your nearest age and the nearest after-tax monthly income from step 2. If you are 35 and
you calculated $4,000 in step 2, you could accumulate over $1.5 million in savings by time you retire
at 65, assuming you can save & invest 25% of your income ($1,000 a month).
But this number doesn’t take into account any potential raises. A monthly income of $4,000 aftertax is roughly $50,000 a year after-tax or $60-$70,000 gross annual income. So assuming you make
$65,000 every year from 35 to 65 without ever getting a raise, you can still save over $1.5 million for
retirement if you can get to a 25% savings rate. Not bad.
Step 4: The Remainder Is Your ‘Budget’ For Your Monthly Spending
Assuming your re-occurring, essential expenses are about 50% of your after-tax pay and you save 25%,
that leaves roughly another 25% to use for all your discretionary purchases.
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This 25% is what you use for your living: food, gas, clothes, phone, entertainment, etc.
If your monthly after-tax salary is $4,000, that gives you $1,000 a month to spend as you wish. ($4,000
after-tax monthly pay is approximately a $60-70,000 annual pre-tax salary). This may not seem like a lot
and may be less than you are used to spending, but that is why you are here and we are unfukt-ing your
finances.
The good thing about this rule, if you truly can’t live on the 25% spending allowance, that means you
aren’t making enough money for where you live. We will address this more later, but in short you need
to make more money…or move to a cheaper location….or both.
Genuinely, it may just be picking up 1 or 2 shifts waitressing, landscaping, etc or maybe you build an
entire side hustle…or you start with a 2nd part time job and work on a side hustle for the longer-term.
Here is an exhibit for your ideal starting point when looking at your budgeting.
3.2.1 Assessing Your Situation: Example
Here is an example showing how to calculate the 4 steps above. Let’s assume monthly income is $4,000
a month. This is your after-tax take home pay. This would work out to around $65,000 annual pre-tax
salary (assuming a 20% tax rate). We show in step 2 how to get your monthly income amount.
With $4,000 in monthly income, your 50/25/25 rule states you should spend roughly:
•
•
•
$2,000 on essentials
$1,000 goes to savings and investing
$1,000 for discretionary spending
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Now going through the 4 steps above:
Step 1: Gather All Your Re-Occurring Essential Expenses
The below exhibit covers a lot of the expenses I would consider as essential and re-occurring. In this
example, your total essential expenses would be $2,000 a month.
Monthly Cost *Note – your minimum payment is an essential
Rent / Mortgage
$
1,200 item (ie-you have to pay the minimum). All the
Car Payment
$
400 extra payments you make to lower the
Student Loan Payment
$
150 outstanding balance come out of your nonMinimum Credit Card Payment $
50 essential budget lines.
Expense
Life Insurance
Utilities
Property Tax ($600 per year)
Total
$
$
$
$
50
100
50
2,000
Perfect, it works out to exactly $2,000.
Step 2: Get Your “True” Monthly
Income
Get some sample W2 or paystubs. You are going to look at your after-tax monthly income. The easiest
way to do this is to start with your net pay (what hits your bank account) and add back in any optional
items that get deducted out.
For example, if you are paying into the company 401k or if you chose to have the company life insurance
(which you probably shouldn’t do, unless your employer subsidizes the insurance. see sidebar) those
items get added back into your monthly income.
When we calculated the monthly after-tax income, we took your bi-weekly paycheck times 2 or monthly
paycheck by 4.
But if you did the math:
For bi-weekly paychecks, we assumed 2 paychecks a month for 12 months in a year => 2 x 12 = 48
weeks.
For weekly paychecks, we similarly assumed 4 paychecks a month for 12 months => 4 x 12 = 48 weeks.
We know there are more than 48 weeks in a year.
•
•
4 times a year there is a month that will have 5 pay-days for a weekly pay cycle and
2 times a year there is a month that will have 3 pay-days for a bi-weekly pay cycle
This means 2-4 times a year you get a bonus check above and beyond your monthly budgeted amount.
This is perfect for an additional savings/investment or to make a bonus payment on some of your debt.
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The small red boxes indicate the paydays in 2021. April & October were the 2 months with 3 pay periods
We set our plan up ignoring these bonus checks because they don’t happen every month. If you start
your budget from the top and take your annual pay divided by 12, you wind up with a number you won’t
get every month (see below).
Taking your after-tax pay and dividing by 12 assumes you get $8,333 a month. But if you plan to spend
25% of this ~$2,085, 10 months of the year you will overspend what gets deposited in your account
since you only get 2 paychecks ($6,154 which 25% of is ~$1,535). So 10 months of the year you are
spending $500 more than you should.
Yes, 2 months you get a 3rd paycheck and get a ‘bonus’ $3,000+, but the timing difference gets people in
trouble. Spending like you get 1/12th of your pay every month leads to overdrafting checking accounts
($35-50 charge for each overdraft) or carrying a credit card balance until a 3 pay check month.
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Whereas living off the 2 paycheck a month number and using that bonus paycheck to pad your
emergency fund, checking account buffer, or add to your investments helps you be more robust.
My company offers ‘group life insurance’, should I use it?
How life insurance works is that an insurance company sells a lot of policies. Then bundles them
together to manage the risk as a block.
It is hard to know when 1 person is going to die. But if you have a group of 100,000 people, you can
have a good guess how many die this year, next year, etc.
A person who dies in the first year only paid 1 small premium and the insurance company is making
a large benefit payment. However, the people who live longer than expected pay more premiums in
and that subsidizes the cost of the early deaths.
Insurance is competitive and in order to attract more healthy people insurance companies will
charge less to healthier lives. They do this by underwriting you (draw blood & have you do a checkup).
The insurance you get through work doesn’t come with underwriting. Instead, the insurance
company looks at the health of your company as a whole and charges a flat price to everyone.
If you are healthier than the average person at your job, you can get a significantly cheaper price
buying insurance on your own. And you should buy insurance – most people should have term life
insurance with coverage greater than 10x their annual gross income. Your premium on life
insurance is considered part of your essential items.
If you are very unhealthy (for one, fix that), but you will likely get a better price through the
company plan.
For most of you, the price you would pay on an individual policy will be much less than the price you
pay on supplemental group life insurance coverage. Since only the unhealthy people should buy the
company group policy, it basically means you are paying the high price of the least healthy people at
your company.
Only caveat is if your company pays for some of the insurance premium as an ancillary benefit. If its
free, you take the life insurance.
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The image above is from ADP which is a common third-party admin for paying salary. There is a good
chance that if you receive paper copies of your paycheck it looks similar to this. I added 3 colored boxes
to the paycheck.
There is a common misunderstanding
around taxes.
The green box shows your gross wage information. This
is before any taxes or deductions. Typically this shows
you a breakdown of the hours you worked: regular pay,
paid time off, overtime, etc.
The taxes that come out of your paycheck
are not PAID at that time. Similarly, when
you ‘do’ your taxes around March, if you
get money ‘back’ it isn’t the IRS giving you
money.
The red box is all your taxes that get taken out of your
check for the year. This will be federal income tax, any
state income tax if you are unfortunate enough to live
in a state with income tax, and your Social
Security/Medicare taxes.
The money that comes out of your
paycheck for taxes is being withheld. You
can think of it like they are being
deposited into a government account and
waiting for you to fill out your tax form.
The blue box is your additional deductions. This area
will show you any additional deductions you have
chosen. Things like 401k contributions, group insurance
through your employer, stock purchase plans, and
health insurance/HSA contributions will show up here.
If you put more money into the gov’t
account throughout the year than what
you need to, you get the excess money
back. This is why tax returns are referred
to as ‘interest free loans’ to the
government. It is YOUR money they had
sitting in an account that wasn’t earning
any interest for YOU.
To get your true monthly income, you can take the
gross income amount (green box) and subtract your
taxes (red box) and any health insurance premiums
(from green box). Or you can take your ending take
home pay on the check add back in any optional
additional deductions like 401k & HSA contributions but
ignore taxes & health insurance. Both ways will get you
to your true after-tax monthly income.
If you typically get a sizable tax return,
you may want to consider decreasing your
withholding amount each pay period.
Then taking that extra money to pay down
debts you have or to invest. That way you
are making money with it.
This is going to give you a much different number than
most people think of. People typically take their gross
annual income and divide it by 12 months to get a
monthly income. Maybe they take some taxes off, but
often they don’t even do that.
We personally like to OWE a small amount
of money at tax time. That means we had
access to the money for the year.
Your actual working number needs to account for 2
things:
Taxes Paid vs Taxes Withheld
As with all things taxes, consult a tax
professional about your personal
situation.
This is wrong.
1) Your taxes
2) Your pay cycle
Otherwise, you wind up with a number that is much
higher than you typically get to spend every month.
This is setting you up to overspend most months of the year. You need to base your budget off the
actual lowest expected income in a month so you don’t go over.
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Step 3: Calculate your Savings & Investing
Savings consists of any money you put into investments, emergency funds, or additional payments on
debt over the minimum required amount.
For example, if you
•
•
•
•
•
Contribute $200 a month to your 401k
Employer matches $150 a month
Invest $500 a month into a ROTH IRA
Pay an extra $150 a month into your student loan over the minimum payment (this is ‘investing’
in paying down your debt faster)
Contribute $150 a month to building up your emergency fund
That would result in a ‘savings & investing amount’ of $1,150 a month of which $1,000 is your budgeted
contribution and $150 if ‘free’ money from your employer.
Notice that you are building in a little buffer in the
above. You have earmarked $1,000 for savings and
investing from your own paycheck. BUT, you get a $150
employer match on your 401k contribution. This means
your actual savings and investing is even higher. But
again, we like to budget around the money you put in
and let that extra ‘free’ money from your employer
match be a nice pad on top.
Step 4: The Rest is Discretionary
The rest of your money is discretionary, meaning it is up
to you on how you want to use it. In this example, this
is $1,000 a month for eating out, buying items, etc.
Here is the wonderful part of our budget system. If you
have 3 accounts you can segregate your money such
that you have:
“Free” Money From Employer
A 401k match may not be the only ‘free’
money you get from your employer.
If you have an employee stock purchase
plan (ESPP), you are often able to get
shares at up to 15% discounts to market
value. That means you get $100 of your
company stock for $85. You can typically
turn around and sell this amount
immediately.
This results in a ‘free’ 15% return (pretax). You can sell the shares right away
(usually paid quarterly) and get ‘free’
money.
There is a little more to it than that, but if
1. An essential checking account where you deposit
your employer offers a discounted stock
all your essential expenses, (~$2,000 a month in our
purchase plan, it is valuable to look into it.
example)
o Note – if you are making reoccurring excess
payments on debt, you can use your essential account for these payments as well. So in the
above example, you could deposit $2,150 into your essential checking account and set up
automatic withdrawals for paying your rent/mortgage, minimum debt payments and excess
debt payments
2. An emergency fund account where you deposit your desired emergency fund of $150 a month
o Remember – have a separate emergency fund account in a high-yield savings account
(HYSA). Keep this fund separate from the accounts you pay your essential and discretionary
spending in. That way you won’t accidentally spend it and it grows over time. Also, most
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HYSA have limits on how many transactions you can make, so you don’t want to be paying
out of it.
3. A discretionary checking account where the rest of your money gets deposited, and you spend your
monthly living expenses out of.
If you use the 3-account system, it simplifies your life. Your essential account is being funded with
enough money to pay all your essential bills. You are making 401k contributions and setting up
automatic transfers so you are hitting your 25% saving & investing target.
Now you just need to monitor your discretionary account and ensure you don’t spend more than you
are putting into it. In the above example, you are depositing $1,000 a month into it, which means you
can spend up to $1,000 a month out of it. This system is automated and simple once set up (you only
need to track your discretionary spending account to make sure you don’t overspend).
3.3 Car and Home Buying Rules of Thumb
For most people, their home is their biggest purchase, and their car is the purchase they are most likely
to overspend on. There are a couple heuristics, or rules of thumb, that can help guide you in your
purchase decisions so you don’t overspend on these 2 major items.
The majority of people buy a house that is too big and a car that is too expensive to appear to be rich
while barely scraping by. We aren’t trying to follow the majority. We are trying to actually grow our
wealth. Remember, you don’t deserve these things, you need to earn these things. It is much better to
appear moderately well-off while having lots of wealth than vice versa.
3.3.1 Home Purchase Rule of Thumb: 30/30/3 Rule
The rule of thumb I like for purchasing a home is the 30/30/3 rule. This rule states that when buying a
home you use the following 3 guidelines:
•
•
•
30% - Your monthly mortgage payment shouldn’t be more than 30% of your true monthly
income
30% - Your emergency fund should be 30% of the purchase price of your home before you make
the purchase
3 – Your total mortgage should be no more than 3 times your annual income
For example, if you make $100,000 a year, your true monthly income is approximately $6,150 assuming
a 20% tax rate. This means that your total mortgage (including escrow for taxes and home insurance)
should be less than $1,850 (30% x $6,150 = $1,850).
The best part of this rule is that it takes into account all 3 important parts of a home purchase:
•
•
Home purchase price is capped based on your income
You can make a down payment of 20% to eliminate private mortgage insurance charges and get
the best rate on your mortgage since you save up 30% of the purchase price in your emergency
fund before buying a home, and
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•
A monthly all-in mortgage payment that fits in your 50/25/25 budget. Since your home is only
30% of your true monthly income, it leaves you with 20% for other essentials like minimum
payments on debts, car loans, utilities, etc.
If you follow this rule correctly, you are buying a home that you can afford without stretching your
budget and hindering your ability to save, invest, and grow your wealth.
Our 30/30/3 Rule differs from what is recommended online though.
If you go and search the 30/30/3 rule online, you will get a slightly different version that uses your gross
income (pre-tax) and ignores your escrow account items in your monthly payment (property taxes and
homeowner’s insurance).
It may seem nuanced, but it is a HUGE difference.
