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ISBN: Print 978-1-64739-957-3 | eBook 978-1-64739-567-4
R0

This book is dedicated to my daughters,
Naima and Aya.
They are my reason.
May they learn from my mistakes
and lead prosperous lives.

Introduction

Chances are if you picked up this book, you are one of two people. You may be trying to do the right thing and make smart money moves. Or you might have gotten this book as a gift from someone who hopes that you’ll avoid the common pitfalls that keep people broke.

Either way, kudos to you. You took the first step, so now it’s time to read and get to work. The hard truth? You won’t build wealth through osmosis. You’ve got to take action—inspired action. I’m going to show you how to get out of debt, save like your life depends on it, and (best of all) grow your money to build wealth on wealth.

This is your road map to tackling those money stumbling blocks that trip people up. It’s what your parents should have taught you or tried to teach you when you weren’t ready to listen. It’s what should be compulsory education in schools. It’s a streamlined, holistic plan for achieving financial wellness. And it’s accessible in nine easy steps.

I know what you’re thinking. Who am I, and why should you trust me? It’s great to have some healthy skepticism. In the financial world, things are often overcomplicated, and people make you believe you have to pay for guidance. (More on that later.) I’m Naseema McElroy, and I’m one of you. I’ve been a registered nurse for over a decade. I have a young family, a healthy stack of cash, and investments that are rapidly building my wealth. I’ve built a second career helping people manage their money, but first I learned by succeeding, failing, and trying again. (And when I tell you I’ve made money mistakes, please believe I’ve done some damage.)

In 2009, against the backdrop of the housing crisis of 2008 and the following recession, I sat in the auditorium of my nursing school with my classmates. We were gobsmacked as our teaching hospital’s director of nursing explained why most of us shouldn’t expect to land jobs there or at any other local hospital. Budgets were tight; training new nurses was expensive. There I sat with my real cute $180,000 in student loan debt. I squirmed in my seat, thinking, What am I going to do now? I had just left a nice job in health-care administration to become a nurse.

Fortunately for me, out of my 83 classmates, I was one of three who landed a job after graduation. After the initial relief of finding employment and getting comfortable as a nurse, things still didn’t feel right. I was making good money, but I was still broke.

It wasn’t until a few years later when I found myself living as a single mom that I decided enough was enough. It finally dawned on me: What was holding me back was the $1,900 a month just going to student loan repayment. I imagined ways that I could instead use this money to live my best life, then set off on a mission to achieve it. My personal finance internet research game was strong, and I was determined to take control of my finances. Initially, money guru, author, and radio host Dave Ramsey was my man, and then I was introduced to a concept known as Financial Independence, Retire Early—or FIRE.

I went on to pay off my six-figure student loan debt and then some. When I put my head down and focused on the plan, I was able to go from six figures in debt to a multiple-six-figure net worth, all in under three years.

That’s why this book exists. You’re here to avoid my money mistakes and the common pitfalls that plague so many of us when we are starting out. More than avoiding mistakes, you’re here to jump-start your wealth during the time in your life when you have the most to gain from making smart money moves. It’s simple math. The earlier you take control of your finances, the more time you have to watch your money grow—and the more you’ll be able to rebound when times are tough.

Think that’s not possible for you? It’s more than possible. In fact, it will be even easier for you because the road map is right here. Your world may not be as muddy as mine was before I mastered my finances, or it might be worse. Regardless of your situation, the tools to wealth building are universal.

In fact, you can boil them down to nine steps. You just have to decide to take action.

How to Use This Book

This is a progressive step-by-step guide for you to grow up and grow your money. I am going to take you from money novice to wealth builder in nine steps, and you’ll learn skills that will soon become second nature to you. The key is to remember that this journey is a marathon, not a sprint. (If you’ve already mastered one or more of the steps prior to reading this book, you can hop around to parts that you need.)

Here is what we will cover in this book:

Step 1: Figure Out What You Owe. This is the first step toward financial freedom. To reach the light, you need to calculate how far down in the hole you are.

Step 2: Know What’s Coming In and What’s Going Out. We’ll talk about how to bridge the gap between your take-home pay and your spending. That gap will determine your wealth-building speed.

Step 3: Put Your Money in the Right Bank. The banking industry has made some major shifts in the last decade. Choose the bank that’ll maximize your wealth in the way that’s right for you.

Step 4: Make Your Credit Card Work for You. Credit can be an excellent tool. But with great power comes great responsibility, and you have to learn to use credit wisely. The consequences of poor credit management are swift and long-lasting.

Step 5: Pay Your Taxes or Go to Jail. Maximize your take-home pay and avoid the legal consequences of making tax mistakes.

Step 6: Invest in Your Retirement (If You like Money). Get in early. Investing now helps you avoid trading time for dollars later on.

Step 7: Play the Market Long Game. Infusing excess cash into the stock market or other lucrative investments is another major key to wealth building that can last generations.

Step 8: Prepare for Big-Ticket Expenses. Know what you’re paying for and how to cut back while maximizing your return. Here you’ll learn how to get the most out of the big-ticket things you spend money on.

Step 9: Live Your Best Life. We’ll put all the pieces together to create a solid system that gets you what you want out of life—at least from a financial perspective.

Step 1 › Figure Out What You Owe

Debt has a scary connotation, but it’s pretty simple when you boil it down. What is it, exactly? Debt is money borrowed from a person or institution that you must repay. Usually people take on debt if they are not in the financial position to pay for a purchase upfront. Instead, they borrow money to pay off the purchase over time, with interest. This means when you borrow, you do so at a cost. You’re literally paying for the time it takes you to pay off that owed sum.

It goes back to the schoolyard. Someone asks, “Hey, man, can I borrow 50 cents for hot Cheetos?” The person responds, “Sure, dude, if you pay me back 75 cents.” You get the hot Cheetos when you want them, but since you had to borrow the money to purchase them, you owe a fee for the time it took to pay off your debt. Your lender, in this case your friend, gets rewarded for having the funds from the jump. (This is how wealth begets wealth, but more on this later.)

The unfortunate truth is that this generation is facing more debt than any other in recorded history. I’m talking about four-comma debt. Over a trillion dollars, according to the Federal Reserve Bank of New York. That’s more than the net worth of all the billionaires in this country combined.

Getting clear on to whom we owe money is the first step toward financial freedom. It’s tempting to downplay our debt, because debt has become super normalized. We all have that uncle who still has student loans from the ’70s. But the normalization of debt is dangerous. In fact, it has led this country into a debt crisis. The average American household carries over $8,000 in credit card debt alone. I’m here to tell you that this is something we have to tackle head-on. That’s why figuring out what you owe is Step 1.

You may have heard some well-meaning money advisor tell you to focus on the money you’re making. This is a little easier to digest, and it’s also where they make their money. But I’m here to give it to you straight. Debt is an issue you need to tackle now so that you can grow your own money. It’s real, but it also isn’t all doom and gloom. Taking control of debt is how you take back your power. In this section we’ll cover:

♦Is all debt the same?

♦Your credit score and its power

♦Credit card debt

♦Student loan debt

♦Other meaningful loans

♦One step at a time

Is All Debt the Same?

Debt isn’t inherently good or bad. It can be used to get ahold of things when you need them (à la hot Cheetos), or leveraged to help you build wealth. Left unchecked, debt can turn on you fast. Alas, not every form of debt is created equal.

Debt is classified into two categories we generally call secured or unsecured debt. With secured debt, there is an asset—like a car—backing your loan. For an unsecured loan, there are no collateral assets necessary, meaning it’s just your credit score (and lending attractiveness) on the line. Credit cards are a common example of an unsecured loan. Although you can’t lose your house or car immediately for nonpayment of an unsecured loan, there can be serious repercussions. Not paying your debt, or even paying late, could cost you more in the long run.

Below are the most common types of debt, interest rates, terms, and consequences of not paying off your debt quickly. I also created a scariness factor cheat sheet to ensure you understand the potential risks of each debt type (see the chart here).

If you’ve got debt, and there’s a good chance you do, you’re taking the first important step to eliminate it by looking closely at it. It might be painful, but you have to know what’s in front of you to tackle it head-on. Let’s take a look at what’s in your closet.

Hella Scary Debt: Work on eliminating this debt the soonest.

Scary Debt: Attack this type of debt as soon as possible, but after the hella scary debt.

Okay Debt: Pay down this debt while stacking cash and investing.

Credit card debt is probably the costliest type of debt you have. Interest rates fluctuate between 6 and 29 percent according to your credit score. Balances can rack up when you don’t pay off what is due on a monthly basis, and your credit score can take a hit. Furthermore, if you default on your credit card, you can be sued or face wage garnishments, which is when creditors take a portion of your paycheck. I classify this as Hella Scary Debt.

Student loans can be federal or private debt, and the terms vary. The generation currently in their 20s and 30s has a higher student loan debt burden than any prior generation. The average amount of student debt a person carries is $33,000, according to Investopedia. These loans typically have interest rates on the lower side, from 4 to 7 percent. If you don’t pay the money back, creditors can’t take away your degree, but they can make life hard. You can lose access to beneficial federal repayment programs, like loan forgiveness or deferment. You can also be sued, have tax liens, or have your wages garnished. But there are several actions you can take to remediate if you can’t pay off these debts, so I classify them as Okay Debt.

Car loans are often calculated by what you can afford monthly, not necessarily based on the total car price. This creates a sense of false affordability as car loan terms stretch out longer and longer. Interest rates vary based on your credit score, the term length, and whether the vehicle is new or used. Interest rates can be as low as zero percent or as high as 20 percent. I classify car loans as Okay to Scary, depending on the terms. The total price you pay, and the interest rate variations, are like the Wild West. Proceed with caution.

Personal loans are often a catchall to get quick access to funds. They’re used for anything from home remodels to emergency payments, and rates are between 5 and 36 percent. I want you to think about that for a second. Would you borrow $100 from your friend if they asked you to pay them back $136? What if that interest compounded over time because you couldn’t make the first repayment, so now you owe 36 percent on $136? The bigger the interest, the riskier the loan—and the more the lender is counting on you to default, hitting you with additional fees and unmanageable repayment sums.

If you can’t afford the upfront amount, chances are you’re living outside of your means, and the system is counting on you to fail. Sure, the terms for personal loans may be shorter, around two to five years, but there is risk nonetheless. I classify personal loans as Scary Debt because they are often used as a crutch. Personal loans usually substitute for saving cash for purchases or paying off debt. Not paying these loans back quickly will potentially wreck your credit, get you sued, and lead to wage garnishments—not to mention the opportunity cost of not using these repayments to invest.

As you can see, not all debt is created equal. Rates, terms, and default consequences vary. Having zero to low debt is your best bet in any case. Remember, the more money you’re spending on paying someone else back, the less you have to build your wealth. Here’s an easy chart to summarize the different types of debt before we dive deeper into each one.

TERM

INTEREST RATES

REPERCUSSIONS FOR NONPAYMENT

DEBT SCARINESS FACTOR

CREDIT CARDS

Indefinite

6–29%

Credit score decrease, lawsuit, wage garnishment

Hella Scary

STUDENT LOANS

Up to 25 years

4–7%

Permanent disqualification from repayment programs, credit score decrease, lawsuit, wage garnishment

Okay

CAR LOANS

3–7 years

0–20%

Car repossession, credit score decrease, lawsuit, wage garnishment

Okay to Scary

PERSONAL LOANS

2–5 years

5–36%

Credit score decrease, lawsuit, wage garnishment

Scary to Hella Scary

Your Credit Score and Its Power

Cash is queen. (Yes, queen. Hi, 21st century.) But credit is pretty darn important, too, because it’s your financial street credibility.

A healthy credit score helps free up cash and get you into the hippest neighborhoods. This is because your credit score is seen as a reflection of your trustworthiness, or your ability to pay money back when you say you will.

Credit scores tell lenders if you can responsibly borrow from them before you even step into their office. It’s like a report card that gives you a grade between 300 and 850. The ranges are broken down below, and my goal is to get you to “Excellent,” if you’re not already there.

750 – 850: Excellent

700 – 749: Average to very good

640 – 699: Fair

600 – 639: Poor

Below 599: Bad

You’ll notice slight variations with every score you pull. Lenders look for different information depending on what they are qualifying you for. Your score will look different when you’re applying for a mortgage than when you’re applying for car insurance.

There are free personal finance sites like NerdWallet, Credit Karma, and Credit Sesame that will give you your credit score. Try to check your credit score often so you know where you stand—I check mine at least once every couple of weeks. Super important to note: Checking your own score does not damage your credit.