First, taxes matter. If you live in a high-tax state, you can bring home significantly less. California has a
13% income tax. That is 13% less money you have. That is real and it is foolish to ignore it by using your
base income.
Property taxes also differ greatly based on where you live. The difference can be nearly $1,000 a month
for an average sized house. And the same goes for homeowner’s insurance which can vary by nearly
$10k a year depending on if you live in a high-risk area for natural disasters.
These are not trivial numbers. See the below example for proof. If you follow the online method you
use:
•
•
•
Annual gross income
Monthly gross income = annual income / 12
o Remember, most months your actual paycheck is less than your annual number divided
by 12. For bi-weekly pay cycles, you get 26 checks, which means you have 10 months of
the year with only 2 paychecks and 2 months a year with 3 checks. That means 10
months of the year, your home is taking well more than 30% of your take-home pay.
Ignores escrow items in the mortgage payment, which as I said, can be $10s of thousands of
extra costs a year that you need to pay.
So by following the online rule, you may think you are being smart with your purchase and then you can
wind up seeing over 40%-50%+ of your take-home pay going towards paying for a home. Suddenly, your
entire budget is blown up and homes are not liquid or cheap to sell. It can be a very costly mistake.
There is a reason we spent a lot of time talking about a ‘true’ monthly income number earlier. This is
your personal number that you need to use for your calculations.
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Example of Our method vs online 30/30/3
Let’s say 2 people make the same $100,000 a year (~$8,300 a month taking $100k /12 aka the wrong
way) and pay the same 20% federal tax rate (FIT).
But person A lives in a high-tax state and pays 10% more state income tax (SIT). Additionally, their
property tax and homeowners insurance cost an extra $6,000 a year or $500 a month.
If you use gross income as many online resources recommend, these 2 people have the same ability
to purchase a home. You will calculate both people could buy a $300k home at 5% mortgage
($1,600 monthly mortgage payment)
•
•
3 x $100k = $300k
$8,300 a month x 30% = $2,500
Person A is using the online method. They buy a $360k home putting 20% down for a $300k
mortgage based on $100k x 3. They see their ‘mortgage payment’ is $1,600 as they ignore escrow.
They think their monthly paycheck is $8,333 because they are taking $100k / 12. And taking 30% of
$8,333 is a $2,500 month mortgage. They buy the house and in their mind:
•
•
•
They can afford a $2,500 monthly mortgage, but only have a $1,600 payment
They followed a 3x your annual income rule and have a $300k mortgage
They put 20% down
They hit all the online recommendations. But in reality, due to high taxes and high escrow items,
what they actually have is:
•
•
An all-in (interest, principal, and escrow) mortgage of $2,200 vs an after-tax true monthly
income of $5,385
So 10 months of the year they are actually paying 41% of their take-home pay towards their
mortgage
o They pay $2,200 when they only see $5,385 deposited in their account (assuming no
other withdrawals for 401k or health insurance, etc)
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Compare this to person B who took the same mortgage out but pays lower taxes and has lower
escrow items. They follow the same 30/30/3 guideline but:
•
•
An all-in (interest, principal, and escrow) mortgage of $1,700 vs an after-tax true
monthly income of $6,154
So 10 months of the year they are actually paying 28% of their take home pay
towards their mortgage
o Pay $1,700 when they see $6,154 deposited in their account (assuming no
other withdrawals for 401k or health insurance, etc)
This means both people thought they were following the 30/30/3 rule, but one is paying 41% of their
take home pay most months and the other is only paying 28%.
No wonder why people can’t get ahead even though they try. They are getting poor generic advice.
We didn’t forget about you renters – you aren’t off the hook. You should still follow 1/3rd of the
30/30/3 rule. Your rent shouldn’t be more than 30% of your true monthly income.
3.3.2 Car Purchase Rule of Thumb: 20/4/10 Rule
Us financial guys apparently really like 3 number rules. For cars, the 20/4/10 rule is our preferred
purchase buying heuristic. The 20/4/10 rule states that when you buy a car you should:
•
•
•
20% - Put a 20% down payment
4 – Only take a 4-year loan
10% - Your monthly car payment should be less than 10% of your true monthly income
We will again differ from your typical online advice and say you use your ‘true’ monthly income for the
10% part of the rule and you include your all-in vehicle costs (property tax and car insurance). For all the
same reasons listed above, if you live in a high-tax state and have high property tax, then you run the
risk of buying a car that is too expensive for your real-life situation. If you are following the generic
online advice, you may calculate a 10% limit on a gross basis and end up paying 15%+ of your actual
bring home monthly income.
So if you were to end up paying 40% on a home and 15% on a car because you used gross income, you
are already over your 50% budget for essentials on just those 2 items. Ouch.
We won’t re-prove that using gross numbers and ignoring property tax and insurance costs can lead you
astray.
If you make $100k a year pre-tax and $80k a year after-tax for a $6,150 true monthly income. If you can
get a 4-year auto loan at a 6% rate, then you could look to purchase a car worth up to $32,500 if you put
20% down. This results in a loan amount of $26,000.
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The resulting loan would have a payment of almost $615 a month (10% of your true monthly income).
And an important piece to this rule of thumb is the 4-year loan. You base the calc off a 4-year loan to as
it leads to higher payments and prevents you from buying a car that’s too expensive. Rough math, an 8year loan would have monthly payments a bit more than half a 4-year loan. If you buy the most
expensive car you can with a longer loan period, you will wind up with a car almost twice as much. That
is twice as much debt you need to ultimately pay off and $10,000s of money you aren’t investing and
growing your net worth.
Using the same $32,500 car with a 6% auto loan and comparing a 4-year and 7-year loan period results
in:
•
•
$235 lower monthly payment with the 7 year: $615 vs $380 monthly payment, but
$2,600 more interest paid over the life of the loan: $3,310 vs $5,905
And worse, people will buy a car that maxes out their monthly payment. So if you take a 7 year loan
instead of a 4-year and use 10% of monthly income, you could get a car worth $48,000. Therefore, using
a 4 year loan is good for normalizing this rule to keep you from overspending.
However, on the flip side, if rates are really low, your cost of a longer loan is less. At a 2.5% rate, you
pay $2,080 in total interest on a 7-year loan and $1,320 on a 4-year loan. With low interest rates, things
are much more close.
But note a key point above. You ALWAYS calculate how much car you can buy using a 4-year loan. If
you strategically decide that low interest rates make it beneficial to get a longer loan, that is fine. But
you don’t purchase a more expensive car. You purchase the same car with a max price of $32,500 in the
example above. People get in trouble by taking the longer loan and maxing out their payments using a
lower monthly payment number.
Cars are different from houses (where taking the max 30-year loan is recommended) because you need
to replace cars more frequently. You may have 5-10 cars over your adult life and if you use the longer
car loan to get more expensive cars you may wind up with 6-figures of additional car payments. That is
money that could have been making you rich.
Additionally, one of the worst things you can do, even worse than leasing cars which gets a lot of hate, is
buy a new car every few years. Car values depreciate quickly over the first few years. Buying a car and
then a few years later trading it in for a new car means you are getting significantly less value for the
trade-in. You are eating all the high depreciation in the car value and then trading it in for a new car to
eat more high depreciation all over again.
The best thing to do is to own your car for a long-time. Not only do you get the benefit of a paid off car
for many years, but later in your ownership the value of the car doesn’t change much.
Let’s say you purchase a new car with a 4-year loan for $30k. You drive it off the lot and it is only worth
$27,000. By the end of the first year it is down 20% to $24,000 and after 5 years it is down 40% to $18k.
That is a $12k loss in value or $2,400 per year.
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But on average, the car depreciates about 15% a year after that. So if you wait till year 10, that car is
worth $8,000. It is only down another $10k in value and each year after that it starts decreasing by
about $1,000 a year.
The longer you own a car, the less the value goes down.
Now older cars don’t have a warranty and need more expensive upkeep. So at some point the cost of
keeping the car running is more than the benefit of having an old car. But that is the point in time
where it is ideal to trade it in for a newer one.
Doing this can add $1,000s of savings to your net worth every year.
If you want a rule of thumb, 8-10 years is a good minimum length of time to own a car.
What is the summary?
1. Don’t buy an expensive car you can’t afford
a. It will eat up too much cashflow
2. Don’t take out a long loan to buy more car than you
can afford
a. It will cost you way too much pretending to
be rich
3. Use the 20/4/10 rule to find a car in your budget
a. If loan rates are low, you may calculate your
purchase price using 20/4/10 and a 4-year
loan, purchase a car at that price point, but
then choose for a longer loan
b. If you choose a longer loan, you will have
lower payments and you must invest or
save the difference
4. Don’t buy a new car every few years
a. Plan to drive whatever car you purchase at
least 8-10 years before trading it in
3.3.3 Do These Rules ALWAYS
Apply?
Having clear rules is great, but it is a double-edged
sword sometimes. If you know anyone who is wealthy
but still does absurd things to save a dollar because
they followed a rule their whole life, you know what I
mean.
These 2 rules give you guidance on what is considered a
‘reasonable’ purchase for your income level. But, they
aren’t necessarily set in stone.
Why does your car lose value as soon as
you drive it off the lot?
You often hear that a car loses 10% of its
value as soon as you drive it off the lot. Is
it true and why?
Yes. It is true that if you buy a car and
drive down the street and try to sell it,
you will get significantly less value than
you paid for it.
But this isn’t some conspiracy.
The reason why this happens is due to
information asymmetry, which is a fancy
way to say “you, the owner of the car, has
more information than the buyer, so the
buyer wants a bigger buffer”. You know
what happened as you drove down the
street, while the buyer of the car doesn’t.
You have more information.
Take an extreme example, you buy a new
car, drive around the corner and put sand
in the gas tank. You know you set a time
bomb, but the buyer doesn’t. The
information is asymmetric in the seller’s
favor.
So the buyer isn’t going to pay the same
price as they would for a new car from a
dealership. Hence the big decrease in
value almost immediately.
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And more important, they are maximums, not targets. Just because you CAN afford a particular
house/car, doesn’t always mean you SHOULD go right up to the max. You can always opt to spend
less….despite what Mrs. F’er tell me.
Additionally, there may be times that both the 20/4/10 and 30/30/3 rule aren’t a good fit for your
personal situation. For example, if you are in a career that has fast income growth and you have a
growing family, and house prices are cheap, it may (keyword MAY) make sense to get a slightly more
expensive home upfront rather than wait a few years and have to swap into a new bigger house.
After accounting for closing costs to both buy and sell a
home and the fact that your early mortgage payments
barely make a dent in your loan balance, it rarely makes
financial sense to move out of a home before living there
nearly 10 years.
•
•
Buyer’s closing costs 2-5%
Seller’s closing costs 8-10%
If you sell one home and buy another, that is 10-15%
closing costs. For a $300,000 home, this means $30,000
to $45,000 in closing costs. And this doesn’t include all
the additional frictional costs of moving, fixing things,
renovations, etc.
So if you have a 5% mortgage rate on a 30-year loan, you
only pay off $25,500 of your $300k mortgage in 5 years
and $57,000 in 10 years. So it takes 7-8 years just to
amortize enough of your loan to match the closing costs
you pay.
If you buy a home with 2 bedrooms and need to move in
3 years because you have 3 kids, it can be financially
worse than if you buy a slightly larger home to grow into
that you hold onto for a while. Or, you could rent for a
few years while you get your financial house in order.
And remember, if the value of your home went up, that
likely means the value of the home you are looking to
purchase also went up.
What do you do if you already have
too big of a mortgage?
Unlike an expensive car that you can
more easily trade-in for a less
expensive ride, if you purchased too
much house it is significantly harder
to downgrade. (see closing costs).
Unfortunately, this is a situation
where you need to hustle your way
out of the hole. All is not lost though.
First, if you get a chance to refi at a
lower rate, take it. This will lower
your monthly payment.
Second, you still need to get your
25% savings & investing, which
means you will need to lower your
discretionary spending. Additionally,
you can lower other essential items
like trading an affordable car to a
cheap one to lower your car
payment.
Third, you need to increase your
income until you can get your house
into the recommended budget rule.
So step up your side income game.
Lastly, maybe you have a high income, but tons of debt.
This is expanded on this in Section 4.
Someone like a dentist may earn $250k a year, but be
leaving dental school with $400k in student loans at 30 years old. You may be able to get an expensive
luxury car under the 20/4/10 rule, but you would be much better served by getting a cheap car and
attacking your student loans.
In short, use these following 2 purchase rules as guidance but don’t make a long-term foolish decision by
blindly following a rule in the short-term.
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3.3.4 How Getting Your Home & Car Wrong Fukts You
Homes and cars are often the highest cash outflows on your budget. And if you use gross numbers for
your rules of thumb, you will quickly burn through your 50% budgeted amount for essentials. In the
previous 2 subsections we showed how using your gross income for the 30/30/3 rule could result in over
40% of your budget going to a home and on the 20/4/10 rule it can result in 15% going to a car.
Well 40% + 15% = 55% and you are already over your 50% budget for essential items before you even
start. This is a big reason people end up over-extended and out of money even when they are trying to
do the correct things.
But there is one other item we need to discuss. It gets grouped into your essential category and it can
have an outsized impact on the above rules.
What is it? Very high fixed debt costs….we are looking at you student loan-havers….
If you are paying something like a monthly student loan that is already taking up 10%+ of your true
monthly income, you need to make sure adding another 40% from a home and car isn’t too much of a
strain.
With the average student loan debt in the country hovering around $38,000 and at an average rate of
over 4.5%, many people are paying $500, $600, and $700 or more a month just servicing that debt. And
they will have it for 5+ years.
It is very easy for someone to extend and have just their house/rent, car, and student loans be 60%-70%
of their true monthly income. If all your money is going out the door to pay high fixed debt payments,
you won’t be able to save aggressively.
There is a massive benefit to investing sooner rather than later in life. In the below exhibit, I show
someone making $80k a year after-tax who gets 2% raises every year.
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What if I my essential / discretionary spending is above the budgeted amount?
First, you should consider making more money as this is a sign that your lifestyle is more expensive
than your income. You should job search to ensure you’re getting paid your market rate.
Companies are incentivized to pay you just enough that you are comfortable. Over time this leads
to getting paid below your market rate. Switching companies often comes with a significant bump
in pay.
If you are making your fair market rate, look to pick up a 2nd job, a side hussle, or to find other ways
to make some extra money (ie-selling old/unused items). This can fill some of the gap between
what you make and what you spend.
And you need to look at you’re spending to see where the problem is. Often it is a fixed car or home
payment that is causing the issue.
The blue line shows their portfolio growth to age 60 if they only invest for their first 10 years and stop.
From age 25 to 35 they put 10% of their income into a retirement fund that grows at an achievable 7%
per year. The red line shows someone waiting till 35 to start investing and putting 10% of their income
into a fund that also grows at 7%.
Both people have nearly the same portfolio value at age 60, this is despite the early investor putting in
under $100,000 of their own money and the later investor putting in over $400,000. By investing early,
they got to put in 25% as much money to get to the same ending result.
That is powerful. That is the beauty of compounding.
If you short-change your early investing by over-extending on major fixed costs, you create a much
harder path to reach financial freedom.
None of the answers here are easy:
•
•
•
Did you overspend on your car? You may want to sell it for something cheaper
Did you get too big of a place? Renters should look to get a cheaper place. Homeowners may
be stuck with the higher price for a while.
High student loans? You find a cheap rental and a cheap car and focus on paying them down
Or, go make more money. You may need to fill the gap with a 2nd job or side hustle. See Section 4 for
our take on making more money.
3.4 Saving & Investing
We touched on saving and investing, and investing is a topic that can (and may) be its own entire book.
Since I recommend putting 25% of your budget into savings and investing, we will hit on the basics
briefly here.
It may seem repetitive, but it is purposeful. The only path to gaining wealth and being financially secure
is to get out of too much debt, spend less than you make, and then let your wealth grow by saving and
investing.
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3.4.1 Prioritize Savings & Investing
You need to be prioritizing your savings and investing. The order I write is also the order of importance.
1) Don’t overextend on big fix costs like your home and car because 2) you want to make it easy to hit
25% savings & investing rates.
The easiest way to accomplish this is to take money right off the top of your paycheck.
First, make sure your 401k contribution is enough to get the full company match. It is free money. Does
your company match you at 100% rate on the first 3% you contribute? Make sure you are putting in 3%.
Is it 50% rate on the first 6%? Then put in 6%.
This is free money and a guaranteed return of 50-100%. It is a no brainer.
Second, does your company allow you to direct deposit into more than one account? If so, take
advantage of this.
•
•
•
•
Put your targeted savings right into your emergency fund – Do you want to put $100 a month
into your emergency fund? Easy, $50 a paycheck direct deposited and you know you hit your
target every month without having to do anything.
Direct deposit another chunk of money right into your investment brokerage and every quarter
move that cash into your IRA.
Your essentials are largely fixed, so a 3rd direct deposit goes into an account that is large enough
to cover your monthly essentials. Then you set up auto-pay for your mortgage, car loan, student
loans, etc.
The remainder you can put into your checking account for discretionary spending.
If your company doesn’t let you direct deposit to more than one account, then you set up a reoccurring
transfer from your checking account to your other 2-3 accounts that lines up with your pay cycle.
So if you get paid every other week, you make a reoccurring transfer of your chosen amounts to your
emergency fund, brokerage, and essentials account.
Third, get all the other free money your company offers. “If its free, its for me”. Does it offer an
employee stock purchase plan with a 15% discount? Max that out and every quarter sell the shares
immediately. Usually, it is a 10% max contribution, and you can get 15% free money on that 10%.
Do you use a high-deductible health plan (HDHP) and your company offers to match some of your
contribution to the health savings account (HSA)? Contribute at least enough to get that match.
[Most HSAs let you invest your funds after you hit some minimum cash balance. And HSAs are superfunds as they are the only account that is triple tax-advantaged: Your money goes in tax-free, it grows
tax-free, and if you use it for medical expenses you can withdraw it tax-free. They never expire and you
can pay yourself for any medical expense you keep receipts for – even ones from years earlier.]
The name of the game continues to be automating good behavior. Yes, the game changes, but
automating stays the same. And read your annual benefit package to see what other free money or
sweet benefits your company offers. These are sorely underutilized.
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Is all of the money you are contributing to your emergency fund + excess debt payments + 401k + HSA +
ESPP + brokerage account = 25%?
No? Increase your 401k contribution
untill it is.
If you do it right, you don’t even have to
think about it and you will be hitting your
25% saving & investing target. In fact,
after setting up this automated system, it
is harder to not hit your target. You
would need to actively go and manually
change your inputs. Meaning it takes
MORE work to miss your goal than to hit
it. This is why I will continue to harp on
automation being the key.
3.4.2 Emergency Fund
Everyone should have at least a 3-month
of living expenses (ie- how much you
have to spend to survive for 3 months)
emergency fund minimum. You should
keep it in a separate, hard-to-access,
high-yield savings account. This way you
earn some interest on the money while it
sits there. If you can’t cover 3 months of
living expenses with your emergency
fund, getting to that level should be a
priority.
You should also continue to contribute to
your emergency fund over time.
Bank Accounts:
We highly recommend at least 3 separate bank accounts
for most people:
1) Emergency fund
2) Essentials checking account
3) Basic checking account
This is the cleanest way to manage your budget.
Your emergency fund should be in a high-yield savings
account (HYSA) and should be hard to withdraw from. If
you tend to dip into your savings, set up manual process.
•
•
•
Choose a bank that is inconvenient. Not a local
bank with ATMs. An online bank works
Don’t link it to your other accounts and when you
do to make a transfer, immediately unlink it.
Make the password a hard and secure password
(for once). Use gibberish like “1Axc$^a2%”
Now you need to find your password, log-in, find your basic
checking account information, link it, send money to your
checking, and THEN withdraw it.
Your essentials account is there to autopay your fixed
loans. Since this doesn’t change month-to-month, your
deposit a little more into the account to keep a buffer and
auto-pay your essentials.
Everything else you spend on comes out of your basic
checking. We like to set a target ‘buffer’ here of $1,000.
How much you want in your emergency
Now you only need to monitor that 1 basic checking
fund depends. If you work in a job with
account to ensure you have at least your $1,000 buffer to
high variable compensation (like sales
ensure you aren’t overspending.
where most of your money is
commissions), you likely want a larger
emergency fund as you may experience an extended dry spell. A 12-month emergency fund may be
your ideal.
This may seem like a lot, but its in a HYSA earning interest not buried in coffee cans in your backyard
(unless your Grandpa F’er who only cusses when talking about bankers…otherwise, hi Gramps thanks for
reading.)
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If you work in a steady, hard-to-fire or in-demand job, and have low debt and other fixed costs, maybe 3
months is largely enough for you.
But remember, no one who got in a tough financial spot ever said, “I wish I had less money available.”
Save now while you can so you don’t regret it when you need it.
3.4.3 Don’t Miss Out On Free Money
Oh, hi again…yes, I am going to reiterate, if your employer offers you a match or a discount, you want to
take it. “401ks, HSAs, ESPPs, oh my”…Yes Dorothy, take that free money. Free money just helps you
expand your salary. If you can get a 3% match on your 401k, $500 in your HSA matched, and a 15%
discount on your 10% ESPP allocation, that is an instant ‘raise’ of at least 5% without even having to
schmooze your boss and laugh at his lame jokes... “haha, yes Carl, horses do have a long face and when
the bartender asked the horse why he had a long face it serves as both a statement of the length of his
snout and a pun on long faces being a colloquial way to say someone is sad”.
There is other benefits employers offer and they are grossly underutilized – childcare flexible spending
account matches, free training and health benefits, etc. Just read the f’in benefit package and see what
you have available – it is considered job related so you can do it on the clock.
It is free so try not to miss out on it. Who wouldn’t want an instant 5% raise?
3.4.4 Extra Debt Payments Count
Your savings & investing target of 25% includes any extra debt payments you make. If you have a 5%
student loan APR and a 3% HYSA yield, it makes sense to make extra payments on your student loan.
That is a guaranteed 5% annual return by knocking down your debt.
The extra payments to debt is a ‘guaranteed’ return of whatever the interest rate on the debt is. If you
make a $100 payment each month above the minimum, you can include that $100 towards your savings
and investing total.
But remember, other than bad debt which you can attack sooner, all excess debt payments come after
getting your minimum 3-month emergency account funded.
There is a big difference between paying OFF a debt and paying DOWN a debt. Paying down a debt is
good, but you still have your monthly payment. It doesn’t increase your monthly cashflow but it does
eat up your liquidity.
Simple example: you have $50k student loan with a $500 monthly payment and get a $10k bonus aftertax. You have no emergency fund. Sure if you drop the $10k to pay down your student loan you ‘save’
on interest. But you still have a $500 monthly payment to make. And you have no liquidity if an
emergency comes up. Let’s say you unfortunately get fired and your fridge breaks. Now you have to go
take out more (probably more expensive) debt to pay bills during the emergency. This is what your
emergency fund is there for. It may not be mathematically optimal to have cash sitting around, but it is
there as protection in case you need it.
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Now, if you only had $5k of student loan and paid it off and put $5k into an emergency fund, you would
have $500 less a month to pay since the loan is paid OFF. Perfect. Use the extra $500 you save every
month to put towards your emergency fund (along with the $5k leftover from the bonus that you used
to start funding the emergency fund). Now you have less monthly expenses you need to cover with
your emergency fund and more cashflow to use. Paying OFF debt is very different than paying DOWN
debts.
3.4.5 Order of Investing Operations
Everyone’s situation is different, but our generalized advice is the following order of investing. I group
investments into 6 tiers:
1) Top Tier: Free Money
a. 401k to match
b. Employee Stock Purchase Plan
c. Health Savings Account (if applicable)
2) Downside Protection Tier: Shore-up your finances
a. Emergency Fund in a high-yield savings
accounts (HYSA)
b. High-interest Debt
3) Middle Tier: Tax-Advantaged
a. Roth IRA (or backdoor Roth)
b. Health Savings Account Maxed
c. 401k Maxed
4) Taxable Investment Tier:
a. Taxable Brokerage
5) Protection Tier:
a. Permanent Life insurance
6) High-Risk Tier: Optional speculation tier
a. Crypto
b. Long Options
c. Small Individual stocks
But I don’t have time to learn to
invest…
Listen, investing can seem daunting.
Hell, look at all these accounts and
tiers.
But investing is what separates you
from your peers. And all these
accounts can be very similar. You can
buy a single ETF in each and be fine.
If you are completely new to
investing, set some time and learn
the basics.
I’d bet if you look at your social media
usage over the last 3 months, you’d
see you have some time to learn how
to buy an Exchange traded fund (ETF).
You need to invest to grow your wealth. Owning equity has been the primary way to get wealthy. This
can be equity from starting a business (if you start and own a business you own 100% of the equity in
that business. See Section 4 for more on this). Or for most of us, you own equity by investing in the
publicly traded stock market.
The stock market has historically grown at 7-9% a year on average. At this historical rate, any money
you put into a broad market ETF would double in value every 8-10 years. A $100k portfolio at 30, would
grow to over $400k at 60 at this rate even if you invested no additional money.
The stock market has outpaced inflation allows you to grow wealthier over time. The more you can
invest in owning equity, the higher potential you have to be rich.
For most people, buying an ETF and not touching it is the strategy that will outperform. Don’t feel like
you need to trade stocks. You can set up a reoccurring buy and ignore it as it grows for you.
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1) Free Money Tier:
Up first is to get the free money from your employer, as previously stated. 401k contributions up to the
match is a no brainer as a 50% or 100% match means an immediate 50-100% return on your money.
That is one of the best deals out there.
Your 401k is basically locked-in till retirement since you need to pay taxes and penalties if you access it
sooner. This has the positives of forcing you to save for retirement, but the downside is you can’t access
the money. Therefore, you want to get the match right away but if your finances are tight, you don’t
want to go above the 401k match yet.
But your employee stock purchase plan (ESPP), you generally want to sell right away. Most ESPP will
give you a discount of 15% from either the end of quarter price or if you have a really good one, from
the lower of the beginning and ending price. Either way, if you pay $85 into the ESPP over the quarter
and get $100 of stock on the last day, you can immediately sell it for a 15% pre-tax return. Yes, you pay
tax on the $15 discount, but it is still free money and no risk.
Additionally, after you sell your shares, you can take the after-tax amount and put it into your other
investing or savings buckets. It is another way to automate savings out of each paycheck.
[Note – some people have ‘black-out’ periods around quarter end due to their position in the company. If
this is you, you typically need to wait ~6 weeks from quarter-end till after the earnings are released
before you can sell the shares. This changes the math a bit, but still tends to be worth it.]
Lastly, if you use a high-deductible health plan (HDHP) and have the option of a health savings account
(HSA), many employers will offer a match on your contributions to the HSA. They do this because it
tends to be significantly cheaper for them to have people in the HDHP. Often this match is less than on
a 401k, typically some flat amount or 25% match of the money you put in. But even a 25% immediate
return is better than you will get with other uses of your money.
2) Downside Protection Tier:
After you have maxed out your ‘free money’ from your employer, then you want to fund your
emergency fund and put extra money towards bad, high-interest debt. Remember, a credit card with a
20% APR that you pay off is a ‘guaranteed’ 20% return. That is much better than the expected returns in
markets.
And on the emergency fund, you want to get to your minimal funding of 3 months of living expenses but
continue to build it up over time. Even $50 a month will build it up over time as you work towards
extending your coverage period.
Once you hit your emergency fund target, you can look to get extra yield in certificate of deposits (CDs)
or US Treasuries. For example, you want 6-months of living expenses covered, then you can take any
excess and put it into CDs with a 6 month maturity if they yield more than your HYSA. This way the CD
would mature by time you need the money and you would have it available.