A good credit score opens up a world of options and opportunities. This is how you can get zero percent interest on car loans and credit cards. It can give you a leg up on the competition when applying for certain jobs, because sometimes prospective employers run a credit check. A good credit score also gets you those sweet interest rates when it comes to buying big-ticket items like a home.

With a lower score, you have to put in more work to prove yourself, or lack access to loans and other services altogether. Most landlords won’t consider you if your credit score is poor. A low score often means paying a larger deposit for housing, a new iPhone, or even to get your lights turned on. It means having to ask your auntie to cosign for your car. Ultimately, you have to pay more on average for every dollar you borrow when you don’t have good credit. That’s how the cycle of creditors taking advantage of people begins.

RUNNING YOUR CREDIT REPORT

Your credit report contains the ingredients that make up your score. In essence, it is a detailed history of your relationship with lenders. It contains personal information, credit account history, credit inquiries, and public records. Lenders and creditors report this information, used to generate credit scores, to credit bureaus.

Your credit report lists:

♦What types of credit you use (credit card, mortgage, car payment, etc.)

♦The length of time your accounts have been open

♦Whether you’ve paid your bills on time

♦How much credit you’ve used

♦Whether you’re seeking new sources of credit

♦Information on where you live

♦Whether you’ve been sued or arrested

♦Whether you’ve filed for bankruptcy

There are three main bureaus that report your credit history: TransUnion, Equifax, and Experian. Each has its own method of reporting and generating scores. Why three agencies that do the same thing? For good ol’ checks and balances. If something looks incorrect on one report, you can point lenders to another.

By federal law, you have access to your reports from all three bureaus through AnnualCreditReport.com, a government-authorized site. This access is free at least once a year. Check it today and then create a reminder to do this once a year. Downloading an app from one of the major credit bureaus is also a great way to catch errors and guard against identity theft.

It’s imperative to know how to access and interpret credit reports. If you skip this section, you might as well toss out this book. When you go to check your credit, you’ll need to provide personal information to verify your identity. They’ll ask for your name, Social Security number, address, and birthdate. If you’ve moved in the last few years, you’ll need past addresses.

Once you’re granted access to your reports:

♦Print them out or save them as PDFs. Scan them for mistakes.

♦Make sure all accounts are ones you signed up for or authorized.

♦Check for any negative information that’s not correct.

♦If you have any negative accounts—severely delinquent accounts like late payments, debt collections, charge-offs, and repossession—you should know that those accounts fall off your report after seven years. The exception is if you have a chapter 7 bankruptcy on your record; those take 10 years to fall off.

♦Make sure that you—and other people you have personally authorized—are the only one(s) listed on your accounts. Beware of scammers; they try to gain access to your accounts, and it’s not uncommon that the scammer is someone you know, like an ex or a relative, who has had access to your personal information. I know I’m not the only person who had parents use their credit unbeknownst to them.

What to Do if Something Doesn’t Add Up:

IDENTITY THEFT

Now that we know the importance of our credit scores and reports, let’s be vigilant in protecting them. A Federal Trade Commission study found that one in four consumers found errors on their credit report. Errors can sink your score, leading you to pay more for loans and insurance.

If you find an error on your report, dispute it right away. The fastest way to fix an issue is online. Each bureau has its own dispute process, so file with the bureau reporting the issue. The dispute should state the contested items, and you should send the bureau supporting documents.

The credit bureau has 30 days to respond. If they agree that your report contains an error, the incorrect item will be removed, and you’ll receive a new copy of your credit report. Don’t let them off the hook automatically, though. Scan this new report like a hawk for errors.

If they disagree with your dispute, it’s time to take it up a level. Escalate this error to the Consumer Financial Protection Bureau (CFPB). Explain what you’re disputing and provide copies of your proof, and the CFPB will look into it. They’ll email you with updates, or you can stay informed by logging in to their website.

GOT SOME WORK TO DO?

If your credit score is lower than you’d like, fix it with time and a consistent history of paying things on time and as agreed. Be aware that it generally takes at least six months before your credit score will start to really change.

You may have not used credit in the past, or you may have made some repayment mistakes. Here is a list of rules to self-impose if you want to start improving your score:

1.Never miss a payment: Payment history has the biggest impact on your credit score. Schedule autopayments for every creditor for the minimum payment amount. Bonus points for creating a separate checking or savings account exclusively for these transactions, which could help you make sure you have money allocated to pay your bills each month. Create automatic transfers into this account at least once a month to cover minimum payments. Try to keep a minimum of $100 in this account. Set a notification for when the account balance falls under $100.

2.Keep balances under 30 percent: The next goal is to get and keep credit card balances under 30 percent of the credit available. This is called credit utilization, and it’s important! You’re mastering credit when you can keep it below 10 percent.

3.Keep old accounts open and in good standing: Avoid closing accounts. Instead, make sure every card is designated to a bill and set it up for autopay.

4.Create a new, positive payment history: I recommend this for anyone with a credit score under 740. A credit-builder loan is like a savings account on a mission. Fixed, scheduled payments to a bank are made until a predetermined amount is reached. The bank reports these deposits to the credit bureaus, considering them installment payments. This shows consistent, on-time payments, which is a credit booster. Secured credit cards require an upfront deposit, which serves as the credit limit. Make small purchases on this card and pay it off in full every month. These payments are reported to the credit bureaus as revolving credit payment. With these accounts, positive information is added to your credit report. This outweighs old negative information over time.

5.Get help from people with good credit: Lastly, you can piggyback off someone else’s great credit by becoming an authorized user. If a friend or family member has a credit card with a high limit and a long history, ask them to add you. Don’t use this account, but ride the coattails of their good credit standing.

Warning: It’s tempting to use a service to fix or repair credit. Don’t do it. In short, no one can legally remove accurate and timely negative information from a credit report, and everything a credit repair service can do for you legally, you can do for yourself at little or no cost. Follow the aforementioned steps to improve your score. You are your own best resource, and you’ll be in the 800-level club in no time.

Credit Card Debt

With interest rates so high, credit card debt is hard to get out of. It’s tempting to make the minimum payments and ignore the debt that’s accumulating, but ignoring the debt doesn’t make it disappear—it just makes the debt worse. The only way out is to face the debt head-on. With some work, this strategy will enable you to get credit card companies working for you. (We will cover that in Step 4.) For now, the goal is to get full control over this debt.

WHAT CARDS DO I HAVE OPEN?

The first thing you need to identify is every credit card you have open. Pull this information from your credit report. Compile each lender on a spreadsheet such as Google Sheets for easy tracking and updating. Link the credit card name to the company’s website, then track the following:

♦Account balance. How much do you currently owe?

♦Credit limit. What’s the total amount that you can borrow?

♦Bill closing date. When is the statement balance calculated?

♦Due date. What’s the latest date you can make a minimum payment or more without incurring a fee?

♦Annual percentage rate (APR). What is the interest rate you’re paying on borrowed money?

♦Date special terms expire. When do special APR rates, no-fee periods, or other special terms expire?

♦Autopayment set. What autopay amount do you have set to avoid late payments?

♦Annual fee. What is the yearly fee for each card?

♦Annual fee due date. When is the annual fee charged?

Spreadsheet example

Account 1

Account 2

Account 3

ACCOUNT BALANCE

CREDIT LIMIT

BILL CLOSING

DUE DATE

APR

EXP. DATE OF SPECIAL TERMS

AUTOPAY AMOUNT

ANNUAL FEE

ANNUAL FEE DUE DATE

The most recent credit card statement should have all the information you need for the spreadsheet. The terms and conditions documentation will have even more detail, and you can request it via regular mail or email. You should update your spreadsheet regularly, at least once a month.

Pro tip! Make logging in to credit card websites easy by using a password management tool, like LastPass or Dashlane. These tools allow you to store passwords so that you don’t have to remember them; the apps also generate secure passwords for you. Stay in control of your money by ensuring safe and secure access to your accounts—and remove that hurdle you create for yourself by forgetting your passwords (it happens to the best of us).

WHAT ARE INTEREST RATES?

Credit card interest rates determine the fee for carrying a balance on a credit card over to the next payment cycle. When you don’t pay off your balance, in full, by the allotted grace period (usually 30 days), the interest gets added to that balance. Simply put, it’s the bargain you make in order to borrow those funds in the first place.

Where lenders really get you is that interest is added to the total balance, not the principal amount you originally owed. In other words, when it comes to credit cards, you’re paying interest upon interest for every balance left unpaid. The larger your balance, the harder your interest payments will hit you, which is why lowering the amount you owe is critical to being able to pay it off.

Remember, an APR only applies to balances that are carried—if you don’t owe the creditor money (in other words, you pay off the balance in full every month), you don’t owe interest. That’s why it’s good practice, and a gift to your future self, to pay off balances in full each payment cycle. The goal is to never pay interest on credit cards. Ideally, you would use your card only for budgeted items you have the cash to pay for. If this isn’t possible, focus on increasing your credit score while you’re paying down debt. Higher credit scores equal lower APRs, which frees up more money to pay down debt.

In jargon world, APR is the “annual payment rate”—this is the amount of interest and fees you would owe if you were to borrow, or carry a balance, for a whole year. What you need to know is that the higher the APR, the more expensive it is to carry a balance on a credit card. A low APR saves you money because you owe less on every unpaid balance.

A credit card can have multiple APRs depending on the balance type, and these rates may not be on your monthly statement. But APRs are always accessible in the card’s “Pricing and Terms” documents, so locate those if you are unsure what you’re being charged. Cash advances almost always carry a higher APR than purchases or balance transfers. Late payments might trigger a penalty APR. Finding the different APRs may mean digging into the fine print. Look for phrases like “Terms and Conditions” or “Fees.” Remember to track the APRs on your spreadsheet.

The average credit card APR is about 17 percent, according to the Federal Reserve. A good APR would be anything around 17 percent or below. Credit card pricing is very fluid, with APRs changing frequently, which makes it all the more important to track this information, and to ask your lender to lower this payment. (If you’re been a longtime customer and regular with your payments, they just might.)

Your credit score is a factor in your rate, and the type of card will also have an influence. Reward cards, store cards, and secured credit cards often have higher rates. The higher rates are due to paying out rewards or covering higher default rates.

THE REPAYMENT CHART YOU DON’T WANT TO IGNORE

The chart below highlights the importance of debt elimination. Here you can see just how much you pay in interest when you have a higher balance, at a higher interest rate or APR. Keep in mind that your outstanding balance is used to calculate your minimum payment for the month, and the minimum will decrease as the balance is paid down.

If you’re in debt repayment mode, cease using credit cards. Cut them up, burn them, freeze them in a block of ice. The goal is to attack credit card debt as aggressively as possible while working to improve your score. When you improve your score, you can negotiate lower interest rates or qualify for balance transfers.

AMOUNT BORROWED

AT 17 PERCENT APR

AT 21 PERCENT APR

Years to Repay

Interest Paid

Years to Repay

Interest Paid

$5,000

18

$4,296.40

22.14

$6,704.63

$10,000

21.58

$8,770.10

26.75

$13,704.62

$20,000

25.17

$17,717.45

31.33

$27,704.61

WHAT IS A BALANCE TRANSFER?

When a balance is moved from one credit card to another, typically for a lower interest rate, this is considered a balance transfer. There is usually a 3 to 5 percent fee associated with transferring a balance, but there are specific credit cards that exist just for balance transfers that may waive these fees and offer a period of no interest on the transferred balance. To keep these special terms, at least the minimum payment should be made monthly. Always read the fine print and do the math before applying for a balance transfer—make sure you understand the terms and that it’s actually saving you money.

DON’T GET SCREWED BY LATE PAYMENTS

We’ve already discussed how not making your payments on time is one of the worst financial mistakes you can make. You will incur late fees, and your credit score can drop up to 100 points instantly. (Ain’t nobody got time for that.) Head off late fees on credit cards by ensuring that at least the minimum payment is on autopay every month. Eventually, you should be able to autopay the balance each payment cycle.

Paying more than 30 days late will cost you in fees and may trigger an APR increase. If it’s a one-off occurrence, you might be able to negotiate a reversal of fees, but don’t count on that option. Stick to your spreadsheet and use it to set reminders for when payments are due.

If it has been 30 days or more, your credit may have already taken a hit, but there are still options. If there is a reason payments aren’t being made on time, reach out to the credit card company in a letter or email asking for a reprieve. Job loss, financial crises, and pandemics are valid reasons to be behind on payments, and the company may remove the negative mark. Don’t wait: Contact creditors as soon as possible to make payment arrangements. Don’t let fear of judgment or shame get in the way of taking action that can protect you against financial ruin. Every creditor has a hardship department. If you need it, don’t hesitate to ask for help.