I continue to contribute a small amount to my emergency fund forever even after it is max funded, like
$100 a month. This is a good way to reflect the reality of inflation over time and your likely rising
standard of living.
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3) Tax-Advantaged Tier
Assuming you knock out the basics above, you just work your way down the list funding the accounts in
the given order.
•
Roth IRA – you contribute AFTER-tax money to a Roth IRA and don’t get any deductions. But
that money grows tax-free, and you withdraw it tax free. Additionally, you can access the
principal you put in easily (since you already paid taxes on it). I recommend maxing out your
Roth IRA every year as there is an annual contribution limit capping how much you can put in
and if you miss a year’s contribution you can’t ever go back to fund it.
o Backdoor Roth IRA – However, there is an income limit for contributing to a Roth IRA. If
you make above the limit ($153k in 2023), you can’t contribute directly. Luckily you can
backdoor your contribution. You make your IRA contribution to your Trad IRA and then
convert your Trad to a Roth IRA (and pay taxes on it). This is a ‘loophole’ to allow
anyone to contribute to their Roth IRA.
o I recommend maxing out a Roth because it diversifies your tax base. One of the big
struggles in retirement is people having all their savings in a traditional 401k. When you
withdraw it in retirement, you get taxed on it at your future tax rate. None of us know
what our tax rate will be in retirement and there is a chance a future Congress increases
taxes and your retirement nest egg is
significantly less.
Why should you diversify your tax
• HSA – People tend not to think of HSAs as long-term
basis?
investment vehicles, but they are super accounts.
Between the 3 main investment
You put in pre-tax dollars, they grow tax-free, and
account types you have 3 different
you can withdraw them tax-free if used for medical
taxable basis
expenses. These are one of the few accounts that
may never be taxed. Most HSAs allow for you to
1) Pre-tax: Trad IRA & 401k
have an investment account to invest in stocks as
2) After-tax: Roth IRA & 401k
well. And HSAs are not use it or lose it accounts.
3) Taxable brokerage
You can contribute the annual max, invest it, and let
it grow till you have a huge medical coverage
This benefits you as you are
account in retirement when you are older and sicker
diversified from tax risks. If Congress
and need it.
increases taxes when you retire, your
rd
Roths are more valuable. If they
• Max out 401k – The 3 best option of this tier is
decrease taxes, your Trads are more
going back and maxing out your 401k. If your
valuable. And you can use your
employer offers a Roth 401k, you should contribute
taxable brokerage to realize gains &
to it or a trad 401k if they don’t. The current
losses when you sell to based on the
employee max contribution on 401ks is over
tax rate in the year you make the
$20,000, so there is a lot of room here to contribute.
sale.
All 3 of the above accounts offer tax-advantages. Either you
This protects you from having one tax
pay some taxes now and none later (Roth) or you don’t pay
law change fukting your portfolio
taxes now but do later (traditional) or if you use the funds
value.
for a specific purpose, you may never pay taxes (HSA).
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Traditional vs Roth Retirement Accounts:
Retirement accounts may all seem the same, but there is a big difference between a traditional
qualified account and a Roth account.
A traditional retirement account (401k or Trad IRA) gets funded with pre-tax money. In your 401k,
you contribute it right away and never pay taxes on it. Traditional IRA contributions are reported on
your taxes and you get a deduction. The money can be invested and any gains are tax-free. But
when you withdraw the money it gets taxed at the current tax rate at the time of the withdrawal.
This means in retirement you have a large unknown tax liability. If Congress increases tax rates
and/or your retirement income is high, you may pay a higher tax rate in retirement than you do now.
Additionally, these Trad qualified accounts are subject to required minimum distributions (RMDs) in
retirement. Since you didn’t pay taxes on them, the IRS requires you to take withdrawals at a predetermined rate (after around age 70) so they can get their taxes. This may seem insignificant now,
but a lot of retirement tax advice is around managing RMDs.
Roth accounts get funded with after-tax money, but since the taxes have been paid, you don’t get
taxed again. Additionally Roth accounts have more flexibility.
We recommend you diversify your tax basis by allocating to both trad and Roth accounts. That way
as you approach retirement you have more options on what to do with your money.
4) Taxable Investment Tier
After you have taken advantage of tax-advantaged accounts, you want to start funding a regular taxable
brokerage account to invest.
Please note, you don’t have to max out your tax-advantaged accounts, before investing in a standard
brokerage, but you should be funding all of the tax-advantaged accounts with some money first. You
have likely heard that diversification is important, but diversification goes further than just choosing
different stocks.
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Each of these accounts diversifies your tax basis (see image) and each has different rules and liquidity.
You need to consider all aspects when deciding where to allocate your money. The tax-advantaged
accounts are great, but there is penalties and/or taxes due when you access them typically.
A taxable brokerage is a standard investing account to grow your wealth. And since you fund it with
after-tax money and pay taxes for gains when you sell, it is fully liquid without penalties. You can sell
your investments and withdraw the money when you choose.
5) Protection Tier
Next is life insurance. Everyone should have life insurance. For most people, buying term life insurance
is a great affordable option. Most people can get multiples of their annual income in life insurance
coverage for <$1 a day. If you die you need your family covered. Term life insurance is very cheap for
the coverage you get, but it has an end date. If you live ‘too long’ you don’t get any money back from it.
If you have dependents, you NEED some term life insurance. Term life insurance is a basic foundational
piece for anyone with a dependent. If you don’t have any life insurance and have a kid, stop reading and
go buy some term coverage now. Take your annual gross income, add a 0 to it (aka multiply by 10) and
go buy at least that much term coverage, preferably for 20-years.
Got it? Good.
If you have invested in all of the above and have term coverage, a permanent life policy may also make
sense. Permanent life insurance has a cash value account that is invested and grows, in addition to
giving you a death benefit. And permanent life insurance comes with a slew of tax advantages. Work
with a financial planner and see if it may fit your needs.
6) High-risk Tier
Lastly, if you had done all of the above and maxed out all your tax-advantaged accounts, you can finally
start to venture out on the risk spectrum. If you enjoy picking stocks, you can choose some smaller-cap
stocks. Everyone who has a good financial foundation should consider having some crypto exposure if
you think it is a major part of the future.
At this point, you are saving massive amounts of money every year. To max out your 401k, IRA, HSA,
and building up an emergency fund and taxable brokerage, you are putting $50k+ a year into
investments. If this is you, you can take some additional money and go for higher risk & higher return
options.
For now, consider this as speculation. If you get deep into the investment world or crypto, there are
ways to lower the risk. But if you have extra money to invest after funding the top 5 tiers, looking for
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some additional returns for additional risk may make sense. But this speculative high-risk tier are all
investments that may go to $0 so just be aware of the risk you are taking on.
3.4.6 Why Do You Need To Invest?
The only way to grow your wealth is through equity. Equity is just a fancy term for ownership.
•
•
•
If you start a business, you own 100% of the equity of that business
When you buy stocks, you are buying a small percent of ownership in the company
When your home value is more than your mortgage you have equity in your home
Historically, saving money in your bank or buying bonds (debt in a company or government) has barely
kept up with inflation. This means that over time you don’t gain any wealth, or ability to increase your
standard of living.
Ownership has been the only way to get wealthy.
We covered how to get out of debt in detail. That is your starting point, to stop the bleeding. Now in
order to improve your finances you need to invest in equity to give your money the ability to grow.
There are no guarantees in life, and businesses/companies fail. But history has shown that equity is the
way to wealth.
3.4.7 What To Invest In
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Sorry. I’m not going to tell you individual names to invest in.
But we will say that most people are best served by lowcost, broad, passive, exchange traded funds (ETFs). These
funds will try to track an index (like the S&P 500 or Nasdaq)
by owning a piece of all the companies in the index and at
roughly the same weight as they are in the index. Therefore,
the ETFs will roughly move in similar ways to the underlying
index.
Definitions:
There are a lot of new terms being
used in this section, so lets define
them:
•
And these basic ETFs have very low costs, like <0.05%
expense ratios. That means for every $1,000 you put in the
ETF you pay a small $0.50 fee per year.
Vanguard funds are the gold standard here for low-cost,
passive, broad-based ETFs. They were the first in the space
and continue to have minimal fees (<5bps aka 0.05%).
Fidelity has tried to challenge them with no-cost ETFs, but
you need to keep them on the Fidelity platform. The
difference between 5bps and 0bps is immaterial over the
long run. For Vangaurd, you can choose:
•
•
•
$VOO = SP500 Index at 0.03% expense ratio (~500
stocks)
$VTI = Total US Stock Index at 0.03% expense ratio
(~4,000 stocks – includes small medium and small
cap exposure)
$VGT = Nasdaq Index at 0.10% expense ratio (~400
stocks)
Or go and find other passive ETFs in the names you want as
there are many. (I’m not recommending Vanguard or
Fidelity funds over any of the dozens of other similar ETFs.
But wanted to give an example in case you are completely
new to investing).
•
•
Small vs large market cap – this is
the size of the company. Large
market cap stocks are the huge
billion dollar companies while
small cap stocks are $100s
million. Smaller companies are
riskier but offer higher potential
returns
Broad market – Some ETFs are
narrowly focused, like an energy
ETF would only invest in energy
companies. A broad market ETF
is one that invests across
industries. Broad market ETFs
are more diversified, which
should lead to more stable
returns
Expenses Ratio – The total fee
you pay for investing in an index.
The company that manages the
fund has costs to cover and they
pass some of it on to you. The
higher the expense ratio, the
more of a drag on your returns.
The benefit of a passive ETF is your returns will essentially be the same as the diversified index returns.
You don’t need to worry about individual stock risk or spending much time on it and will keep up with
the overall market.
If you enjoy researching stocks or want to try your hand at stock picking or options, you can take a small
amount of your account and do so. Make sure you compare your effort versus the broader market
though. Most people underperform indices historically, so it is a negative expected value behavior as
you are taking time to match or get less return than just passively buying the indices.
A good way to do this is to have one of your retirement accounts (Roth IRA) buy $VOO and use your
smaller taxable brokerage to pick stocks and see your performance.
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For 401ks, you have the options of non-stock funds, like bond ETFs. I generally recommend diversifying
from stocks with a small allocation to bond ETFs and other options you may have available. However,
you want to make sure you are taking enough risk that you gain the upside. The typical
recommendation is a 60/40 portfolio or “100 – age”% allocation to bonds. This can leave people with
not enough growth. Until you are near retirement, you will likely be better off with a high allocation to
stocks to get the higher potential growth.
But, you need to find what risk level you are comfortable with. The worst thing people do is see their
investments go down a lot, get emotional and sell. They then typically wait too long to buy back in and
miss a lot of the return of value.
In short, the simplest advice around what to invest in is:
•
•
•
•
Buy low-cost, passive ETFs
Find an allocation to stocks that you can stomach any volatility
Ignore near-term fluctuations
Keep contributing
This has historically been the winning formula. No one knows what the future holds, but doing this over
decades has been the key to growing wealth in markets for the majority of people.
Outside of stocks, you can look to further diversify with real estate or businesses. Picking good rentals
or businesses is outside the scope here. But adding investments that are outside of traditional investing
markets helps to further diversify your portfolio. But unlike contributing to your 401k at work, both of
these require more hands-on work from you. I would stick to the basics until you have a good net
worth.
You can, and should, also consider starting your own business or side income. We live in a world where
a $500 computer and internet connection is all you need to get started on a business. Replacing time
you spend watching TV with trying to build a cash flowing business is never a bad financial decision (See
section 4 for more information on this).
3.5 Discretionary Spending
Your discretionary spending bucket is the last piece. We already earmarked a minimum of 75% of your
monthly income number to essentials, savings, and investing. You have accounted for:
•
•
•
•
•
•
Paying your mortgage/rent
Paying your car loans
Covering your minimum payments on all your debt
A minimum budget for food
Building an emergency fund
Contributing to your retirement and investing accounts to grow your wealth
If you have accomplished the above, you are light years ahead of everyone. Make sure you are
automating the positive behaviors so they continue forever.
Now you have what is left over.
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This is your money to use how you see fit. Do you want to upgrade your eating? Any meals out at
restaurants or upgrading your food choices (ie-steak instead of chicken) comes from discretionary
spending.
Do you want to update your wardrobe? Discretionary
Take a vacation? Discretionary (and hopefully you save up for that vacation ahead of time so you have
the money to spend when it gets here instead of taking out debt to afford it.)
Yup, everything above the bare minimum spending comes from your discretionary budget.
But there are a couple of caveats here. I strongly recommend that this is a ‘leftover’ bucket. The 25%
number is a target after you get settled. But if you have a ton of debt and after accounting for
essentials, building an emergency fund, and getting ‘free’ money from your employer you only have 15%
of your budget left…you only get to spend that 15%. At least until you pay off some debts and can
afford to increase your cost of living.
Even though the discretionary budget is the simplest part of all this, it is the place people make the most
mistakes.
If you think you make decent money and deserve a certain lifestyle…well re-read section 1…you don’t
yet. You need to earn that lifestyle by fixing your finances and/or making a lot more money.
Living lean for a few years can completely change the trajectory of your life.
Take an example. Let’s re-use our previous example. You make $100k a year pre-tax and keep $78k
after-tax & health insurance leading to $6,000 of monthly income (with 2 months you get $9,000).
You have a $2,000 mortgage/rent, $700 car loan, $500 student loan, $100 of utilities, and the bare
minimum food budget of $100. This is $3,400 of essentials. You don’t have an emergency fund yet so
you are paying $200 a month to that, you are contributing $350 a month to your 401k to get the
employer match and $800 a month to your ESPP to get the free money that you then put into your
brokerage. Lastly you put $150 into a Roth IRA so you are saving and investing your 25%.
But all-in you are spending $4,900 a month on the above only leaving $1,100 in discretionary spending,
or 18%. This is because of your high car loan ($100 over the max recommendation of 10% of your
monthly income) and your high student loans.
You need to find a way to live on the $1,100 or reduce your expenses in the meantime. You could trade
in your car for a cheaper version that has a $300 loan for instance.
But the important piece, is that your discretionary budget is the leftover after your essentials and after
your 25% saving and investing target. You can lower your essentials and shift some to your discretionary
budget. But I recommend that under no circumstance do you save and invest less than 25%.
Lastly, I recommend setting some buffer amount in your basic discretionary checking account, typically a
month’s of expenses. So in the above example, you set your threshold at $1,500 or 25% of your $6,000
true monthly income.
Now you pay your bills and look at your balance. Is the number over $1,500 buffer? Good. You are on
track.
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Is the number below the $1,500 threshold? You spent too much and now next month you have to
spend less to get back over the buffer.
Your entire monthly financial check under this system is making sure your basic checking account is over
your threshold. That is it. And that is why we love a nice, automated system.
3.5.1 Finances Simplified
I know, after nearly 80 pages it may feel overwhelming and definitely doesn’t feel simple. But once you
implement the above system, your finances are really, really, simple.
You literally just need to look at 1 account month to month to ensure you are on track. Remember that
you are setting up a system that:
•
•
•
•
•
~50% of your monthly income goes into one account and autopays your fixed costs
At least 25% of your monthly income is going into investments or being deposited to a separate
high-yield savings account for an emergency fund
You are automatically buying simple, passive ETFs with most of your invested money
Most of your bills are being paid automatically and you are hitting your wealth growing target
You have a buffer in your basic discretionary checking account that you are monitoring
So week-to-week you are only monitoring your basic checking account that is getting the discretionary
leftover portion of your income. You need to make sure it is over the buffer.
That is it.
Because you have an automated system in place, you know all your targets are being hit and all you
need to do is track your spending in that one checking account.
Simple.
I recommend that every quarter you calculate your net
worth by pulling the quarter-end balances of all your assets
and debts. This should be a simple and quick process. Look
at your investment accounts and emergency fund and look
at your outstanding debts. In the near-term as the stock
market goes up or down you may see a quarter-overquarter decrease. But over a long-term, your net worth
should be trending up.
And since we aren’t frugal FIRE dorks, we don’t even look at
the equity in our home or resale value of our cars
personally. Why would you do it? If you go to Zillow one
month and see your home is $300k and next quarter it is
$305k, you may see that as a $5k gain. But it is noise unless
you are going to sell your home right away (and even then,
you should be looking at your home price after adjusting for
closing costs.)
Financial Independence, Retire Early
(FIRE):
FIRE is a popular movement in the
financial world where you live a very
minimalist life and try to save every
penny. Once you hit some portfolio
value (25x your annual living
expense) you retire and live off your
portfolio.
In theory, it sounds good and is based
on some good principles. But in
practice it involves an obsessive
adherence to a spreadsheet. It isn’t a
fun way to live.
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Don’t make your finances a burden. Too many people waste time in their net worth tracking
spreadsheet and doing projections.
I just showed you how to build a system that is sustainable with 5 minutes of work a month (checking 1
account) and 15 minutes a quarter (checking multiple accounts). Now use your free time to make more
money and really get ahead.
3.5.2 Where Should You Spend Your Discretionary Money?
The good news, you should spend your discretionary money where it makes the most sense to you. Ask
yourself what brings you the most joy. Is it eating out? Wearing nice clothes? Watches? Purses?
Vacations?
Spend it where it brings you the most joy.
Don’t spend it where society tells you that you need to.
Personally, I’m not into fashion. Most of my clothes are CostCo bought. Sure, I could afford to upgrade
our wardrobe, but it wouldn’t improve my life. And yes, I could use the money saved on brand name
designer clothes to invest even more…but for what end? Nope, I enjoy family vacations and twice a year
spend lavishly on them. (Every month I put some of our discretionary money into a separate vacation
account in order to keep a system in place).
If you are doing the rest of it correct, you are on a path to wealth. But don’t be a curmudgeon for 40
years and have a huge retirement fund that you can’t even spend in retirement. You need to balance
building for your future AND enjoying the journey. It is the same reason I don’t like FIRE. You live a
bland frugal life till you are 45, to retire and keep trying to squeak by on a frugal budget hoping to die
before you run out of money.
The point of this is to enjoy yourself. You don’t want to be 65 to start enjoying life. Not only do you
miss out on your youth, who knows if you even live long enough to enjoy it.
I will finish up with a parable and an anecdote.
The parable is a story of a FIRE couple. They both want to travel to some exotic location. They work 35
years eating rice and beans and saving so they can retire early and take a month-long dream vacation
once they retire. (Listen, the F’er family loves some rice and beans, probably more than the next guy,
but 40 years of anything twice a day would get old.)
They finally hit their numbers. They are 50 and have enough saved to take their dream vacation and live
off the 4% rule. The wife goes in to get a physical before they leave and finds out she has terminal
cancer. Dead in a week. The husband passes soon after. They were here for 50 years and never did the
1 thing they wanted.
They could have gone on the vacation earlier and just worked a few years more. A good year in your 30s
is worth multiple years in your 60s anyway.
Don’t miss out on living life because you are saving for some future dream life that may never come.
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And anecdotally, when we went on our honeymoon, part of the trip was in Napa. There was a particular
vineyard that had a special significance to our family…but it was an uber-expensive, private vineyard.
We called and got the price for a tour and tasting. Way out of budget. The cost of the wines
there…astronomical. We talked about it and almost decided against going.
“We will go back to Napa and have more money so we can wait and do it in the future.” Right?
In the end, we decided to go. It was wonderful. Sure, it may have set us back a few months financially
and we aren’t recommending you do this often, but as a one-time experience it made sense. If we were
to do it now, we would save up ahead of time a bit more though.
A few years later, California wild fires burned the whole thing down. The vineyard shut its doors and
never re-opened. Additionally, over a decade later and we still haven’t been back to Napa. If we didn’t
go when we went, we would have never had that experience.
These 2 stories aren’t telling you to YOLO and go rack up massive debt. It is about enjoying your journey
and maximizing your time on Earth.
Just do it in a way that fits your budget and allows you.
Section 3: Conclusion
Let’s be honest, budgeting sucks. It is a bore to do and feels restrictive. No one wants to spend their
time in a spreadsheet playing with nickels and dimes.
But if you are in a financial hard spot, budgeting can help tremendously.
By following the above design, you get the best of both worlds. You spend a little time upfront
automating all that you can. And then you can go live your life knowing you are on track.
•
•
•
Every month 50% of your income goes to account A and a little less than you put in gets autopaid to cover your fixed expenses like living and minimum payments on debt.
Every month at least 25% of your income gets transferred/deposited into your investments
and/or extra debt payments to pay down your bad debt
Every month you have at most 25% of your income to do with it as you wish – all you need to do
is look at your one basic checking account and ensure you haven’t overspent and lowered the
balance below your threshold
Its automatic.
If you were to never touch the system after you set it up, you would wake up in 10 years and be shocked
at the progress you made.
[Note – don’t ignore your finances for 10 years. There will be minor tweaks along the way. For instance,
your mortgage escrow account items (tax and home insurance) likely go up every year, so you will need
to do minor tweaks to your essentials. Also, banks suck. You should be making sure that you aren’t
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getting hit with one of the dozens of bank fees in your accounts. But just take a look quarterly when you
update your net worth.]
We can achieve this by focusing on the big picture items. Cover your known fixed costs with a system.
Save a lot. Do those 2 items and the rest is largely irrelevant. Who wants to agonize over buying a $3
coffee every day because some arbitrary rule? Not us.
Take all that time you wasted manually tracking finances and take the mental bandwidth you wasted
debating to buy a coffee, and put all of the time and energy into a side income. Now you just
leapfrogged ahead in life. I believe everyone can find a way to make an extra $10k a year. If your salary
is $100k, making a $10k side income is like a 10% raise. Use that extra money to hurry up your debt
paydown or bolster your investments. Now you are on a roll.
The numbers used are guidelines, good guidelines for most, but guidelines. If you live in a cheap living
area, maybe only 40% of your income is used on fixed-cost essentials. Great, you can save & invest 35%
and make even more progress.
The point isn’t to try to be optimal right away. You can change your numbers as your situation changes.
This framework is supposed to be freeing. It is like the old infomercial tag-line for a rotisserie oven, “set
it and forget it”.
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Frugal Philmore:
Budget…now your speaking Philmore’s love language. His budget is
pristine, there is no rounding here, everything is to the penny. You
spend your weekends relaxing while Philmore is triple checking his
numbers. He proudly tells you how he spends 10 hours a week
budgeting and another 20 hours finding deals. He has cut his expenses
$3k this year alone. (Yet all that calculating he never bothered to figure
out the 30 hours he spends a week on minutia works out to $1.50 an hr).
Philmore laughs at anyone who doesn’t have a budget.
Finance Chad:
Chad knows budgeting is a drag. Anyone who’s entire identity is around
being a budget guy is a midwit, but anyone who doesn’t track their
spending is undisciplined. Chad budgeted when money was tight, but
then developed a system that is largely hands-off. All of his paycheck
gets split into 3 accounts. One account gets $3k to cover the autopays
on his $2,900 of fixed expenses like his mortgage, car, student loan, and
utilities. And $200 a month goes into his HYSA emergency fund. $500 a
month goes to his Roth IRA contributions and another 15% gets taken
right out of his paycheck for his 401k and ESPP. The rest goes to his
checking account. He logs-in once a month to pay off his credit cards
and make sure the account has over his $2,000 buffer. And 15 mins later
he knows that yup, another successful month. Time to work on that
side income so he can really jump ahead in life.
Overspending Otis:
Budget might as well be a 4-letter word. Otis’ idea of budgeting is when
all the credit cards in his wallet get declined from being maxed out. One
time Otis thought about budgeting, but quickly became overwhelmed
and gave up. “This is hard and I’m stressed, but I deserve to reward
myself for trying.” He thinks as he turns on his 74” 4k TV and picks up his
iPhone to get a new pair of limited-edition sneakers. But next month he
will start saving for retirement…yes siree, he will get serious then….
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SECTION 4: Make More Money
It seems self-evident that making more money is beneficial to your finances. But there are people who
peddle a minimalist lifestyle as the more noble option. They argue that continuing to cut your spending
lower and lower is better than making more money.
They are misleading a lot of people.
But the message has staying power. It is easy to skip a coffee and see an immediate outcome. It is easy
to think cutting another $1,000 is a sustainable plan. “You don’t need to work harder or take on risk,
just spend a little less.” That resonates with many people starting on their financial journeys.
It is also dead wrong.
Don’t get us wrong, you don’t want to be frivolously spending. And a dollar saved is a dollar more in
your pocket that you can invest and have grow. But you can only cut your expenses so much. There is a
base amount of money it costs to live. And continuing to look for areas to cut costs leads people to do
some crazy things. We have all heard about the weird froogal guy who sold their car and got a bike.
They don’t even particularly like biking, but think of the “money saved on gas, taxes, maintence, etc”
they tell you in the morning at work…while covered in rain/snow during the winter or dripping sweat in
the summer.
And even that guy still needs to spend some money.
Which gets to the bottom line, you can only cut your expenses so much. Even at the most extreme, you
cut your expenses from $30,000 to $0 a year. That is a $30,000 increase to your cashflow. But if you
pursued the path of making more money, you have no limit. There is literally no ceiling to the amount of
money you make. Now we all can’t be the next Jeff Bezos, but so many people make 5-figures a year
just from a side hustle.
In this section I will give more support for why you should want to make more money and then lay out
some ways you can immediately start making money.
4.1) Why Making More Money Is Always Financially
Better
We already established that you have no ceiling to the amount of money you can make. And we live in
one of the best times in history to try to make money.
Imagine just 100 years ago. Your wealth was largely relegated to your birth place. Travel was hard.
There is no internet and books aren’t abundant so it is hard to get information. You still need to spend
most of your day doing hard manual labor for long hours. If you want to start a business, you need to
get a brick and mortar store, find someone to trade goods with or make them yourself to sell. But your
small town doesn’t have much wealth or interest.
You don’t need to head out on the Oregon Trail to get a chance at life anymore (and risk typhoid or
dysentery or other ways your whole family dies when fording a river…)
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Nowadays, you have all the information on your phone. Setting up a business can be done for under
$100. The gig economy is around. Travel is easy. You have free online courses to learn marketable
skills.
The biggest barrier to people making more money tends to be their unfamiliarity with it. If you grew up
in a typical home, since a young age it was beaten into you that you go to college, get a job at a
company, work 40 years, have a family in a big house with a picket fence, retire with a pension and
social security…
Or maybe you grew up poor and the only people who seemed successful were breaking the law. The
thought of starting a legitimate business seemed out of your reach.
If you aren’t thinking about the opportunities around, it is easy to go through life without realizing how
abundant they are.
But we are getting ahead of ourselves talking about ways to make more money. Lets first go over 3
reasons it is better to make more than it is to spend less.
1) You will be more robust
2) You have a Spending Inflection Point
3) More potential for lowering expenses.
4.1.1 Making More Money Makes You More Robust
Making more money and then saving more money makes you better able to handle expenses. There is a
large group of budget gooroos who tell you its ok to have a small salary if you just budget harder. You
just need to buy their budgeting course of course.
But they are preying on your ego by telling you that you don’t really need to make big changes, you are
good how you are, just skip a coffee or 2.
This is a lie.
Simple math, compare 2 people:
•
•
Person A makes $50,000 a year and saves 20%
o They are living on $40k and saving $10k a year
Person B makes $150,000 a year and saves 10%
o They are living on $135k a year and saving $15k
Despite having a significantly higher standard of living, person B is still out saving person A despite ½ as
large of a savings rate (10% vs 20%). That means person B is going to have 50% more retirement
savings.