Student Loan Debt

Your student loans are held either by the federal government or by a private company. The vast majority of student loans are federal, meaning you borrowed money from the government; more specifically, the US Department of Education. In 2018, MeasureOne reported that 92 percent of borrowers had federal loans. That’s around 43 million borrowers with $1.4 trillion in student debt. MeasureOne reports private student loan debt to be around $124.65 billion. These are both shocking figures. Imagine if instead of being locked up in debt, this money was infused into the economy, or better yet, into your investment accounts.

As a borrower, it’s important to know the differences between federal and private loans, because they impact your repayment options. Private loans lack some protections offered to federal loan borrowers. Federal loans can be subsidized, which means the government pays the interest while you’re in school, whereas private lenders don’t typically offer subsidies. Federal loans offer income-driven repayment, which means that payments can be adjusted down if your income drops. Loan forgiveness is not offered by private lenders, but federal borrowers can apply for various loan forgiveness programs. Private lenders do not offer discharges, whereas federal lenders will discharge loans for those deemed to have permanent disabilities.

IS MY STUDENT LOAN DEBT THAT BAD?

This generation is among the first to see student loan debt of this magnitude. The feds reported that a chunk of 15.1 million millennials collectively carry $497.6 billion in debt, and that’s not even all millennials. This translates to an average student debt of around $33,000.

The average person entering the workforce today is at a disadvantage. Compared to earlier generations, larger debt means delays in wealth accumulation. There is a ripple effect that can happen when income is diverted to debt repayment. Paying down student loan debt decreases what is available to put toward retirement. Milestone purchases like a first home may be delayed because it’s harder to save for the down payment.

Although it might sound bleak, it doesn’t have to be if you have a plan. There is a way to efficiently pay down debt and build wealth at the same time.

THE COST OF DEFERMENT

Forbearance and deferment postpone student loan payments when you can’t afford them. There are key differences between the two services, and situations when each is appropriate. The biggest difference is how interest accumulates. Typically, you don’t pay interest on a deferred loan but you must qualify for deferment, whereas loans in forbearance accumulate interest. When the forbearance period is over, the total due on the loan will have increased. These options can sound tempting when you are short on cash, but as with all debt, it’s best to pay off your loans as fast as you can.

In the face of job loss or other financial hardship, reach out to your lenders to see if one of these options is ideal for your situation. They can walk you through the best options based on your needs and repayment goals. With federal loans, it may be better to apply for income-driven repayment. Under this program, you may be eligible for “payments” of zero dollars. These payments count toward the number of payments you need to qualify for loan forgiveness, and they also report as positive payments on your credit report.

There are several loan forgiveness programs, mostly based on your profession. The most well-known one is the Public Service Loan Forgiveness Program (PSLF). To qualify, you must be employed by a US federal, state, local, or tribal government or not-for-profit organization and work full-time. StudentAid.gov has information and resources around loan forgiveness, based on your specific situation.

CREATING A PLAN

Now that we know there’s hope, let’s take some action. The National Student Loan Data System (NSLDS) tracks all student loans by borrower. Log in and create a list of all your student loans. Separate the federal and private loans. Note the total amount you owe.

If the debt is less than one year of your salary, your best bet is to eliminate the debt as quickly as possible. If it is more than a year’s salary, it may be better to enlist the aid of a student loan repayment specialist. These advisors have the best up-to-date knowledge on legislation and loan programs. They can create a customized repayment plan that can save you tens if not hundreds of thousands of dollars.

I wish I had consulted a repayment specialist. As I now know, I should have been maxing out my retirement accounts and 457 for the two years I stopped investing to pay off my debt. At the time, the maximum contribution was $18,500 in my 403(b) and 457. That’s $74,000. Plus, there’s the $6,000 I didn’t put in a Roth IRA one year. That doesn’t include interest or employer matching. I could have been $80,000 richer had I done this, and that’s not even counting the interest. Don’t make the same mistake that I did.

For all federal loans, call your loan servicer and see if they offer an income-driven plan. This may require loan consolidation if you have older loans, but these plans usually offer lower repayments so you can pay off debt faster.

For private loans, pay close attention to your interest rates. Though private loans don’t offer the same benefits as federal loans, there are some perks. Private lenders may offer low interest rates and a cash-back bonus with refinancing.

When you have all your loans listed in a spreadsheet, decide on the order you will pay them off. You can pay the highest-interest loans first, then move down to the lower-interest loans, an approach known as the debt avalanche. The debt snowball is another method, and that’s the way I attacked my debt so fast. With this method, the debts are paid off from smallest to largest balances.

Either approach you choose is fine. The key is to pay off one debt at a time and to not let up until all the debt is paid off.

THE REPAYMENT CHART YOU DON’T WANT TO IGNORE (AGAIN)

You don’t need a lengthy preamble here. The bottom line is that the longer it takes you to pay off your student loans, the more you will end up paying in the long run. Unless loan forgiveness is part of your plan, this chart is your future. Choose your option wisely.

5-YEAR REPAYMENT

15-YEAR REPAYMENT

30-YEAR REPAYMENT

Interest

Total

Interest

Total

Interest

Total

$25,000

$4,702

$29,702

$15,447

$40,447

$34,877

$59,877

$50,000

$9,404

$59,404

$30,895

$80,895

$69,754

$119,754

$100,000

$18,807

$118,807

$61,789

$161,789

$139,509

$239,509

At 7 percent interest rate

REFINANCING STUDENT LOANS

Refinancing a student loan may be a great way to help speed up loan repayment. Lower interest rates allow for more of the payment to go toward paying down the loan principal, so there’s less money on which interest will accumulate. Some lenders even give you cash back for refinancing. Although there can be some great benefits to refinancing, proceed with caution.

Refinancing means a new lender pays off your existing loans and replaces them with a new loan with new terms. In the student loan space, all refinancing is done through private lenders. That means that if you have federal loans and refinance them, they are converted to private loans. All the federal loan advantages go out the window.

Losing those advantages, however, can be a good thing if the plan is to pay off your student loans in a year or two. And for private student loans, it’s always a good idea to refinance. Why? There is no limit to the number of times you can refinance, so shopping for lower rates periodically can be a great way to speed up repayment. Lower interest rates will save you thousands of your hard-earned cash. And if there’s a cash bonus, it can then be used to further knock down the balance.

If you have a federal loan and it’s going to take a while to repay, try to get on an income-driven repayment plan. Be aware that refinancing is not a good idea for federal loans. You don’t want to lose the federal loan protections for an extended period, especially if you qualify for loan forgiveness. A good example is the COVID-19 forbearance—people with federal loans didn’t have to pay from March to December 2020 because of the financial crisis related to the pandemic. These programs weren’t offered to those with private loans. With a private loan, you also wouldn’t be eligible for loan forgiveness programs.

When considering companies to refinance with, also beware of scams. There are companies that lure borrowers into believing they are getting debt relief. They usually collect an upfront fee and enroll you into income-driven repayment programs, charging to enroll you in the same program that you have access to for free by contacting your loan servicer. If it seems too good to be true, it most likely is.

Other Meaningful Loans

Outside of housing costs, people often spend a good amount of their take-home pay on vehicles. Instead of looking at the total price of cars, they start by looking at the monthly payment. Car loan terms get longer and longer to give the appearance of affordability. This makes cars more expensive in the long run, as longer loan terms lead to higher interest rates and higher overall costs.

If you have an existing car loan, look at your interest rate. (You should already know the rate, as your car loan should be included on your debt spreadsheet.) Refinancing may be an option to lower monthly payments and interest rates. This will free up money for debt repayment, saving, and investing.

A great time to refinance is if your credit has improved since the purchase of the car. It’s also a good idea if your current interest rate is higher than average. ValuePenguin lists the 2020 average interest rate as 5.27 percent on five-year loans. Refinancing is rarely a bad idea if it means freeing up cash. The only time it can be a bad deal is if the term of the loan is extended. Yet in times of financial hardship, extending a loan term is better than missing payments.

If you’re thinking about purchasing or leasing a new car, consider this choice carefully. Reevaluate if this choice aligns with your new money goals: Paying cash for a car, riding out your current car, or rocking public transportation may be your best bet if your primary goal is to pay off massive debt.

If buying a new car is an option, make sure your budget includes the cost of taxes, title, registration, and insurance. It’s smart to have a preapproval on financing in hand while shopping.

One Step at a Time

Talking about debt can be really heavy. Having all the numbers listed out on a spreadsheet may feel bleak. The debt can seem insurmountable, and it’s easy to believe you don’t have the means to really attack it. But you do, you can, and you will.

All it takes is a little intentionality and a plan. Focus on one goal at a time and go hard on that. Get a few emotional wins under your belt and build up the momentum to keep going. The secret is consistency. Consistent small actions trump occasional big actions.

Start right where you are, even if you don’t have a single extra dollar to throw at your debt. Start making calls to see if you qualify for zero-dollar student loan payments. Ask credit card companies for interest rate reductions to reduce your monthly payments. You may be able to get a same-day car refinance, instantly freeing up cash. These actions save you actual dollars in the amount you will eventually pay out, and they’re part of an attack on debt.

Every single dollar found should be assigned a job in advance. No longer paying that $450 on student loans? An extra $450 payment on that credit card can be a game-changer. There is hope!

You’ll get in the debt payment groove, and when you’re there, it’ll truly feel like you’ve received a raise. You’ll have found so much money to attack that previously insurmountable debt. In the meantime, here is a little cheat sheet:

7 WAYS TO TACKLE DEBT TODAY

1.Print a copy of your credit report from AnnualCreditReport.com. Scan it like a hawk. Report any inaccuracies immediately.

2.List out all your debt in a spreadsheet like the one here.

3.Figure out which debt you are going to pay first. Decide whether you want to take a debt snowball or debt avalanche approach.

4.Aggressively attack one debt at a time while paying the minimums on the rest.

5.Ask your lenders for lower rates on credit cards.

6.See if your federal student loans are under income-driven repayment plans. If not, apply if you are eligible.

7.Shop private student loan lenders for low rates and cash-back bonuses.

WHEN YOU’RE TRULY OUT OF CASH

Job loss or other financial hardships can happen to anyone. You should always have a plan, and remember to:

♦Apply for unemployment or public assistance immediately. Don’t let fear or shame get in the way of bringing in some form of income to stay afloat.

♦Call all your lenders and explain what’s going on. Remember, they all have hardship programs. Ask for payments to be deferred or decreased. If you have federal loans, make sure every loan is under an income-driven repayment plan. Submit documentation with your current financial status to make payments as low as $0.

♦Reduce expenses down to the essentials of daily living. The lower the expenses, the less money needed to cover them.

WHEN DO I FILE FOR BANKRUPTCY? AND WHAT HAPPENS NEXT?

Bankruptcy is the last resort in financial recovery. It seriously damages credit and can take years to rebound from. But in certain circumstances, it may be the only option to provide relief. It erases your debt, stops collection calls, and ends wage garnishments. It’s for people who aren’t meeting payment minimums and can’t get ahead of late payments. Bankruptcy is helpful when you reach the point at which your credit score is so damaged that bankruptcy may be an improvement.

Student loans and child support payments are rarely discharged in bankruptcy. However, credit card debt, past due rent, and medical bills can be cleared. This frees up resources to pay off the debt that is not dischargeable.

Seek out an attorney to determine the type of bankruptcy to file. It usually takes about six months for debt to be discharged. Once the discharge paperwork is in hand, the journey to rebuild starts.

Credit-builder loans and secured cards are excellent tools to employ right away to start working on getting that credit score up. Commit to never having a late payment by automating minimum payments. Making your regular payments on non-dischargeable debt should also build payment history. Your credit should be back in good standing within a couple of years.

Call to Action

Time to get to work. Here’s what to do now:

√Create a debt repayment spreadsheet.

√Request a credit report and download a credit monitoring app.

√Place all federal loans on income-driven payment plans, and refinance private loans for lower rates and sign-up bonuses.

√Pick one debt to start attacking today.

√Commit to never having a late payment.

√Call credit card companies to ask for interest rate reductions.

Step 2 › Know What’s Coming In and What’s Going Out

Ask most people what they earn and how much they spend, and chances are they’ll be way off. We often depend on mental math for ballpark figures when it comes to making financial decisions.

Many of us think we have more money in the bank than we really do. No, honey, there was not a bank error. There was wishful thinking. The truth is that most people spend outside of their means because they have no idea what’s coming in and what’s going out. This is how you accidentally end up cash poor or in debt. The reality is this situation is no accident—it’s a result of careless financial planning or, let’s be honest, a lack of awareness.