And it will be much easier for person B to tighten up their budget. If they get serious about saving and
cut an extra $20k of expenses, they still are living a higher standard. If person A tries to cut another
$20k, that is ½ of their entire living expenses.
Now let’s talk about pay raises. In general, raises are given as a percent increase to your salary at most
companies. Assume person A and B both work at the same company and never get promoted or change
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jobs. Every year they get a 2% raise. Person B will always make 3x as much as person A. So after 20
years when person A is making $75k a year, person B is still making three times as much money, but the
dollar difference has increased from $100k more a year to $150,000 more a year.
Saving 20% a year means person A is saving $15k a year, but person B is now saving $22,500 a year even
at a 10% savings rate.
In total $ terms, person B is pulling further
and further ahead by making more money.
4.1.1.1 FIRE Faults
We have poked fun at the FIRE movement,
but our issue is that they are using recency
bias (aka looking at recent events and
thinking they continue on forever or are
more likely than other options) to inform
their decision to try to squeeze by.
Living frugal and withdrawing 4% of your
nest egg has, historically, worked for over
90% of the US’s recent history.
But that was a history where the US largely
was growing into a prosperous empire.
And the last 40+ years we have seen a bull
(good guy) market in bonds and stocks and
decreasing/low inflation. That is all
recency bias.
But it doesn’t take much to go wrong to
make your FIRE number insufficient for your retirement. I used the popular online FIRE tool (Search
“FIRE Calculator Tool” and many come up) to see how fragile it is.
The calculator looks at 100+ years of market returns to get 121 scenarios. Out of the 121 available
historical samples, using the 4% rule works 95% of the time (115 / 121).
But this result is both recency bias and sample bias (the 4% rule was developed by looking at 121
samples, so of course it works well in the same 121 samples – this is a huge issue with back-testing
historical data. You only have so much data, and you can’t develop a rule on data then re-use the same
data to test its effectiveness).
However, if inflation is a little higher than historical (5.5% vs 2.5-3.0%) you end up only being successful
½ of the time.
The typical person lives to 85-90 years old, but almost 10% of people live to 100. If you live to 100, you
fail 1/3 of the time with the 4% rule. And medical advancement is making it more likely that you live
longer than expected.
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Medical costs are skyrocketing, so you may only plan on living on $30,000 a year in retirement, but you
better hope you don’t get a treatable cancer that adds tens of thousands of dollars to your living costs.
(Financially speaking, if God forbid you get cancer, I hope it is of the treatable kind).
And to really drive the point home, there is no guarantee the stock market continues as it has
historically, which is a large assumption FIRE makes. Take a look at the stock market below:
That looks good right? From 1950 to 1990 it went up from $100 to over $35,000. That is ~15% average
annual return over 40 years. If you were to use FIRE rules and assume a high equity return based on
history, you can imagine people in 1990 sitting there and thinking they could retire and live off their
savings.
But then you zoom forward a bit and add the next 30 years from 1990 to 2020 onto the chart:
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Now obviously this isn’t a US stock market. It is the Japanese Nikkei market which is their equivalent of
an S&P500 fund. But in the 1980s-1990s everyone knew that Japan was going to have this massively
growing economy based around tech companies. And then the market went down, and it took over 30
years just to get back to previous highs.
If you use the FIRE tool and 4% rule assuming the US stock market performs like the Nikkei did from
1990 to 2020 you fail very quickly.
In short, if you are planning to get some low savings amount and eek out a retirement, you aren’t
planning. You are praying a lot of things go right.
4.1.2 Your Spending Inflection Point
If you can’t afford to eat and you are starving, and someone gives you $5, you aren’t going to worry
about trying to invest it, you gonna eat.
If you are Jeff Bezos and someone gives you $5, maybe you pay one of your assistants $100 to go give
the $5 to that starving hungry guy above (your Jeff Bezos, you don’t interact with the poors after all and
besides, you make more than $100 in the 3 mins it would take to hand the $5 bill out). But there is no
need for Jeff to spend it right away.
That is the underpinnings of a spending inflection point. Everyone has a point where they have kind of
spent all they care to spend. Yeah, as they make more and more money maybe they upgrade life here
and there so their spending continues to go up. But it really tapers off after some point (see below):
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When you are starting out and you don’t have much, every additional dollar of income is getting spent.
It’s just simple math.
If it costs $20,000 just to live. And we are talking the bare bones minimum living at $20k…Like you are in
some gross ‘studio’ that feels like a repurposed closet and splitting rent and you are eating rice and
beans for every meal. “Living” on $20,000 a year in this example is really scraping by. And your salary is
$21,000 after-tax, then 95% of your income needs to be spent just to survive at the bare minimum.
This is the bottom left-hand corner of the chart. You have a low income, and you need to spend almost
all of it on life. You have no room to save and invest. Any additional money you get is going out the
door to keep yourself warm and fed.
As you follow the orange line up and to the right, that is your income increasing and you spending more
money on your lifestyle. This is lifestyle inflation.
Maybe you get promoted and suddenly make $40,000 a year. You are likely going to get a little nicer
place. Maybe add some chicken to your meals since you are getting a little emaciated from lack of
protein. At a $40k salary, maybe you’re able to finally do some saving and get a 401k match. Now
instead of spending 95% of your income just trying not to die. You spend $35,000 of your income on a
better quality of life. So you are spending 87.5% of your take home on life. Not every dollar extra you
make needs to be immediately spent, but most of it is still spent on improving your life.
You are a good worker though, so in a few years you get another promotion or switch jobs to a better
paying role and are making $100k. Nice. You can buy a house, take a vacation, life is looking up for you.
And now you are able to start saving in your emergency fund and investing a bit more.
Now you get a great job and suddenly make $200,000 a year. You already got a house, a car, you’re
eating good food and taking a vacation a year at $100k. What do you do with the extra income? You
are starting to run out of things to spend it on. You don’t have millions so getting a huge house isn’t
practical. You’re not a car person. You are going to nice places on vacation. Yes, if you hit the lotto you
could splurge, but you are very comfortable with your current quality of life. That extra money can now
go heavily into saving and investing instead of spending. Maybe you read a great book about UnFukting
Your Finances so you know to save at least 25% of it…just an oddly-specific example.
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As your income keeps going up, you upgrade lifestyle but eventually hit that inflection where you aren’t
in a rush to upgrade things with every extra dollar. You aren’t starving in the streets and any money you
get doesn’t need to be spent.
There is no magical number for when that inflection point is. It depends on where you live (high-cost vs
low-cost of living area), your familial status (single vs married with kids), you & your partner’s spending
habits, etc. Some people like the quiet life and could live happy on $50k a year regardless of their
income. Other people may like luxury items and need $500k of spending before they hit an inflection
point.
The point is, if you find it hard to save at least 25% of your money, it could be because you are
frivolously spending…or it is because you aren’t making enough for the lifestyle you want to live. If you
make more than your inflection point, then saving more is easy.
Even the world’s billionaires run of out things to spend on. They start buying ridiculous items like $100
million super yachts they use once a year because they have run out of things to spend on, their savings
rate is so high that they need to buy flashy big-ticket items just to try to spend some of their wealth.
At some point, you are content enough and that extra dollar of income can go straight to your investing.
This section may have seen drawn out, but it is important set-up for this point….
The absolute, undeniably, easiest way to save more of your income is to make more than your spending
inflection point. Whatever that number is, if you make more than that point, saving is painless. In the
above exhibit, the red arrow at the bend in the graph is that point. Make more money (to the right of
the arrow) and you are able to save more money without resorting to cutting out life’s enjoyments.
To wrap this section up, yes I know it seems self-evident that making more money is better. And if you
asked me before spending time on personal finance Twitter I would have said “no one would seriously
claim making less and spending less is better than making more money.” But there are a LOT of people
who brag about working a minimum wage job and being an extreme cheapskate to save.
It is all psyops.
Read the previous section. Planning to scrape by with the 4% rule and a small living expense isn’t a plan.
It is a prayer.
•
•
•
•
•
•
You are praying inflation stays very low
You are praying stock returns continue to be strong
You are praying you can earn above inflation rates on your cash & cash equivalents
You are praying you don’t get an expensive medical issue
You are praying you don’t live too long
You are praying none of your dependents need support
The list goes on.
This entire book is how to go from 0 to something. But if you really want to be well-off, the way to do it
is to make more money. Anyone who promises they will “Teach You To Be Rich” by budgeting is lying.
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4.1.3 You Can Always Cut Expenses With High Income
Another topic that always seemed self-evident until spending time on personal finance twitter, is the
amount of cope around people with high salaries. There is a constant stream of tweets that claim that
everyone who makes a lot of money is in
massive debt.
This gooroo on the left is arguing that making
$80k a year, living on $64k and saving $16k is
better off than the person making $180k and
living on $162k and saving $18k…so despite
saving more and having a larger retirement
nest egg, the person making more money is
worse off…allegedly.
The argument is because the 4% rule states that you take 25x your expenses as your retirement target.
So 25x of $64k is $1.6 million FIRE target and 25x of $162k is $4.05 million FIRE target (ignore the fact
this 50k+ follower LARP…err…account made a math error by calculating FIRE off the income number to
say you have a $4.5mm saving goal and not the
spending number which is the $4.05 I used).
And this isn’t a one-time thing. Here is a 2nd big
follower account making a similar claim. If you
make less and spend less, you are better off than
if you make more and spend more.
And this isn’t a two-time thing either. This is
rampant. And a lot of these accounts have a lot
of followers because the message feels good.
Users want the dopamine of seeing a gooroo tell them “Your below-average to average salary is fine,
you don’t need to work harder, just spend a little less and you are actually BETTER off than all those guys
making big money who save a lower percent of their salary (even if it is a higher actual number and their
net worth will be higher).”
[For those of you who read the previous section where we compared a $50k salary vs a $150k salary and
thought it was a silly example…First congrats on your common sense and second this is why those
numbers were chosen. Only a budget gooroo would try to claim $50k salary is better.]
I could keep posting these takes. Accounts who brag about making $40k a year but not having a car loan
claiming they are better off than rich guys who do have car loans. Or definitely not made-up stories of
how EVERY person who makes more than $250k a year is actually in massive debt because they are
pretending to be even wealthier by buying nice things.
And I get it. Really, I understand the psychology of it. People who are unhappy with their own financial
situation would rather hear that if they worked hard and made more money, they would actually be
WORSE off.
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And all those successful rich people you see? Actually, their financials are even WORSE than
yours…these gooroos promise. Just make sure you sign up for their $500 budgeting course so they can
help you spend less.
Lies. Lies. Lies.
I mean, sure, there are plenty of irresponsible people who make high salaries. I work with high earners
and many of them overspend and keep saying that ‘next year when their raise/bonus comes, they will
finally be able to start their saving’.
But I also grew up poor. And there are also plenty of irresponsible people who don’t make good
salaries. They overspend and keep saying ‘next year when they get their tax refund they will finally be
able to start saving.’
The issue is the mentality of most people. They think they deserve the finest things, and they deserve it
now.
Here is the issue with all these midwit tweets though…who cares what an irresponsible rich person or an
irresponsible poor person is doing. You don’t have to choose between these 2 false narratives. You can,
you know, be responsible and when you make more money you save more of it. So the real question
is…
What would you do?
There are plenty of rich folk who make top 5% incomes who live like they make bottom 25% incomes.
Hell, our savings rate has routinely been 30-40% through our adulthood.
If you are a responsible person at $50k a year. And you continue to be a responsible person at $250k a
year, YOU are better off with a higher income.
It is comical the logic in these tweets. Take the 2nd one. A person making $100k and investing 20% has
$80k to live life. Let’s assume the same person suddenly doubles their salary. They can now spend
$120k (ie spend even more than their entire previous salary) and save $80k for a 40% savings rate.
Yes, life doesn’t happen in a vacuum. Your choice isn’t make less and save a higher percent or make
more and save a lower percent. You can literally make more, spend more, and save more. That is a
choice.
And for those of you who are reading and make good incomes but let your lifestyle creep out of control.
Well, you can easily cut back on expenses immediately and see a huge increase to your savings.
•
•
•
Sell the $150k luxury car you are paying $1,500 a month on and buy a reasonable vehicle for
$40k that you are paying $500 a month on.
Stop buying designer clothes and accessories. Just wear the ones you have and when you need
something new, go for mid-tier
o Or just get your clothes at CostCo – black Ts and plain jeans is a look that always works –
you don’t need a $120 t-shirt when you can get a $10 one that no one can tell the
difference. There are plenty of nice but less expensive brands.
Eat out less – you can make a meal at home for $5 a person vs $40 a person at a decent
restaurant
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The list goes on and on.
If you currently don’t make a huge income, as you start making more money, just increase your savings
rate each year to prevent lifestyle creep. If you make $50k and somehow save 25% of it. Each time you
make more income, increase your savings rate to 26%, 27%, 30%+. Now your spending is increasing at a
slower rate than your income and therefore your savings is going up both in dollar terms and percent
terms.
It is not as big of a dopamine boost to say – “yea you probably need to find ways to make more money
and it will be hard and may take a while, but you’ll end up much better off”. That is probably why
realistic tweets like that don’t get as many likes. But it is the truth. And future you will thank current
you for making that decision.
Remember – the order of these sections isn’t random. The reason making more money is 4th, is because
if you don’t have the right mentality, you are ringing up debt, and you are spending out of control, then
more money in itself doesn’t fix it. Those bad habits carry on. But if you figure out how to live
responsibly and then make more money, your progress will really take off.
4.2 How To Make More Money
I will assume most people are W2 or hourly wagies. If you are already a small-business owner and you
want tips on scaling your business, that is outside the scope here. To be honest, if that is you, you
probably don’t want the distractions of these other items and should just find ways to free up time to
work on your business and keep scaling.
[Note – if you are hourly, you have the benefit of trying to pick up extra hours. Many of your coworkers
will look to take shifts off. If you ever worked as a waitress, you likely saw people trying to get out of
Friday or Saturday night shifts so they could go out. Ironically, these tend to also be the most profitable
shifts. An easy way to make more money is to be that person who everyone knows to ask to pick up a
shift.]