These spending habits are common and easy to fall into, so there’s no shame there. The good news is that correcting this blind earning-to-spending ratio is completely in your control. Similar to assessing your debt, you need to know what you have, and then you need to spend it (or save it!) with intention.

In this chapter, we’ll define “living within your means.” We’ll cover:

♦What you earn

♦Creating a monthly budget to curb overspending, here

♦How much take-home pay to allocate for wants versus needs, here

♦How to bring in extra cash, here

What Do You Earn?

Please do me this quick favor (trust me, it’ll be worth it). Set a timer for five minutes and complete this worksheet from memory. Don’t look up any numbers, just guess. No pressure. If you don’t know or can’t remember, leave those spots blank.

The goal is to complete this self-assessment sheet based on what you think you spend in a given month. We’ll crunch the real numbers in due time. If you want, you can download a PDF of this worksheet (and others from this book) at CallistoMediaBooks.com/smartmoney.

Income

$

Auto/transportation

$

Take-home pay period 1

_____

Car payment

_____

Take-home pay period 2

_____

Public transportation

_____

Side hustle

_____

Gas

_____

Other

_____

Maintenance

_____

_____

_____

Registration/tickets

_____

_____

_____

Parking

_____

Total monthly income

_____

Other

_____

Giving

$

Food

$

Donations

_____

Groceries

_____

Gifts

_____

Dining out

_____

Other

_____

Other

_____

_____

_____

_____

_____

_____

_____

Lifestyle

$

_____

_____

Childcare

_____

Savings

$

Tuition

_____

Holidays

_____

Travel

_____

Big-ticket misc. (e.g., a wedding or future child)

_____

Education

_____

Vacation

_____

Spending money

_____

Other

_____

Pet care

_____

_____

_____

Clothing/cleaning

_____

_____

_____

Business expenses

_____

_____

_____

Household items

_____

Debt

$

Personal care

_____

Student loans

_____

Children’s allowance

_____

Credit cards

_____

Sports/entertainment

_____

Store credit

_____

Exercise

_____

Bank loans

_____

Health expenses

_____

Loans from friends/family

_____

Professional dues

_____

Other

_____

Other

_____

_____

_____

_____

_____

Housing

$

Insurance and tax

$

Rent/mortgage

_____

Auto

_____

Maintenance/repairs

_____

Homeowners

_____

Phone

_____

Life

_____

Electric

_____

Medical/dental

_____

Gas

_____

Other

_____

Water

_____

_____

_____

Trash

_____

_____

_____

Internet

_____

Investing

$

TV

_____

Investment

_____

Home security

_____

Fees

_____

Cleaning services

_____

Other

_____

Yard maintenance

_____

_____

_____

Other

_____

_____

_____

Job well done! Now, let’s do this again, this time with the actuals. Pull up last month’s statements from your bank(s) and credit cards. Fill out the following chart to the penny. How close were your original numbers?

No shame—this chart just highlights how when we don’t really pay attention, it’s easy to lose track of how much money is going out.

Income

$

Auto/transportation

$

Take-home pay period 1

_____

Car payment

_____

Take-home pay period 2

_____

Public transportation

_____

Side hustle

_____

Gas

_____

Other

_____

Maintenance

_____

_____

_____

Registration/tickets

_____

_____

_____

Parking

_____

_____

_____

Other

_____

Total monthly income

_____

_____

_____

Giving

$

Food

$

Donations

_____

Groceries

_____

Gifts

_____

Dining out

_____

Other

_____

Other

_____

_____

_____

Lifestyle

$

_____

_____

Childcare

_____

Savings

$

Tuition

_____

Holidays

_____

Travel

_____

Big-ticket misc. (e.g., a wedding or future child)

_____

Education

_____

Vacation

_____

Spending money

_____

Other

_____

Pet care

_____

_____

_____

Clothing/cleaning

_____

_____

_____

Business expenses

_____

_____

_____

Household items

_____

Debt

$

Personal care

_____

Student loans

_____

Children’s allowance

_____

Credit cards

_____

Sports/entertainment

_____

Store credit

_____

Exercise

_____

Bank loans

_____

Health expenses

_____

Loans from friends/family

_____

Professional dues

_____

Other

_____

Other

_____

_____

_____

_____

_____

_____

_____

_____

_____

Housing

$

Insurance and tax

$

Rent/mortgage

_____

Auto

_____

Maintenance/repairs

_____

Homeowners

_____

Phone

_____

Life

_____

Electric

_____

Medical/dental

_____

Gas

_____

Other

_____

Water

_____

_____

_____

Trash

_____

_____

_____

Internet

_____

Investing

$

TV

_____

Investment

_____

Home security

_____

Fees

_____

Cleaning services

_____

Other

_____

Yard maintenance

_____

_____

_____

Other

_____

_____

_____

_____

_____

_____

_____

GROSS VS. NET INCOME

The difference between gross income and net income sometimes trips me up, even now. Gross income is a person’s total income earned before taxes and other deductions (actually sounds delicious, right?).

Net income is a person’s income earned after deductions and taxes. Deductions can include federal, state, and local taxes. Other taxes include Social Security and Medicare. Other deductions may be for health benefits, retirement contributions, and health savings account contributions.

When a person starts off with a big pile of cash (gross) and ends up with a little pile (net), they’re left wondering, What happened to my money?

Calculate Your Monthly Budget

To most people, budgets represent deprivation and leave a bad taste behind. But everyone—and yes, that means you, too—needs a budget. Budgets give us permission to spend without hurting our chance to pay off debt, aggressively save, and ultimately build wealth. Call it a “spending plan” if it makes it more palatable. The goal is to go from guessing you can afford something to knowing exactly where each dollar is going. In all reality, the results are security, happiness, and a surefire way to grow your wealth.

You’ve got the juice! In fact, consistent budgeting often leads people to believe they have gotten a raise. You won’t be worrying anymore, because you won’t be doing mental math on the fly. You’ll know exactly how much money you have to spend.

It takes at least three solid months of budgeting to get the hang of it, so give yourself some grace. We’ll go over three budgeting options. Pick the one that resonates most with you and try it for three to six months. The platinum rule? The best budget is the one you can stick to.

ZERO-BASED BUDGETING

Zero-based budgeting doesn’t mean there is zero money in your bank account. It means you tell every dollar of take-home pay where to go in advance. All your income is assigned to expenses, savings, debt repayment, and investing to ensure that every penny is working for you.

This is my preferred budgeting method. I used it to wipe out my debt, and still rely on it, as it helps me meet my savings and investing goals.

You’ll recognize your old chart friend below. First, you filled it out with what you thought you spent. Then you filled it out with your actuals. Now, you’ll fill out the sheet with a monthly budget in mind—what you can actually afford to spend.

For best results, don’t sleep on this task. Complete the budget sheet by the end of the week, filling in your expected income and expenses. Set a goal amount to put toward debt repayment, savings, or investing, and prioritize those numbers. Adjust nonessential spending to ensure you meet your goals. For example, if you want to save up $1,800 for a Cancun vacation in six months, you would have to save $300 a month consecutively for six months. Assign $300 in the vacation category, then adjust all your other spending. If it makes your life easier, download a PDF of this worksheet at CallistoMediaBooks.com/smartmoney.

Income

$

Auto/transportation

$

Take-home pay period 1

_____

Car payment

_____

Take-home pay period 2

_____

Public transportation

_____

Side hustle

_____

Gas

_____

Other

_____

Maintenance

_____

_____

_____

Registration/tickets

_____

_____

_____

Parking

_____

Total monthly income

_____

Other

_____

Giving

$

Food

$

Donations

_____

Groceries

_____

Gifts

_____

Dining out

_____

Other

_____

Other

_____

_____

_____

_____

_____

_____

_____

Lifestyle

$

_____

_____

Childcare

_____

Savings

$

Tuition

_____

Holidays

_____

Travel

_____

Big-ticket misc. (e.g., a wedding or future child)

_____

Education

_____

Vacation

_____

Spending money

_____

Other

_____

Pet care

_____

_____

_____

Clothing/cleaning

_____

_____

_____

Business expenses

_____

_____

_____

Household items

_____

Debt

$

Personal care

_____

Student loans

_____

Children’s allowance

_____

Credit cards

_____

Sports/entertainment

_____

Store credit

_____

Exercise

_____

Bank loans

_____

Health expenses

_____

Loans from friends/family

_____

Professional dues

_____

Other

_____

Other

_____

_____

_____

_____

_____

_____

_____

_____

_____

_____

_____

_____

_____

Housing

$

Insurance and tax

$

Rent/mortgage

_____

Auto

_____

Maintenance/repairs

_____

Homeowners

_____

Phone

_____

Life

_____

Electric

_____

Medical/dental

_____

Gas

_____

Other

_____

Water

_____

_____

_____

Trash

_____

_____

_____

Internet

_____

Investing

$

TV

_____

Investment

_____

Home security

_____

Fees

_____

Cleaning services

_____

Other

_____

Yard maintenance

_____

_____

_____

Other

_____

_____

_____

_____

_____

_____

_____

_____

_____

_____

_____

As you move through the next few months, track your transactions daily, ensuring that your spending remains aligned with your goal. Did you go a little over your limit in one category? Look at other areas where spending can be curtailed to make up for it.

PERCENTAGE BUDGETING

50/30/20 is a form of percentage budgeting. In this method, monthly income is divided into these three buckets. Spending and savings are allocated accordingly:

♦No more than 50 percent of monthly income goes to essential needs like housing, transportation, and food.

♦No more than 30 percent of monthly income goes to wants and nonessentials like travel, spa services, and shopping.

♦At least 20 percent of monthly income goes to savings, investing, or debt repayment.

For this budget sheet, downloadable at CallistoMediaBooks.com/smartmoney, allocate your total monthly income so that it totals 50 percent, 30 percent, and 20 percent in each of the appropriate categories. (The percentages can also be adjusted to what makes sense for you.)

TOTAL INCOME:

50% OR LESS OF INCOME

Fixed/essential expenses

Total

Fixed/essential expenses

Total

Rent/mortgage

_____

Water

_____

Donations/giving

_____

Trash

_____

Childcare

_____

Auto insurance

_____

Groceries

_____

Homeowners insurance

_____

Car payment/car registration

_____

Life insurance

_____

Public transportation

_____

Medical/dental insurance

_____

Gas

_____

Professional dues

_____

Electric

_____

Other

_____

30% OR LESS OF INCOME

Variable/nonessential expenses

Total

Variable/nonessential expenses

Total

Dining out

_____

Sports/entertainment

_____

Travel

_____

Exercise

_____

TV

_____

Spending money

_____

Home security

_____

Pet care

_____

Cleaning services

_____

Clothing/cleaning

_____

Yard maintenance

_____

Personal care

_____

Gifts

_____

Other

_____

Vehicle tickets

_____

_____

_____

Parking

_____

_____

_____

Children’s allowance

_____

_____

_____

20% OR LESS OF INCOME

Savings

Total

Debt

Total

Holidays

_____

Student loans

_____

Replacing big-ticket items

_____

Credit cards

_____

Vacation

_____

Store credit

_____

Other

_____

Bank loans

_____

_____

_____

Loans from friends/family

_____

Investing

_____

Other

_____

Investment

_____

_____

_____

Fees

_____

_____

_____

Other

_____

_____

_____

ANTI-BUDGET

“Anti-budget” sounds like saying “get lost” to budgeting. Of course, you know me a little by now, so you know it doesn’t quite work like that. It works by focusing on meeting one or more set financial goals per month. As long as that goal is met, there is no need to detail your transactions.

Simple! But it does take some work upfront to come up with the limit and not overdraft your account.

For this budget sheet, figure out the gap between your income and expenses. Then choose the amount you want to put toward debt elimination, savings, or investing. Here’s the kicker: You’ll want to automate it, so that you can set it and forget it. Revisit these numbers when your pay increases, when a debt is paid off, or when one savings goal is met.

One thing to note: You’ll still need to calculate your monthly expenses, which means revisiting your actual budget sheet (see here). If your expenses were out of whack that month or your situation has changed, you’ll need to hit the drawing board to calculate your essential expenses so you can get an accurate understanding of your gap. If your income changes, you’ll also likely need to make adjustments.

______________ (Income) – ______________ (Expenses) = ______________ (The gap)

Debt elimination

$

Savings

$

Investing

$

Wants vs. Needs

This conversation is about to get philosophical, but here we go. What is a “want” and what is a “need”? This I don’t have the answer to because it’s specific to each individual and will vary depending on circumstance. So here is your test.

Say you lost your job and unemployment benefits only covered half your current expenses. What things would you need to survive? What things would you willingly or reluctantly cut back on? Well, those are your needs versus wants, respectively.

THE NECESSITIES

The absolute essentials that we need to live are known as the Four Walls. This is a concept I learned from radio host, author, and financial expert Dave Ramsey. The Four Walls include food, shelter, transportation, and utilities, all of which are necessary for survival. Here are some tips to keep these costs manageable.

Food: You don’t have to live off rice and beans, but be aware that food budgets are often overinflated. Home-cooked meals and food you can buy in bulk are money savers.

Shelter: Housing costs easily eat up budgets. Renting out a room in your home or minimizing your housing expenses is a great way to save.

Transportation: New cars are hot, but what’s even hotter is all the money you’ll save by buying a used car with cash. Public transportation, walking, or riding a bike might be the best option, depending on where you are.

Utilities: Utilities include water, gas, electricity, internet, and trash. To mitigate fluctuations in seasonal pricing, request balanced billing. This sets fixed pricing throughout the year. If you’re facing financial setbacks, most utility companies offer programs to reduce or temporarily forgive payments.

FUN MONEY

We can’t deprive ourselves of joy. Cutting spending on what we love can stop us from building strong financial habits: Why would anyone feel fully committed to a lifestyle that seems miserable?

If you’re able, include some “fun” money into your nonessential spending. The beauty of fun money is that it can be spent however you like. I recommend taking out the monthly designated amount in cash. This is especially helpful when you’re budgeting with a partner. That big concert ticket or that new vivarium for your gecko can be your choice, and your choice alone.

What’s ironic is that once people know they have the money to spend freely, they hardly ever spend it all. They use the excess for other things in their budget. Simply knowing that there is freedom built into the budget makes the budget easier to stick to.

THE TEMPTATION AND DANGER OF LIVING IN THE MOMENT

You should enjoy your money, but that doesn’t mean you should spend recklessly. Coming of age in Los Angeles, I lived in the moment far more often than not. During that time, I made less than $50,000 a year while leasing a brand-new luxury car and buying big-ticket items like expensive— $2,000- to $3,000-a-pop—bags. I even had a designer dog: Big Poppa, a seven-pound black and brown Yorkie-poo with a wardrobe that rivaled mine.

I didn’t have money in the bank. What I did have was credit card debt—debt that was later discharged only by filing for bankruptcy. This debt was a major blemish in my credit history that took 10 years to recover from. You only live once, and it’s your life to live. But it’s far better to enjoy this one precious life without bankruptcy on your record.

SAYING “NO”

Some friends and family members look at me as the one who “made it.” It didn’t matter that I was drowning in debt and dealing with a negative net worth. The big ol’ house, the luxury car, and a stable career meant, to everyone else, that I had made it. When you “make it” where I come from, there is an obligation to give back.

I sometimes loaned money I didn’t have to friends or went on a trip I knew I couldn’t afford. I grew resentful toward others for “forcing” me to overextend myself. I’ve even lost friends because they never paid me back the money they borrowed.

In the end, I had to get comfortable with a two-letter word: no. What made it easier was the budget I set for myself, which includes fun money and giving money. I will never again loan anyone money. If I don’t have the money to give, or I don’t expect to get my money back, the answer is a firm “no.” And that “no” is a complete sentence.

Increasing Your Monthly Income

There are only so many ways you can cut your expenses. But here’s some good news: There are infinite ways to make money. The fastest way to increase your monthly income is to start where you’re currently employed.

You can make this happen not only by asking for a pay increase (see below) or to work extra hours, but also by maximizing your benefits. Save money by utilizing health-care and dependent care flexible spending accounts (FSAs). Commuter benefits, too, can cut transportation costs—often a big-ticket monthly expense. If you get tax refunds, adjusting your tax withholdings can increase your monthly take-home pay (you just might not get a refund).

NEGOTIATE YOUR PAY

The single biggest impact on your income comes from the thing we all hate to do: ask for a raise. When it comes to approaching the powers that be, show up prepared. Take a few days to lay out a plan and go for it. The easiest way to get a raise is to ask for one, but not enough of us simply ask the question.

The most powerful thing you can do is gain as much insight on the qualifications and pay for your position across multiple companies. Reach out to recruiters for your specific industry. They have salary insights for multiple companies and know what they’re looking for. Use this information to highlight your skills and determine how much to ask for.

Having a mentor, especially one at the decision-making table, can make all the difference. Proactively seek out someone you admire who has a similar background.

The biggest way to boost your income could be by getting a job somewhere else. If you have an offer, use it in negotiations with your current employer. It’s very expensive to replace an employee, so your employer probably doesn’t want you to leave. Share any offers you’ve received and explain how paying you more may save the organization money in the long run.

Note that discrimination in the workforce is a very real thing. Men still make more than women. People of color make even less. With any factor that marginalizes a person, the chances are that it has a negative effect on their pay. When a person has multiple marginalizing factors, the discrimination compounds. This information isn’t meant to be discouraging—acknowledging the facts allows a person to come prepared to address it in the discussion. These tough conversations need to be had. If possible, it can be useful to enlist a white male friend in the same position or a similar position as yours to share his salary; then use that information in negotiations. (If, dear reader, you are a white male, then you can be this friend!)

It can be scary to ask for more money, especially for people in marginalized communities. Marginalized people are more likely to face negative repercussions. For this reason, excellent record-keeping will be your friend. Discrimination can often be subtle. If things have to be escalated, your thorough documentation can be used to file a complaint. Address concerns in writing to supervisors and the human resources department internally. There may be a need to include your union, a lawyer, or the Equal Employment Opportunity Commission (EEOC).

Often people get lowballed on their starting salary. Most people never negotiate; they just settle for the first offer. This leaves thousands on the table that can compound over the length of a career. Asking for a raise is not about squeezing more money out of companies; it’s about fairer compensation. A 2020 PayScale study found that women make $900,000 less than men on average over a 40-year career due to the gender wage gap. This amount doesn’t factor in the years of compound interest lost. For people of color, this wealth gap gets substantially wider.

This section is pretty heavy, so let’s recap. It’s fair to assume that you are underpaid. Change this as soon as possible by asking for a raise. Come to the negotiation table armed with knowledge of your industry and the value you bring to the organization. Be prepared to discuss gender and racial pay disparities if you’re affected by them.

CONSIDER A SIDE HUSTLE

A side hustle is anything you do to earn money outside of your full-time job. Although they should be enjoyable, side hustles are not a hobby. Hobbies cost money, whereas side hustles earn you money. Like every dollar that comes in, the money earned from side hustles should have an assignment. In addition to putting more cash in your pocket, the secondary revenue stream of a side hustle makes you less dependent on your “real” job. Many of the biggest companies today started as a side hustle.

Here are just a few side-hustle ideas:

♦Sell household items on an online marketplace

♦Work as an online virtual assistant

♦Teach a course on a skill

♦Teach English online overseas

♦Drive for a ride-share service or be a personal shopper

♦Rent out a room or space in your house

♦Rent out a personal vehicle

When considering a side hustle, first ask yourself if the time and effort that go into the hustle are worth it. Anything I pursue, I compare to my hourly salary at my full-time job. If the pay doesn’t come close, it would be better to pick up more hours at work or get a second job.

Never let a side hustle cause you to lose your main hustle. Don’t fall behind at work or get fired for using the company Wi-Fi or a company device (e.g., a corporate computer) in pursuit of more income.

Some companies, especially multilevel marketing companies, present themselves as lucrative side hustles but come with hefty upfront costs. Don’t fall for the trap. You should not be going into debt for a side hustle. Minimize your out-of-pocket investments as much as possible.

The trick is to start making money as soon as possible. Don’t put up unnecessary barriers or overcomplicate things. You don’t need an LLC, a fancy website, or a sophisticated payment system. Put yourself out there and have people use apps like Venmo to pay you. Once you start raking in the cash, you can start looking for ways to formalize your hustle.

Goal-setting Sheet

If you could snap your fingers and get paid what you really, really want, how much would that be? I’m not talking about winning the lotto, but rather your vision of the earnings you are truly worth. Don’t hold back—your boss, parents, and partner aren’t reading this.

In the sheet below, fill in your total debt (what you owe), followed by your current earnings, what you project you will earn in the next year, and your ideal earnings. Only you can decide what to do next, but this sheet should tell you when it’s time to ask for a raise, begin a side hustle, or explore something new.

What you owe

$

Current earnings

$

Projected earnings

$

Ideal earnings

$

Call to Action

After reading this chapter, you should:

√Have a clear idea of your income and expenses, and understand the gap between the two.

√Choose a budget and stick to it.

√Understand essential and nonessential spending, and make a list of your wants and needs.

√Know how to bring in extra cash through a side hustle.

Step 3 › Put Your Money in the Right Bank

Dramatic shifts in banking in recent years have made many of us less trusting of banks. This has, in part, led to the rise of digital currencies like Bitcoin. Digital access is extremely important to younger people, which makes visits to banking branches rare.

Yet regardless of in-person branch visits or digital management, you should think of banks as strategic allies in your wealth acceleration. Convenient access to your money, reasonable lending opportunities, and low to no fees make for a great partnership.

This next section is about making sure we’re using the banks that serve us best. We’ll cover:

♦How to choose the right bank, here

♦If credit unions should be considered, here

♦Understanding account types and fees, here

♦A challenge to pad your savings with $1,000, here

Bank Basics

Before we launch into where you’ll bank, let’s cover a few of the basics. You’re likely familiar with checking and savings accounts, but let’s examine them in the context of choosing a bank that will serve you.

A checking account is a deposit account with a bank. Simply stated, you put your money in, and you draw it out when you need it. Checking is a way to effectively, securely, and efficiently exchange money. It is the account that’s mostly used for daily transactions. To open a checking account, you need to be able to deposit funds and provide documents to verify your identity. This means providing a Social Security number and reports related to your earnings.

Unlike saving and investment accounts, money doesn’t sit in checking accounts long term. It’s hard for banks to make money from them; therefore, they offer little to no interest. In fact, these accounts often cost banks money to maintain. They’re used to get people in the door and entice them to get loans or certificates of deposit (CDs), which are deposits you make to the bank that you agree not to touch at all for a fixed term in exchange for, typically, a fixed interest rate.

Joint checking accounts are, no surprise, accounts shared with someone else. They can be used whenever there is a mutual interest in combining funds. Many people set up a shared account for shared expenses like rent and utility bills. They can be used by a parent helping their child manage their money (or a child helping their parent manage their money, as the case may be). A joint account must be set up with both parties present. The account can then be accessed by either without the consent of the other.

A savings account is a relatively safe place to park money for your short-term goals. These accounts pay a small amount of interest and usually limit the number of withdrawals you can make per month. They are typically linked to your checking account(s).

Pro tip! Proceed with caution when opening a joint checking account. Mutual trust is essential. Agreements should be made on how money is deposited and what it’s spent on. Both account holders are liable if one is subject to collections or garnishments. It’s advisable that each person holds an individual account outside of the joint account. The solo account should serve as that person’s primary account, with some funds redirected to the joint account.

Choosing Your Bank

There are three main types of personal banking institutions to choose from: traditional, internet-only, and credit unions. It’s important to choose wisely. The right bank should meet your current needs and set you up to meet future goals.

You’ll be choosing from a plethora of banks, and there is also no limit on the number of accounts a person can hold, so there’s a lot to bear in mind as you move forward. Most people landed in their current bank for the location or some other convenience. Often, it’s where their parents banked. Many people put little thought into the choice; it’s just a box people tick when they start earning money.

Yet now that you know banks can be your strategic partner, you can get the most out of the relationship. Although it’s possible to get everything you need from one bank, some people choose to spread their dollars over multiple banks to get the best bang for their buck.

There are comparison sites that make this decision-making process super easy. My favorites are NerdWallet and MagnifyMoney because they have their own rating systems that they use to weigh banks against one another. These sites are regularly updated with banks’ new products and service offerings. Something to keep in mind is the relationship between banks and comparison sites. The sites don’t charge you, but they can make money from banks if you open an account through them. This affiliate relationship isn’t necessarily a bad thing; it just speaks to the importance of intentionally choosing a bank—and the due diligence required when doing so.

To determine how banks stack up and what to watch out for to ensure your current and future money needs are met, here are some important factors to consider.

Insurance

Most people trust that banks are a safe place for their money. To protect against bank failure, insurance covers up to $250,000 per depositor. However, not every bank is insured, and coverage limits can vary. Look for a bank insured by the Federal Deposit Insurance Corporation (FDIC) or a credit union insured by the National Credit Union Administration (NCUA).