For everyone else, here is the list of items I would recommend to someone looking to make more
money:
1)
2)
3)
4)
5)
Ask for a raise/promotion
Change companies/jobs/careers
Add side hustles
Start a side business
Diversify Income Streams
I will go over each below in more detail.
4.2.1 Ask for a Raise/Promotion
For most people, this is low hanging fruit, and I don’t know why it isn’t advised more often. Assuming
you are performing sufficiently at your job, ask for a raise or promotion. Companies have every
incentive to pay you just enough that you don’t leave. And so many employees just accept the pay they
get.
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This is a great time for the reminder that “if you don’t ask the answer is always no”.
And why wouldn’t you ask? What is your concern?
1) You ask and your boss gets pissy about it…Great. That is a huge red flag that your manager isn’t in
your corner at all. An employee taking some initiative and having ambition should always be a good
thing. If your boss gets an attitude about your question, it is a great sign they won’t advocate for
you. Now instead of wasting more time in your current situation you know to look at other options.
2) You ask and your boss tells you that you don’t deserve it….Great. If you thought you were in a
position to ask then you thought you were performing well. Now you just got great feedback that
something isn’t up to expectations. Find out what it is. A lot of managers are terrible at managing
and don’t know or have the fortitude to bring up performance issues. You just opened that line of
communication, so find out where your manager thinks you are falling short. Then show
improvement in those areas and try again. And then, if your boss isn’t able to explain why you don’t
deserve a raise, that is also a red flag to move on.
3) You are uncomfortable with talking about money/asking…Great. Do it anyway. Especially if you
never talk about your salary. People who show up every day and never show initiative to own their
career are absolutely the most underpaid people at a company. The company knows the people not
bringing up salary/promotions are likely lifers and aren’t leaving and assumes no complaints.
4) You ask and are told it isn’t in the budget….Great, now you know that no relief is on the way and can
start looking elsewhere. Besides it is expensive to hire and train new people, so there is an incentive
to keep you onboard. So if you work at a company that can’t afford to give you a raise, that should
be a red flag that you should look for a stronger company.
And having a conversation about wanting more, it means that if you were previously pegged as
“someone we can underpay, and they won’t do anything about it” you will be viewed differently. Good.
That means now you are on the list of talent they need to compensate to keep around. You may have
given yourself a future pay boost just by inquiring.
And if your manager isn’t helpful, look for internal roles at your company (if your company is large
enough) to apply for.
In short, there is rarely a downside for an above-average performer to verbalize wanting more money.
Asking for a promotion can be done by the question “what do I need to do to be able to get to the next
level?” You should ALWAYS have line-of-sight into what you need to do to advance your career.
Entirely too many people will get stuck in a dead-end role and think they just need to work harder.
Find out exactly what the expectations are for a promotion. Do them. And if you get excuses for not
being promoted, it likely means it’s time to jump roles or companies.
The point is to find out what your future trajectory at your company is sooner rather than later so you
can proactively manage your career. Time goes fast and one year turns to two which turns to 10 very
quickly.
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4.2.2 Change Companies/Careers/Jobs
Society has changed from the ‘work for one company for 40 years, live a rich life, get a big pension, and
retire’ stage. If you have asked for a raise and promotion and been shut down. It means you need to
start looking elsewhere.
Every situation is unique, so you can use some discretion on what move is right for you. But your
situation probably isn’t so unique that you can’t apply these general rules.
First, are you in a high-demand career and role that you can easily jump to another company? Great,
you have leverage. Go apply for a few roles. Our general rule is 20-30% pay bump to make the switch
to a new company.
That may seem high at first, but you are giving up:
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Any unvested stocks
The typical 1-year period before getting a 401k match
Your reputation at your current firm
Vacation days that typically increase the longer you are with a company
Basically, making a jump for flat to low pay bump rarely makes sense unless the new company has a lot
of extra opportunity.
Now if you are in a lower paying career that isn’t in high demand, your job will be a bit harder. You will
likely need to jump career paths. Some careers this is fairly easy as you have skills that are applicable to
related roles. A good example is if you are a high school math teacher and decide to pursue a finance
career. Similarly, if you like computers and can pick up coding fairly quick, there is ample opportunity
for you to go into a developer job.
But often times you will need to pursue some sort of credentials before you can change career paths. In
the finance field the CFA exam is attainable if you have an affinity for numbers. Showing your future
employer that you are committed to the new field by passing an exam is a good first step to jumping
careers.
If you are in a dead-end career that isn’t easy to jump out of, sales are always a good option. You may
not immediately land a high-paying role, but if you can show success in sales you can jump to better
paying industries fairly easily. Every industry runs on sales and at the top, sales guys can clear 6-7
figures a year.
Sales, finance, and coding are all fields that are evergreen careers with continual good paying roles.
But don’t limit yourself. I personally know people who went from a low-paying corporate job to
something completely unrelated and quickly made more than their wage job. This can be personal
training, hairdressing, driving big machines, etc. Too many people leave college at 22 in a career and
stay for 40 years because that is what their degree was in. Look around and see where the best money
is for you and pursue it.
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Without knowing you and your personal strengths, it is hard to get too specific. But if I woke up in a
low-paying, dead-end career and didn’t have in-demand skills, I would put all the effort I had into finding
a better paying path. And our first stop would be sales.
The goal here is to get to an above median (average) pay for your local area as soon as possible. This
will give you plenty of breathing room. Look up the average salary in your area and see how you stack
up. If you are below average, that means there are a lot of jobs around that pay better.
And getting an above average salary is one of the quickest ways to grow your wealth. It indicates that
most people are living in your area for less, so an above average salary means you are making good
money for the cost of living. If half the people in your area are clearing a particular salary, there is little
reason you can’t find a way to get into the top 50%. This can double your take-home pay by swapping
40 hours in one field of work to 40 hours in another.
[Note – yes, I realize I am making it sound simple. “Just get a higher paying job bruh, duh”. And I know a
lot of people personally who make well below median wages and feel like they are trying to get paid
more. But often they are focused on one field or they write off entire occupations. Be open, flexible, and
honest with yourself and you might be surprised what roles you can make work.]
If you try to get out of debt and grow wealth without ever earning above average income, you are
entering the race with a leg tied behind your back. Try to make it easier on yourself and bump up your
pay.
4.3 Add Side Hustles
Side hustles should not be a replacement for bumping up your base pay. Don’t use side hustles as a way
to mask low salaries.
But adding a second income stream or some extra cash can help get you started on your financial
journey. Just like your main income, there are a huge number of things you can do as a source of
additional income.
I define side hustles as exchanging your time for money still. And you only have so much time, so these
won’t ever let you be truly rich. But adding an extra $1,000 a month can make the difference as you
work to pay off debt or boost your savings. Especially as you work on increasing your main income and
working on a real side business.
There are a lot of commonly recommended side hustles, and I have even done a bunch of them at
various times. If I had to start from 0 today, some things I would look to do are:
1) Sell your old stuff – This is an easy one as most of us have a lot of old and unused items sitting
around. Not only do you make some extra money, but you can de-clutter your living space.
Clothes and accessories you can sell on sites like poshmark. Old books go for good prices on
Amazon. Old electronics or furniture you can sell on ebay/craigslist/Facebook market. And
don’t forget about your old school pawn store. You won’t get rich, but you can earn a few $100
a month with minimal effort.
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2) Churn accounts – one easy way to earn a few $100 is to open new accounts at banks or credit
cards. To entice you to open an account, banks offer promotional sign-up bonuses of $100-500.
Everyone can open 2 credit cards and 2 bank accounts a year and do the minimal required
transactions (typically spend a certain amount on credit cards or direct deposit a certain amount
to banks). This is another easy $500-$1,000 a year for a few minutes clicking buttons. There are
sites and forums built solely around finding good promotional rewards.
a. Three notes – One, make sure you are organized enough to do the necessary
transactions and to avoid any fees. Two, you shouldn’t overdo this. Typically, one credit
card and one new account every 6 months (2x a year for both), lets you fly under the
radar as being an account churner. And three, see how long the account needs to
remain open before you can close it, and then make sure you close old, unused ones –
especially bank accounts (remember banks love to charge inactivity fees). It is less
important to close credit cards and keeping a lot of open credit cards that you barely
use can actually help your credit score long-term.
3) Gigs – gig work was really popular and then fell off a bit. But everyone knows the uber model of
signing into the app and taking work when you have downtime. This has become widespread in
many industries. If driving a car or doing deliveries isn’t your thing, they have help desk roles
where you log-in and get paid to take calls. I have even heard of sales roles that operate in this
model. You are sitting around and you can log-in and get customers sent your way and you just
work through the prompts you are given to sign them up.
4) Second job – no one likes the idea of a second job, but it can have a big impact on your finances.
You can look at the traditional routes like waiting tables……But I actually think taking a job
where you just need to be present is a good option too. For example, the front desk at a gym.
At our gym, the girl who works the front desk on the weekends from open to noon is making the
$15-20 an hour wage, but also has hours of free time that she spends writing a book. She gets
there at 4:30 am, has about an hour of opening and stocking to do (the gym opens at 5 am), But
from ~5:30 to noon she has almost nothing to do but be present while people scan in. This kills
2 birds with one stone – you get paid and you get to do work you had to/wanted to do anyway.
In college, our roommate did 3rd shift at a storage facility. No one came, and he just had to
watch the cameras. He used that time to do his school work. Even dog boarding places have an
overnight shift.
5) Amazon reselling – there are a ton of resources out there for this. It is basically buying items on
clearance, at goodwill, at tag sales, etc. and then selling them on Amazon at a mark-up to earn a
profit. There are apps that you can scan item barcodes and it will tell you the price the item is
selling for on Amazon and calculate the shipping so you know what the projected profit is.
6) Freelancing – if you have a niche skill, you can get some social proof (ie- reviews or successes
you can showcase) and then sell your services. People are always looking for website designers,
writers, etc. This will take some outreach on your side to find clients but can be a lucrative
hustle if you are committed to it.
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This is a partial list as there are so many ways out there to make extra money. People in cities do dog
walking (get your steps and get paid) or dog sitting. Drive delivery. Genuinely the possibilities are
endless.
Just don’t do online surveys. For the love of all that is holy, that ends up being like $1 an hour. It is
atrocious and anyone who recommends it should be forever banned from giving any advice.
But most everything else is game.
Find a side hustle. Spend a few hours doing it. Make a few extra grand to help bolster your financial
situation while you work on the main 2 movers: 1) advance your careers, and 2) start your side business.
4.4 Start a Side Business
Your employer is not your family. Your employees are not your friends.
This is a hard pill for many people to swallow. People spend 8+ hours a day with their co-workers and
obviously bonds are formed. But think of all the people who have moved on in your career. How many
do you stay in touch with after they leave? How many do you not even remember?
Companies are built to avoid key man risk. A company can’t grind to a halt just because one person
leaves.
If you have ever had the unfortunate job of being in conversations during a downsizing, you will see how
everyone is just an expense line item to your employer.
The quicker you realize this, the quicker you realize no one is coming to save you and you don’t owe
anyone anything.
Luckily, most jobs, especially white collar, only involve a few hours of actual work a day. Most of the
time is spent in meetings, conversations, trainings, or just people being inefficient, etc.
You need to start a side business. If it becomes very successful, you have options. If it only makes a
little money, it is more money you can save to build your wealth and security blanket. Even if it doesn’t
work out, you will pick up skills that make you better off for the next attempt or even in your day job.
Ideally, you can carve out a few hours a day to work on your own business.
Typically, if you take a new role or get promoted, you need to hunker down and over-perform to get in
good graces of everyone on the new team. But after 6-12 months, you should be able to dial back to
above average and get back to grinding on your personal business.
And there is nothing to feel bad about doing this. I’m not recommending you aim to be a bottom-tier
performer. There is no reason in this day and age that ‘hours at the desk’ matter. If you can be an
above average performer in 5 hrs of working while other people take 8 to be average, there is little
benefit to crushing yourself.
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Your company is still getting the same amount of output from you. If you and a co-worker both
make $100k a year. And you can do the same amount of work more efficiently. The company is
no worse off.
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Bonuses tend to not reflect total output. Sure doing the 10 hours a day may get you a little
larger of a bonus, but for working 10 hours instead of 5 (5 hours a day), that is over 1,000 hours
a year of extra work. How much larger is your bonus on a per hour basis vs the 1,000 hours of
work?
o Let’s say you get a $5,000 additional bonus. That works out to $5 an hour. And if you
spent 1,000 hours on a side business, there is a good chance you can clear more than
$5k from those efforts.
Most roles there is a ‘cooling off’ period of 3-5 years before you can make another jump. Therefore, you
want to book-end your performance. Start strong and get a good reputation. Dial back and work on
your side business for the next 2ish years, then when you are getting ready to make the next jump, dial
it back up for that promotion or to jump to a new role.
And also find free time before/after work and on the weekends to work on your business.
What side business should you start?
I have no idea where your skills lie. Find something you should be successful in and do that. A couple
questions that can help you get started:
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Is there something you already spend your free time on?
o There are people making 6-figures a year blogging and selling subscriptions to access
their insights in niche video games, board games, hobbies, collectibles, etc. If there is
already something you have built a huge knowledge base in, this could be an area.
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Is there something people consistently compliment you on unprompted?
o Your parents don’t count. If strangers are constantly telling you ‘man you are really
good at X’ then explore if there is a niche and opportunity here. Note – this is why I
started talking about personal finance.
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Is there an unserved opportunity where you live?
o I know someone who had a lot of pets with health issues and had to travel far to get
holistic pet items. They were in a rich town and saw an opportunity to provide a holistic
pet supply store. It was wildly successful. So as you go about your day, ask what
inconveniences you are experiencing and there is probably a lot of other people who
share that feeling.