Products and Services

Banks can offer more than just checking, savings, and loans. Online bill pay, mobile banking, cashier’s checks, and money orders are a few things you might want or need. Some institutions also have access to wealth management and financial planning services.

Interest Rates

Look for the highest rates for money deposited and lowest rates on money borrowed—you’re trying to earn the highest amount of interest on the money you put in the bank, and you’re trying to pay less interest on the money you borrow. Online banks usually pay much higher interest rates than traditional banks. If you’re shopping for car or property loans, the lower the interest rate you can get, the more you’ll save long term.

Fees

It’s important to look for ways to avoid or minimize banking fees. Many fees can be avoided by setting up direct deposit for your paycheck or by having loans paid automatically. Some common fees to look out for include maintenance, ATM, overdraft, wire transfer, and money order fees.

Location

If going into a physical location is important to you, then proximity matters. Find out where bank branches are located and how many there are. Determine how to access money when you’re out of town.

ATM Access

Weigh how easy it is to access your cash without a fee. Some banks waive or credit ATM fees for all ATM withdrawals, so access is limitless. Consider when and how you’ll want to access cash.

Customer Service

It’s important to know your bank has your back. When questions or challenges arise, it should be easy to talk to a human who can help.

Inclusivity

Banks have not had the best track records for inclusivity. Women and minorities have typically not had the same access to low-fee banking services or affordable lending. Research the bank’s history and track record for providing services to underserved populations. Understand the leadership and board policies and take note if they align with your personal values. For example, I would not bank at an institution where my deposits were going to support businesses profiting from prison labor.

DISCRIMINATION IN LENDING

It would be irresponsible to leave out the role banks have played in this country’s wealth gap. Historically, women and people of color have not had the same access to banks and their lending services. Bank accounts weren’t even an option for some people, not to mention access to preferential interest rates and investment products. The Equal Credit Opportunity Act—which outlawed credit discrimination on the basis of race, color, religion, national origin, sex, marital status, age, or receiving public assistance—was only passed in 1974. And although these kinds of discrimination are rightly illegal now, discrimination still happens.

Let’s do a quick history check. The Freedman’s Savings and Trust Company was established in 1865 by President Abraham Lincoln. It was a place for newly emancipated Black soldiers and workers to “safely” deposit money. These banks were so successful that they were able to open 37 branches between 1865 and 1871, according to the National Archives and Records Administration. Although many depositors had been led to believe that the federal government was backing the Freedman’s Savings and Trust Company’s assets, the bank was, in fact, unprotected. When the bank was later shut down, more than 61,000 depositors lost a total of nearly $3 million, according to the US Department of the Treasury. Black depositors were never repaid in full; many received nothing, and some waited years to receive only part of their money. Huge fortunes were lost due to government indifference to the financial security of Black Americans.

Having access to inexpensive capital has allowed some people to build financial empires, whereas denial of services has left others in poverty. For example, particularly from the 1930s through the 1960s, while white families were offered affordable home loans, Black families were denied mortgages and prohibited from buying homes in affluent neighborhoods.

The Federal Housing Administration (FHA) started insuring private mortgages in the 1930s, with the aim of making homeownership more accessible: Interest rates and down payments went down with the federal backing, and thus more people could afford to buy property. But the FHA typically refused to insure mortgages in primarily Black neighborhoods. At the same time, both formal and informal “redlining” policies restricted Black families to predominantly Black neighborhoods. More than 98 percent of $120 billion in federally backed mortgages went to white homeowners from 1934 to 1962. White families were given a huge advantage that helped them build generational wealth; Black families were put at a disadvantage that impaired their wealth building.

Despite anti-discrimination laws that have been in place since the 1960s, people of color were hit hardest by the predatory lending that drove the 2008 financial crisis and was later made illegal. These communities also suffered the most during the Great Recession. The NAACP filed suit against 14 major lenders in July 2007 alleging racial discrimination in high-cost subprime home loans. This is just one example of institutionalized racism.

Decades of exclusionary policies have had a compounding effect. Currently, half of Black households do not have traditional bank accounts or have very little access to banking services. Over a lifetime, this can cost a person $40,000 in fees. For Black Americans, basic checking and savings accounts are harder to open and more expensive to maintain. Black consumers also face higher-cost loans even with comparable credit ratings. They often turn to payday loans (a quick loan that comes with a high interest rate) and end up paying 400 to 600 percent in interest and fees on the loans.

The best way to fight lending discrimination is to report lenders to the Consumer Financial Protection Bureau. Reporting lenders helps others have access to affordable capital.

INTERNET-ONLY BANKS

Internet-only banks sprang up in the ’90s with the popularization of the internet. These banks are close cousins to their traditional counterparts, yet there are features that set them apart.

Online banks don’t spend on physical locations, and they transfer these savings to their customers. With internet-only banks, customers generally enjoy higher interest rates on their savings accounts and lower banking fees. Another perk is that it often doesn’t take much effort to open and maintain an account. And, since internet-only banks were born online, they usually have more streamlined and user-friendly mobile platforms than traditional banks, making on-the-go banking quick and easy.

What’s missing from online banks is that personal relationship. It’s nice to be able to chat with your banker or to know your loan officer personally. Traditional bank managers have some discretion with approvals or account changes—knowing them can work in your favor.

ATM access can be both good and annoying. Internet-only banks don’t have their own network of ATMs, so ATM fees from other banks are usually waived or refunded. Still, the online bank may impose monthly caps on the number of times you can use ATMs.

Another challenge can be making deposits. Without direct deposit, getting money into online accounts can take some work. Mobile deposits are great, but what about cash? Although they have the benefit of having a large network of affiliated ATMs, it can be a struggle to locate an ATM with the ability to accept deposits.

There is also often a delay with accessing funds. Online banks are sometimes used for larger savings accounts to get higher returns, which may include emergency savings. In the event of an emergency, it could take up to two days to access your money.

Some traditional bank services—like investing, insurance, and notary service—are hard or impossible to find in the internet-only banking space. And loyal customers of traditional banks may be offered special perks, including preferred rates and investment advice at no extra charge. Those can be game-changers when it comes to wealth building.

I personally keep the majority of my savings in an online bank. I have my checking account at a credit union and only keep enough money in the account to cover bills. I keep $1,000 in the credit union savings account. All other money is either invested or in the high-yield online savings account.

WHAT’S THE DEAL WITH CREDIT UNIONS?

If I could sing my love for credit unions from the rooftops, I would. Okay, I’m a little biased, but these banks have always been good to me. (Of course, you still need to do your due diligence and see if they’re right for you.)

A credit union is like a traditional bank but smaller and run cooperatively. It’s kind of a for-the-people, by-the-people approach to banking. Whereas a traditional bank is a for-profit institution working to maximize profits for shareholders, credit unions are nonprofits owned by their members, so any profit a credit union makes goes back to the members, i.e., the customers. Being a member of a credit union makes you a partial owner. How dope is it to say you own part of a bank? With ownership comes the ability to vote for the board. Each person gets an equal vote, regardless of how much money they have in the bank.

Although there is no charge to be a member, membership is often (but not always) based on some kind of affiliation. There are military credit unions and city credit unions, for example.

Credit unions are usually a local operation, with few physical branches to access. The small size also limits how tech-savvy they can be, so that mobile app might not be too cute or efficient. There also may not be as many service offerings as traditional banks. For instance, there may be just a few options for credit cards compared to the wide range available at the big banks. Access to customer service could be limited to business hours. But notably, because credit unions are nonprofits and thus exempt from federal income tax, they generally offer higher interest rates on savings accounts and lower banking fees.

Banking Best Practices

When you’ve found the bank that’s right for you, here are the things to keep in mind with your accounts. Get the most out of the relationship by making sure the bank works for you.

There is no limit to the number of accounts you can have, so consider setting up multiple accounts to help meet your wealth-building goals, and take advantage of sign-up bonuses. Set up safety measures to protect yourself from fees. Make sure you are getting the best interest rates by looking outside of traditional banking.

SERIOUSLY, AVOID FEES

Banks charge fees for a source of revenue. Many accounts have fixed fees and potential penalty fees associated with them. Fixed fees are assessed for things like maintenance and transactions. Penalty fees are assessed for overdrafts or low account balances. Fees are one of the most important things to consider when looking at checking and savings accounts. They can eat away at cash faster than any banking interest rate could grow your funds.

The best way to avoid fees is to set up an account with a bank that doesn’t charge built-in account fees, such as those charged when your balance falls beneath a set minimum, or fees just to keep accounts open. Look for banks that offer the first few cashier’s checks or money orders free, because it’s a mark of a good bank if they reduce the fees a person pays from the jump. Why should you pay to access the money they are already making money off? You can also ask for fees to be waived if you do something like accidentally overdraw your account. This is where a relationship with bank managers and tellers could come in handy.

If you are considering opening a new account or switching banks, be on the lookout for sign-up bonuses. Some banks deposit cash directly into your account just for opening, and there are also cash incentives for setting up direct deposit. Don’t base a banking decision on the sign-up bonus alone, but getting a little extra cash for doing what you were going to do anyway sounds good to me!

Another way to avoid fees is to make sure that the minimum balance required is met. Make sure to read the fine print, as minimums vary from bank to bank. Some account minimums are $100, whereas others may be in the thousands. Some banks measure this amount by averaging daily balance or by what’s left at month’s end. Sometimes the minimum balance requirement is waived with direct deposit.

There may also be fees associated with using out-of-network ATMs. It’s great to have a bank with a robust network of ATMs that can be accessed for free. You can also avoid ATM fees by using your debit card and getting cash back. When grocery shopping, for example, swipe that debit card and ask for cash back. The drawback to doing this is that only smaller sums, typically $20 to $100, can be accessed at a time.

It might be a surprise, but you could always ask not to have fees charged. If accounts are in good standing or you have other products through the bank, they might work with you.

OVERDRAFT PROTECTION WILL SAVE YOU CASH

Overdraft protection can save a person from bouncing a check. It can also save the embarrassment of a transaction not going through at checkout. With overdraft protection, you link another account—like a savings account or a line of credit—to your checking account. If the balance in your checking account falls below zero, the bank automatically transfers money from the linked account to cover the difference. This allows the transaction to clear for a small fee. It also protects a person from being hit with a more expensive non-sufficient funds (NSF) fee.

CREATE SEPARATE SAVINGS ACCOUNTS

Again, there is no limit to the number of accounts you can own. Got savings goals? You may want to set up separate savings accounts for specific long- or long-ish-term goals, like a new car or a down payment on a home. I like to call these separate savings or sinking funds. It can be hard to tell if a goal is reached if the money meant for one goal, like a house or a car, is commingled with other savings, so this strategy can be helpful.

You shouldn’t make any withdrawals from this account until the savings goal is met. It’s also a good idea to have a separate account for emergency funds, because when you leave your emergency funds in an account used for general savings, it’s hard not to view the need for a new couch as an emergency.

Beware of monthly maintenance fees. If an account does have such fees, setting up automatic deposits could negate them. Maintenance fees can also be avoided by meeting minimum deposit requirements.

AUTOMATE, AUTOMATE, AUTOMATE

Imagine if your boss handed you your earnings in cash for every day you worked. Then the IRS came to the door, collected their share, and handed you back the balance. This would cause some friction. Instead, paying taxes is automated, and the money’s gone before you get paid. Out of sight, out of mind.

This same automation can be hacked to reduce friction and meet your financial goals. To determine how much to save via autopay, let’s take a look back at the Goal Sheet you created earlier (see here). Remember that dream of your amazing future self? Actions that you take today will help make that dream a reality.

As a rule, the minimum you should save is 10 percent of your income. Ideally, this 10 percent is a starting point. Add small percentages every few months to build that savings muscle. Before long, the goal that seemed like a dream will be a reality. Nobody ever regrets saving too much money.

CONSIDER HIGH-INTEREST SAVINGS ACCOUNTS

Once you’ve built up your savings, you don’t want it sitting in any old account earning a fraction of a percentage point in interest. Only up to $1,000 should be sitting in a savings account linked to a primary checking account for immediate access. Outside of that, it’s time to look into high-interest savings accounts.

High-interest savings accounts pay 20 to 25 times the national average of a standard savings account, according to Investopedia. This means that instead of earning $5 on $5,000 in savings, you earn $100, comparing a standard rate of 0.10 percent APY (annual percentage yield) versus the 2 percent you could earn in a high-interest account. These accounts used to be offered only through online banks, but several traditional banks now offer this type of high-yield savings account.

Money in high-interest accounts should serve one of two purposes. It should house emergency savings of around three to six months’ worth of expenses. It can also be used to save for larger purchases like cars or home down payments. High-interest accounts should hold funds that need to be accessed in five years or less. All other money should go into investments that yield even higher returns.

If a high-interest account is not offered at your bank, then you’ll have to set up an account at a different bank, which could be a drawback. Making an electronic transfer could be the only way to access the savings, and instant access to this money may not be a possibility.

The $1,000 Challenge

Here is an opportunity to build that savings muscle. Our goal is to save $1,000 over the next year with little to no effort. If saving $1,000 is not a big deal, try to double or triple the savings. If $1,000 is a big stretch, scale back. Don’t sell yourself short, though. You are capable of so much.

The first thing we always need to do when setting money goals is to give your dollars an assignment. Tell that money where it needs to go and when it needs to get there by. Saving $1,000 in a year is about $20 a week.

Next, log in to your online checking account. Set recurring $20 weekly transfers into a savings account. Here is where the discipline comes in: You’ll need to decide whether you want to use a connected savings account or not. If there is any temptation to access the savings before the year is up, consider another route. Setting up an online savings account with no debit card may be a great option. Know thyself.

Once the transfers are set and the savings is accounted for in your budget, forget about it. Out of sight, out of mind. In 50 weeks—less than a year—you will have met your goal!

Call to Action

In this chapter, we learned how to:

√Understand what your banking needs are and determine which type of account or accounts to open or close.

√Determine whether opening a joint account with someone else would be beneficial.

√Be aware of the fees associated with new and existing accounts and set measures in place to avoid fees.

√Start the $1,000 Savings Challenge.

√Create separate savings accounts to fund specific goals.

√Recognize discrimination in banking. If you are not being offered the rates and services you qualify for, know that you have options.

Step 4 › Make Your Credit Card Work for You

It’s time to tap into that inner hacker to get the most out of your credit cards. Credit cards open up a world of opportunity, from free travel to cash back on your purchases. But proceed with caution. With one major slip-up, people have found themselves deep in debt, and the high interest rates on credit cards make this type of debt hard to climb out of.

Credit card companies do not—I repeat, do not—have your best interest at heart. They entice you with sign-up bonuses and points, and it may seem like you’re getting a deal. But ultimately, credit card companies almost never lose. For every few people winning at credit card hacking, there are thousands of people deep in debt, making credit card companies richer.

According to Business Insider, the majority of millennials said the biggest percentage of their debt is credit card debt. My hard-and-fast rule: Eliminate all credit card debt as soon as possible. When using credit cards, always pay off the balance monthly.

This chapter is going to give you the tools to win the credit game if you determine that credit cards are right for you. We’ll cover:

♦What credit card will cater to your needs, here

♦The best credit cards available, here

♦How to win the credit card game

Consider Your Needs

It’s time to keep it all the way real. Most people—like 90 percent of people—should not even consider using or applying for new credit cards. Credit can be a slippery slope into debt. It’s a fast way to sabotage wealth-building goals if you’re not careful.

Let me be very clear: We are about to cross into potentially dangerous territory. I am not interested in taking you with me only for you to fall into the quicksand of debt. (If you skipped through the last few chapters, have debt, and think budgeting is for suckers: Close this book.)

You’ve got to prove you’re ready for the responsibility of owning a credit card. The goal is to come out of this wealthier, not in a tight spot.

You’re not ready if:

√You currently have credit card debt

√You haven’t created a budget that you are willing to stick to

√You think everyone has debt and it’s just a way of life

√You think that building wealth is for other people, or that rich people are evil or greedy (this belief will cause you to self-sabotage and you’ll stay broke)

You can roll with this chapter if:

√You don’t have any credit card debt

√You have a plan for every one of your dollars, and any credit card spending is within your means and accounted for in your budget

√You have set up a savings automation and haven’t had to dip into your savings

√You have good to excellent credit (anything above 661)

√You know you have what it takes to build wealth

I know the feeling of not being able to qualify for credit cards. You get that sinking feeling that you’re not good enough. That somehow, you’ve messed up and you don’t belong. That feeling of rejection hits deep.

There may be several factors that contribute to denials. Instead of accepting defeat, we have the power to prevent being denied for credit again. If a low credit score is a factor, it may take six months or more to improve your score. You’ll have to reduce existing credit card balances, ideally below 30 percent, and improve payment history by paying on time, every time.

If your credit card application is denied, the lender is obligated to send you a letter stating the reason. There should be a phone number on the letter. If there isn’t, search for the lender’s “reconsideration” number. There is usually a 30-day window during which you can ask for the application to be reconsidered. They’ll ask you a series of questions to see if it’s feasible. If you’re still denied, ask for a detailed explanation. Ask if they offer cards that someone with a credit profile similar to yours is more likely to be approved for. Don’t be discouraged, and keep working on your credit as discussed in Step 1: Figure Out What You Owe.

Know that discrimination occurs even when it comes to credit card approvals. Approval rates differ depending on zip code. Your chances of getting approved are much higher if you live in a predominantly white neighborhood. Try opening a post office box in a more “affluent” neighborhood. Applying with that address may increase the odds of approval. Although this type of systemic discrimination is shameful, it’s important to be aware of what you might be up against.

Beware of companies that claim to “fix” credit. You are capable of improving your credit on your own by continuing to build that positive payment history, working to lower existing balances, and disputing any inaccuracies on your credit report. Self-empowerment is the key to wealth building.

As you chip away at existing debt, remember to work with your current lenders to lower credit balances. Ask for lower interest rates so more of the payment goes to the principal (scripts can be found, “Talking Points with the Credit-Company Robots”). Ask them to remove any late payments they may have reported to the credit bureaus. Let them know that you are working on improving your credit and ask if there is any way they can support you. You might be surprised by how much others are willing to help you.

Don’t get discouraged. In another six months, try applying again. You got this.

Know What’s Out There

There are thousands of credit cards circulating throughout the world. Credit card companies are aggressively competing for customers. They steadily pump out new cards paired with awesome incentives. Your goal is to know how to use their thirst to your advantage. Thanks to the information age, we have tools to compare cards at our fingertips. Several comparison sites like NerdWallet, MagnifyMoney, Credit Karma, Bankrate, and Debt.com rank the best credit cards for you. I love NerdWallet because it also provides thorough and up-to-date research on the pros and cons of the cards and whom they best serve. If you’re on Facebook, you should also join credit card rewards groups where you’ll find tips for credit card hacking, usually for travel or cash-back rewards. Rewards change rapidly, and these groups are where the most up-to-date peer-reviewed information lives.

There are many different cards to suit your needs. Here are the card categories:

♦Rewards cards give you cash back, points, or miles for every purchase made.

♦Low-interest cards offer low interest rates, sometimes as low as zero. These cards are typically used for balance transfers or for making large purchases with no interest.

♦Student cards are for students with a cosigner, or students over 21 with a form of income.

♦Credit-builder cards are secured cards—which you set up with a security deposit—or unsecured cards with higher interest rates.

Important factors to consider for each category are the annual fees, points, cash back, and incentives. There are several cards that don’t have annual fees or that waive them for the first year. Other cards offer bonuses so good that the fee may be worth it. Annual fees should be avoided unless they can be justified by the rewards. In case there is an annual fee, always try calling the company to see if they will remove it.

Points and miles are used for cards associated with travel. They can be exchanged for free or discounted flights, hotel stays, rental cars, etc. Some cards use points for cash reimbursements of travel-related purchases.

With cash-back cards, percentages of purchases earn cash. Cash back earned can be used to reduce card balances or can be sent as a check or transfer into a bank account.

Outside of annual fees, there are several other types of fees associated with credit cards that we’ll dive into later.

The Best of the Best

Credit cards should cater to your lifestyle. This comes down to assessing your financial goals and personal preferences. That’s why cards with bonuses for travel, eating out, and online shopping (I relish two-day delivery) are right up my alley.

Generally speaking, here are the MVP credit cards that give you the biggest bang for your buck. These cards are perfect for someone without credit cards or who hasn’t applied for a card in the last 24 months. If you have applied for more than five credit cards in the last two years, it may be worth waiting to apply for another one. To apply for these cards, you need to have good to excellent credit. Remember, this is typically a score higher than 661.

Chase Sapphire Reserve

This card is known to have the best sign-up bonuses and is clutch for travel lovers. It gives you complimentary access to over 1,000 airport lounges and triple points on travel and dining. This card has a hefty $550 annual fee, but it can be worth it. The perks include a sign-up bonus of $750 toward airfare, hotels, car rentals, and cruises; a $300 annual travel credit; and $100 every four years for Global Entry or TSA PreCheck fees.

Note: Chase has some of the best cards, but it also has a very strict restriction that some people call the “5/24 rule.” You’ll automatically be rejected for a Chase card if you’ve opened five or more credit cards (with any bank, not just Chase) in the last 24 months.

Discover It Cash Back

This card offers the most cash back that never expires and isn’t capped each year. Use it for regular daily purchases like gas, restaurants, and grocery stores, and you could earn up to 5 percent cash back. The best part is that there’s no annual fee.

American Express Gold Card

You’ll get quadruple points on purchases at restaurants and supermarkets, a $100 annual airline credit, and a $100 credit for charges through Amex’s Hotel Collection, plus free room upgrades. There is a $250 annual fee, but no foreign transaction fees. The card also covers car rental loss and damage insurance.

Citi Premier Card

This card is for people who want the perks of a good travel rewards card without having to pay a large annual fee. The annual fee is $95 with a sign-up bonus of either $750 toward airfare or a $600 gift card. Points can also be redeemed when you shop online at Best Buy or Amazon.

Chase Freedom Flex Card

This impressive credit card launched by Chase offers a $200 cash-back bonus after spending $500 on purchases in the first three months. This no-fee card also offers 5 percent cash back on grocery store purchases up to $12,000 in the first year, plus other significant bonus categories.

Amazon Prime Rewards Visa Signature Card

This card offers 5 percent cash back on Amazon purchases. There’s no annual fee, but you must be an Amazon Prime member to apply. Upon approval, you get a $70 Amazon gift card. Travel perks include travel and emergency assistance. The card covers lost luggage reimbursement up to $3,000 for you and immediate family members. You’ll get baggage delay insurance for baggage delays over six hours, which is worth $100 a day for three days. The card comes with travel accident insurance for air, bus, or train travel, or cruises booked with the card, for up to $500,000. You also get an auto rental collision damage waiver and roadside dispatch assistance.

Remember that bonuses offered change frequently, so it’s always best to check what’s right for you before applying. The companies that have cards with an annual fee typically also have no-fee or lower-fee alternatives.

Tips for Travelers

Credit card rewards can really enhance your travel experience. Access to plush airport lounges, first-class tickets, and room upgrades are lovely. For international travel, the cards can help you easily access funds without foreign transaction fees. The cards with the most benefits often come with high annual fees, but the benefits usually far exceed the fees—if you use them. If travel is not your thing, you’ll likely want to opt for a lower-fee alternative, or a card that emphasizes different benefits, like cash back.

If you travel as part of your job, that can give you a leg up when working the points system, depending on your company’s policy. Sometimes companies expect you to pay for travel-related expenses and reimburse you; you might even request this option to reap the bonuses on your own card using the company’s money. However, proceed with caution. You still have to wait for the reimbursement, which can take some time. If this is your situation, I suggest beefing up your emergency savings. Ensure you can pay off the balances monthly if you aren’t reimbursed in a timely fashion. We never want to find ourselves in a position where employers don’t pay us, or delays end up hurting our ability to make other on-time payments.

If you are self-employed, travel cards for small businesses have some of the best rewards. Even if you don’t have a formal business but have a small side hustle like dog walking, you may be able to qualify. You can skip the huge annual fee with the Chase Sapphire Reserve card in favor of the bank’s business card. The Chase Ink Business Preferred card gives new customers 100,000 points as a sign-up bonus. That’s one of the highest sign-up bonuses out there. In addition, you’ll earn triple the points on travel and other business-related purchases. All this for an annual fee of only $95.

If travel is not part of your job but is part of your lifestyle, the Capital One Venture Rewards card is the most straightforward travel card. They have great travel rewards, a big sign-up bonus, and flexible redemption options. You earn two miles for every dollar spent, and those miles are worth a penny each toward eligible travel expenses. There are no rotating bonus categories, blackout dates, or travel restrictions. You also get to skip the $95 annual fee for the first year.

How to Win the Credit Card Game

Credit card incentives are enticing. But to get the most out of your cards and not get burned by credit card companies, you have to know how to play the game. This game requires strategy and persistent tracking—and it is rigged against you, so proceed with extreme caution.