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Does your day job lend itself to starting a business?
o If your day job is making a website for your company, then you have a valuable skillset
that can be applied to every company. You can do a website design business.
o Note – you will need to check your employment contract to see if you need to report
any business or if you are disallowed from working with just competitors or in the field
at all.
▪ I wouldn’t recommend anything illegal, but there are gray areas around these
types of clauses depending on how they are written. Say, if a parent or friend
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o
got paid to have their name on a company that you ‘consult’ for, does that allow
for you to pursue this avenue.
This is one area the older folk and younger folk have a big leg up. Older people will have
a ton of varied work experience and the distinguished look that will allow them to be an
in-demand consultant. Young guys likely have on the ground experience in some new
tech or model that they can leverage to help business’ run by old and out of touch
owners.
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Do you have a lot of time on your hands?
o There are lots of opportunities to build a business with only ‘hustle capital’. Blogging or
growing an audience is one.
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Are you a wiz at social media?
o People will pay good money to buy a large following account or to have their account be
grown.
o This can be part time as you grow a reputation and scale. If you are going to spend time
on social media anyway, you should try to get paid so it’s a positive
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Do you have money to spend?
o Look at successful business with older owners and see if you can buy something from
someone retiring. You can get a profitable business and maybe the owner wants to stay
on as a worker but just doesn’t want to deal with the administrative work of running a
business. There are likely a lot of opportunities here as Boomers retire.
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Are you handy?
o Starting a handyman service is a great business. People are less and less capable to fix
things in their home and willing to contract out for it. Even getting a power washer for
cheap and power washing people’s houses, pools, walkways is a good low start-up cost
business model (power washers are only a few $100) that has high margins while
requiring little skill or training.
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Are you good at / enjoy finding deals?
o Amazon reselling is a huge business with people earning 6-fig profits just from buying
items at local stores clearances/good will/tag sales and then putting them on Amazon
for 2-day delivery. Most consumers don’t price compare and just buy from Amazon
prime for convenience. You can buy an item from a low-cost retailer, wait for delivery
then send it to Amazon and sell at a mark-up of 30%+.
o This can be both a side hustle and a full-time business. People have hired employees to
help find deals, purchased warehouses to store items, and have employees to work on
the logistics as they scale a side hustle business into a full-blown business.
There are millions of business opportunities out there if you start thinking about your skill set and where
there are holes in service.
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Additionally, the world is hyperconnected with the internet. You can start an ecom store for under
$1,000 and sell to people all over the world. You are no longer limited to where you live.
4.4.1 How to ACTUALLY Get Wealthy
The quickest and surest path to real wealth is to own equity in a business. Bar none. And almost any
business can be sold.
Simple math – Most companies are sold for ~3x revenues. Let’s say you start a business and get to
$100,000 in revenue and $20k in earnings. That is very very very attainable with a few years work on the
side. You can sell it for $300k. For most people, $300k is multiple years of full-time W2 work. If you
make $60k a year and add in $20k in earnings that is a 33% increase to your income and big. But selling
that business for $300k is the equivalent of 5 full years of your earnings. That is huge because that is all
upfront.
Going a step further, if you save 25% of your income at $60k that is $15k a year of savings. So getting a
$300k buy-out that you can save & invest is the equivalent of 20 years of your savings. And we are
ignoring that the $300k is made now and you can invest it and have it grow over those 20 years.
This is a major shift in most people’s thinking, and it is worth reiterating. You just made the equivalent
of 20 years of savings as a one-time lump sum. You have completely changed your entire financials.
There is a reason most millionaires are/were small business owners. With a few years of hard work on a
side business you can jump your net worth ahead 20+ years of working and saving at a W2.
Anyone who promises to ‘teach you to be rich’ and doesn’t tell you to start a business is lying to you. No
amount of budgeting is going to have the same impact as starting even a mildly successful small
business. This goes even if you have a high-salary as well since most of us aren’t saving $300k a year.
“Don’t 9/10 small businesses fail?”
Yes…but also No. That stat looks at the number of LLCs that close. There are lots of reasons to have
LLCs from asset protection to estate-planning to owning real estate. Closing an LLC doesn’t mean a
business failed.
And even if 9/10 fail, that includes every person. If you go to a commercial gym, you get a sense of how
committed the average person is to change and improvement. Jan 2nd (not Jan 1st, because everyone
needs to sleep off their New Year’s hangover), the gym is packed. Come March, only 1 or 2 of the new
members are still showing up.
There is no reason to believe that people don’t have the same type of weak commitment to building a
business. They read something inspiring, start hard, open an LLC, and then lose interest once they
haven’t created the next Amazon with a few month’s worth of work.
Take the long-term view. Plan to spend a full year of grinding on your business before you see results
and go after it.
And even if you try and fail after a year. I would bet if you worked hard for a year, you will learn a ton of
new skills. And you can try again but this time starting from a much better vantage point. Remember,
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one mildly successful business can be the equivalent of decades worth of working at a job and saving.
All it takes is for one idea to work.
Sure, you may not be able to go to your local yokel spot 100 times this year if you are building a
business. But the good thing about local spots, is when you go back a year later they have the same
people, with the same problems, doing the same things as they were a year ago. I promise you that you
won’t miss much if you dedicate a year to building something.
4.2.5 Diversify Income Streams
Everyone wants to jump right to having multiple income streams. It is a wonderful goal. “Most
millionaires have 5 different income sources” after all, don’t you know.
But people don’t get wealthy by starting with 5 income streams. You could say it is almost impossible to
start 5 simultaneously, especially not if this is your first rodeo. By splitting your attention 5 ways you are
guaranteeing each one is only getting 20% of your focus on average.
Who is going to be better off?
The person laser-focused 100% on one business or the guy juggling 5 things? You are going to lose to
the people in the space who are grinding away, fully devoted to one thing every time. So you end up
with 5 very unimpressive things.
Instead, you need to focus wholly on one additional income stream. Build it. Then delegate the work
away while you switch your attention to the next one. If you have built a successful business, you hire
people to do low-value work. If you have cash flowing real estate, you hire a building manager and
support staff.
Most truly wealthy people have gotten their wealth by being entirely allocated to one area first. Jeff
Bezos wasn’t trying to juggle land-lording, ecom, freelancing, stock-picking, and building Amazon into a
powerhouse. He had the entirety of his wealth and attention on Amazon till he made it a success. And I
don’t personally know Mr. Bezos’ financials, but I assume he now has millions in non-Amazon sources of
income (if not, and if you are reading this Jeff, I will gladly join your finance team to offer our insights).
Keep your W2 for a safety net until you are making significantly more with your other sources of
income.
And as your wealth increases, you continue to add income streams and delegate the work. This is the
real ‘millionaire next door’ move. Leverage a good job while growing a good business. Then use the
cashflow from the business to buy more income producing assets. Repeat.
Section 4: Conclusion
One of the biggest eye-opening experiences is meeting people who own successful businesses as a W2
worker. They are largely average people who failed a handful of times and then found success. And
then once you set off on your journey for side hustles and businesses, you quickly realize that many
places you shop at are likely run by one or a few people. Anyone can pay $100 and set up a shopify
store that looks like a big professional corporate site.
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And if you go to a site like ‘Empire Flippers’ you will dozens of small ecom businesses for sale at
$100,000s. These are companies started by people just like you.
Trying to build a business when you are massively in debt can be a big risk as you don’t have a strong
financial foundation. There is a lot of lower hanging fruit for you to work on first.
You don’t need to build a business. You can push your W2 income up, budget and save aggressively,
and pick up miscellaneous side hustles to find financial success. Over a lifetime, you can even build
significant wealth.
But to be truly wealthy, starting a business is the quickest path to wealth. This is your financial final
form.
Once your mindset flips from a scarcity one to an entrepreneurial one, you start to see opportunity
everywhere. And after trying to start a business, you know what is going on behind the scenes. If you
set up an ecom store and run some Facebook ads, you will never look at advertising or websites the
same again. It isn’t some mystical thing.
The takeaway from this final section isn’t that you need to be the next serial entrepreneur or work 120
hour weeks to make it. Honestly, not everyone can or is willing to make millions as a business owner.
But what everyone can do is find ways to make more money.
Start with the job you already have and look to optimize your pay per hour there.
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Ask for raises/promotions
Switch companies for a pay bump
Pick up hours
Switch careers to a higher paying one
Find side hustles to supplement your core income.
And if you want a chance to be truly wealthy, start a side business.
There are $1,000s that you are missing out on every year by not pursuing even the low-hanging, easy
opportunities. Pursue that money and use it to make jumps in your financial journey. At the end of the
day, making more money is always financially beneficial.
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Frugal Philmore:
Frugal Philmore doesn’t think he needs to make more money…hell he
doesn’t even think its possible. Money is scarce. He has 100s of excuses
why it won’t work. “It is much better to not spend” is his motto. Instead
of starting a side hustle to make an extra $1,000 a month, he spends 20
hours tweaking his budget and clipping coupons to save an extra $50 on
groceries. Philmore never stops to think that behind every business,
there is someone making money selling a product or service, and most of
them are just average. If scarcity mindset was personified, it would look
a lot like Philmore.
Finance Chad:
Chad may have a top decile income, but he knows relying on a W2 puts
him 1 lost income away from a $0 in income. “Two is one and one is
none” after all. He finds ways to be efficient at work, and is able to be
near the top performer in his job grade. Perfect, since the difference in
pay between being the 3rd best vs the 1st is minimal, but it would take an
extra 15 hours a week to be #1. He understands opportunity cost. Since
he has freed up time, he is able to spin up a side hustle walking dogs
during lunch hour and makes it a priority to hammer away on his ecom
store instead of watching TV in bed. Sales are up again this month with
his new marketing campaign. He just saw an order come in from Otis
and got a message from Philmore asking for discount codes at his shop.
Money is everywhere and he is always on the lookout for opportunity.
Overspending Otis:
Oh Otis…despite making a big salary, Otis somehow is having a hard time
making ends meet. “How does everyone else afford their Range Rover?”
he wonders as he makes his $2k monthly car payment. Oh well, Otis
knows he just needs to triple down at the office. If he puts in extra
hours he can get that higher bonus and the extra $4,000 will give him
breathing room. As he spends time looking at IG, he sees an ad for a
new watch. Man, that looks just like the one his manager has, clearly he
deserves it too. Otis gets to work and finds out his whole department is
getting cut. He frantically starts searching for open roles, but his highcost lifestyle traps him as he can’t take a lower paying job. No savings,
high fixed expenses, and a short-window before he is
unemployed…yikes…I thought this company was my family?
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OUTRO:
Personal finance is a subject that is simple, but it isn’t easy. At its core, it really boils down to:
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Make more money
Spend less than you make
Don’t overspend on items till you can afford it or saved for it
Have an adequate emergency fund to fall back on
Invest as much as you can to grow your wealth
Have life insurance in case you die young
Having a business/owning equity is the path to real wealth
That is really the core of it all.
The hard part is actually how to accomplish each of those seemingly simple steps. If you read this book,
you now have the right frameworks and knowledge to achieve your financial goals.
There is a lot of personal finance advice out there, but it is too prescriptive while relying on people
making the right choice every time. I could tell you how much of your discretionary money should go to
every expense and then berate you for making a poor decision on our radio show (hi Dave..err Rave).
If you take anything away from this, it is automating a framework that you will succeed with over the
long-term. The biggest failure point is people relying on motivation. When life gets hard, your
motivation will wane. That is why an automated system will outperform being ‘motivated’ 100 times
out of 100.
If you are in debt, don’t despair. You now have the exact playbook to follow to turn your situation
around.
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Our Parting Thoughts
Nearly 3/4s of this book was dedicated to mindset, debt, and budgeting. You need to walk before you
run. And when you are drowning, it is hard to see the beauty of the stars. If you are over your head in
debt, you need to address the actual financial issues as well as explore the emotional and mental issues
that allowed you to get there.
You need to get yourself stable. Yes, some people are absolute chaos masters who thrive in disorder.
99% of us only have so much mental, physical, and emotional bandwidth. If you are in debt you need to
address that first and foremost. Take the time and sink all your energies into:
•
•
•
Figuring out why and how you got there – and this isn’t a complain-fest. Take ownership.
Society may have made your path hard. Your parents and support systems may have failed you.
You may have been given a ton of terrible advice. But at the end of the day you need to take
agency for YOUR life. We are adults. No one is going to come swoop in and save you. Fairy
Godmothers are only in cartoons and winning the lotto is improbable. You and only you can fix
this. So you and only you can figure out what went wrong, what triggers your bad habits, and
what YOU need to do to fix it
Get out of debt – You now have all the information you need to unfukt your finances.
o Do the budgeting and stick to it - This is your new way of life till you are wealthy.
o Increase your salary – whether it is getting a raise, lining yourself up for a promotion, or
jumping ship to a new role now or upskilling yourself to take a higher paying job in the
next few months. Then plow your new, higher income into fixing your finances.
o Start easy side hustles – We saw a bunch, but until you get out of the hole, any time not
spent fixing your finances is time wasted.
o Take free money – and don’t forget to take advantage of free money along the way.
Build REAL wealth – Once you have incorporated the new behaviors into everyday habits, they
no longer will be taking up all your available physical/emotional/mental capacity. Don’t lapse
back into lethargy, now that you put your pedal to the metal and start creating real wealth by
getting equity. Start a business, buy real estate, invest aggressively, and iterate till you succeed.
Most people will be shocked to discover that in under 6 months you can dig yourself out of any hole if
you devote yourself fully to it. And in only a few years you can build something of real value that will
allow you to achieve real wealth. That’s it, 3-5 years of hard work and you can be financially set for life.
It doesn’t matter if you are 20 or 60, 3-5 years and you can be set. Or you can read this book, maybe
half-heartedly try some stuff, and go back to Netflix, IPAs, and a lifetime of meager living to try to scrape
by.
I will end this book the same way I started it. Our goal is to help everyone to:
Get out of Debt. Gain Financial Security. Grow Your Wealthy.
Good luck
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