You have to be willing to invest a few hours a week to formulate your initial strategy. Arm yourself with knowledge, thoroughly researching each card and comparing fees and incentives before applying. After that, you need to spend a few hours a month tracking and updating your cards. I love social media groups formed around credit card rewards for this purpose. Search terms like “travel hacking” or “rewards points” and find people who will share their up-to-date tips and hacks.

To get the most reward points, you are expected to spend a large sum of money over a short period—like $3,000 to $5,000 over three months. Doing so could easily lead to overspending. Using cards, in general, makes people less cost-sensitive than if they had to pay with cash. Exercise caution and plan your transactions carefully.

Credit cards are designed to never be paid off—that’s why the minimum payment is so low. It’s enticing to just pay the minimums. Yet with high interest rates that accrue over time, making minimum payments could plow you into massive debt, fast. On top of that, not paying balances in full can lead to higher interest rates. That is not the road we want to go down.

Credit card companies are hip to the game. One false step and you can get shut down (see the second commandment below).

Pro tip! Reading the fine print extends beyond knowing the things you should avoid. It is also the best place to find the unique perks that you may not know about. Perks can include extended warranties, cellphone replacement, and roadside assistance, and are different from card to card. The easiest way to determine your secret perks is to call the credit card company and ask them to send you a summary of all the perks.

YOUR CREDIT CARD COMMANDMENTS

1.Thou shall pay in full. No balance should be left behind. Statement balances have to be paid off every month. This means if the minimum payment is $100 but your balance is $2,000, you need to pay off the $2,000 by the time it’s due or you’ll be hit with a huge interest charge on that remaining balance.

2.Thou shall read the fine print. Know the various fees and when the introductory rate expires. For example, Chase prohibits repeatedly opening accounts for the purpose of generating rewards. Break the rules and your account may be frozen, or your rewards taken away.

3.Thou shall budget for annual fees. Track when fees will be due and budget for them in advance. Better yet, create a fund dedicated to annual fees.

4.Thou shall keep up-to-date records. Credit card–tracking spreadsheets are a must. Transactions made for every card opened need to be tracked. Keep track of bonuses, incentives, interest rates, and fees. This step cannot be skipped! Tools like AwardWallet can be used in lieu of spreadsheets.

5.Thou shall wait to reapply. Wait three to six months and apply for two cards at a time to minimize the credit ding for inquiries. Some credit card companies, including Chase, are getting savvy and won’t approve applications if there have been more than five credit card applications at any bank within 24 months. Every time you apply for a new credit card, your score takes a small two- to five-point hit.

NIP FEES IN THE BUD

Fees can be the difference between you coming up or you getting got. Here are all the fees you can incur and how to avoid them.

Interest fees or finance charges

You pay these when you don’t pay your statement balance in full by the due date. Fees are where credit card issuers make most of their money. Pay your entire statement balance by the due date. If the card is used for balance transfers or cash advances, interest accrues immediately on transferred balances unless the card offers a special zero percent APR on transferred balances, a limited offer that usually ends in six to 20 months.

Annual fees

Not every card has one, but the ones that do usually have excellent perks. These annual fees can range from $69 to $550. If your spending or lifestyle habits don’t justify the annual fees, avoid them. You can also call your credit card issuer and ask to have the fee waived. Fees may also be waived for the first year or for active-duty military personnel.

Balance transfer fees

These occur only when you transfer debt from one card to another, and the fees usually range from 3 to 5 percent of the transferred balance. These fees are separate from the finance charges from balance transfers, and they’re sometimes waived for the introductory period. Transferring balances to lower-interest cards can be part of a strategy to pay off debt. The savings from the lower rate may justify the balance transfer fee.

Cash advance fees

These are levied when you borrow cash from a credit card; they’re generally about 2 to 5 percent of the cash withdrawn. This is an expensive way to get cash and is not recommended. Not only is there a fee, but interest accrues immediately.

Foreign transaction fees

These fees are imposed when you make a purchase in a foreign country. They range from 1 to 5 percent. Most travel credit cards don’t charge these fees, and Discover and Capital One don’t have this fee on any of their cards.

Late payment fees

You owe these when you don’t make the minimum payment by your due date. The fees vary but can never be more than the minimum payment. There is a federal act that caps late payment fees up to $28 for the first time, and $39 for additional late payments. To avoid these fees, set up autopay and create calendar reminders. Paying more than 60 days late could lower your credit score and increase your interest rate.

Over-the-limit fees

These fees, which consumers have to opt in to, are fees assessed when you spend over your credit limit. If you don’t sign up for this fee, any transactions over the limit are simply declined. To avoid the fees, simply don’t opt in. The amount of the fee varies but legally cannot be more than however many dollars you went over your credit limit.

Returned payment fees

You’re charged up to $35 if your payment doesn’t go through. Before paying your credit card bill, make sure you have enough money in your bank account to cover it.

Subprime card fees

These cards are for those with bad credit. Just steer clear of these cards, period. It’s best to get that credit up!

KNOW YOUR INTEREST (APR) RATES

You know from Step 1—the debt chapter—that credit card interest rates are much higher than other loans because there is no asset to collect against in the case of a defaulted payment. Car loans and home loans, remember, can be cheaper because the lender can collect property in the event of default. Because credit cards are unsecured, these companies are taking on more risk. The high rates protect them against late payments and default. That also means they’re the Hella Scary type of debt.

Credit card companies make their largest profits from interest payments. So being aware of these high fees can empower you when selecting a new card. (As you agreed to in your commandments, pay off your balances in full, on or before the due date. And avoid the temptation to overspend while chasing bonuses.)

APRs are adjustable based on market fluctuations. They also vary by card type with a 3 percent variation on average. This rate can go up by 10 percent on a card for those with bad credit. These rates shouldn’t make or break your decision to apply for a card because your intention is to never to carry a balance, and you won’t owe interest if you’re paying your monthly balance in full, on time. But you should always know the average rates to ensure you’re being offered a fair rate. CreditCards.com offers a weekly rate tracker that is a good resource. If your rates are far off, that may indicate other issues with your credit history.

As always, read the fine print to know what you’re getting.

UNDERSTAND BALANCE TRANSFERS

A balance transfer is when you transfer debt from one credit card to another. It is typically done to get a lower interest rate. Sometimes you may even get a zero percent interest rate for a window of time.

This can help speed debt repayment as more of the payment is going to the principal balance, but be careful to look at the balance transfer fee and the rates on transferred balances. These rates are separate from the APR and start accumulating from the date of transfer.

Also, be aware that transferring a balance may give you the same psychological win of “paying off” a debt. Don’t transfer balances without a clear repayment plan in place.

AVOID CASH ADVANCES

Avoid cash advances on credit cards at all costs. If you need to pull cash, playing this credit card game is a bad idea. The fees are high, and interest accumulates immediately on withdrawal.

TALKING POINTS WITH THE CREDIT-COMPANY ROBOTS

Here is what you say when calling to negotiate with credit card companies.

For a lower APR (compare rates on a comparison site prior to the call):

“Hello, my name is _______________. I’ve been a customer of ____________ since ________, and I’m interested in securing a lower interest rate. I’ve made payments on time, and I spend _____ dollars per _______ [month/year] on this card. I’ve recently compared rates from _______________ [competing credit card companies]. They offer _____ percent interest rates on average. I’d like to stay with you based on our history, but going with one of these companies is compelling. Would you be willing to match that offer?”

To reduce or waive fees:

“Hello, my name is _______________. I’ve been a customer of _________ since ______. I’ve noticed ________ fee on my account. I’m in the process of improving my finances and would like this fee waived/reduced. Is this something that can be done as a one-time courtesy?”

KEEP YOUR EYE ON THE PRIZE

You set your budget for a reason. You are only using credit to increase your wealth-building ability, not to go into debt. Doing so takes strategy and planning.

There is a heavy price to pay for overspending. Higher payments and a decreased credit score are not all you can anticipate if you get yourself into debt you can’t pay off. Massive debt will impact your ability to access affordable lending in the long run. Although buying a house or investing in another large purchase might feel far away, it’s important to leave this option open for yourself, for both personal and wealth-building reasons. You’ve worked too hard to get here. Don’t get pulled into an overspending trap.

YOUR DUCKS-IN-A-ROW CHECKLIST

Building on your credit card commandments, here are a few things to do and to avoid once your new credit card arrives:

DO

DO NOT

Only use cards to pay for things in your budget

Overspend

Keep thorough records of rewards, spending limits, and transactions

Forget to track transactions

Pay off all balances in full

Carry a balance

Ask for annual fees to be waived

Pay annual fees without having the means to take full advantage of the perks

Keep balances below 30 percent, preferably below 10 percent

Take cash advances on cards

Stay current on the best cards

Apply for another card for at least another four months

Call to Action

After reading this chapter, you should feel confident in being able to accomplish the items below.

√Ensure that you are ready before playing the credit card game. Don’t set yourself up for failure—you’ll end up paying for it.

√Before opening any cards, come up with a strategy. Decide which cards to apply for and the type of transactions they’ll be used for.

√Set up autopay to cover the balance due on your cards. If you can’t cover this expense each month, you know you’ve gone outside your means. At the very least, set an autopay for the minimum payment so that you never have a late payment.

√Create a credit card tracking sheet or use a site like AwardWallet to track payments, bonuses, and important dates.

√Join credit card rewards groups and stay up to date on credit card comparison sites to ensure you’re maximizing the benefits of your cards.

√Call credit card companies and ask them to send you a document with all the perks outlined.

Step 5 › Pay Your Taxes or Go to Jail

Taxes are a big deal. A really, really big deal with serious implications if you ignore deadlines, protocol, and procedure. This chapter may seem dry, but it’s important stuff to know. Not paying taxes is a federal crime punishable by fines up to $10,000 or five years of jail time. No matter your income level, it’s not worth playing around with tax fraud.

It’s not just about avoiding the legal repercussions. It’s about maximizing every single dollar you’ve worked hard for. Let’s step our game up like the adults we are. We can make the process simple, so we can get it done. Let’s stay ready by making clear plans and understanding what we owe so we don’t have to scramble when it comes to tax preparation. In the following chapter, you can look forward to learning:

♦Why the heck you have to pay taxes, here

♦Whether to take the standard deduction or to itemize, here

♦How to choose whether to work with a tax professional or use tax software for filing, here

♦What can go wrong (so you can prevent mistakes), here

♦How to maximize your take-home pay, here

What You’re Doing When You File Taxes

A tax return is filed to report income, expenses, and other relevant financial information. It is usually filed once a year and submitted to the Internal Revenue Service (IRS). In the United States, tax filings are typically due on April 15. However, because of the COVID-19 pandemic, the filing date was pushed back to July 15 in 2020.

You may wonder why we have to file taxes in the first place. Well, our tax dollars fund our economy. They pay the salaries of government workers and the police and firefighters. Tax money supports road maintenance and public libraries and parks. Filing ensures we are contributing to society. (This is also a reason to vote for your congressional and state representatives—to have a say in who controls these funds—but that’s for another book.)

In 1909, Congress passed the 16th Amendment, which allowed the federal government to tax individual personal income. It became law in 1913, and Americans have been required to pay federal income taxes ever since. By law, any American making the income minimums must file a federal tax return. The minimums are a gross income of over $10,000 for individuals and $25,000 for married couples filing jointly. Those who earned more than $400 from self-employment must also file.

Taxes are a thorn in the side of a lot of people. There is an interesting dance between avoiding taxes and getting the public services we expect. The bottom line is that as long as you have an income and you’re not claimed by somebody else as a dependent, you need to file taxes.

Preparing Your Taxes

First things first—get your documentation in order, whether you are filing on your own or using a tax filer. At the very least, you’ll need:

♦Social Security number or Employer Identification Number

♦W-2 form (if you’re an employee) or 1099 form (if you’re an independent contractor)

♦Documentation of retirement account contributions

♦Property tax from the county, including special assessment supplemental taxes

♦Form 1098 (mortgage interest statement)—check your lender’s website

♦Receipts from cash or noncash charitable donations

♦A form 1098-T (tuition statement) from each of the schools where you had eligible expenses

♦Medical and dental bills, but only if you had significant expenses and the plan is to itemize (submit receipts and note that you can only deduct costs not covered by insurance)

♦Last year’s federal, state, and local tax returns

You can file taxes electronically or by mailing in your return. Submitting online will usually get refunds to you faster. It’s even faster if you set up a direct deposit of your refund.

Deductions 101

A tax deduction reduces the amount of income that is subject to being taxed. One example of a deduction is a retirement contribution. Let’s say, in one year, you contribute $10,000 to a retirement account from a $100,000 salary. The $10,000 can be subtracted from the salary earned, leaving $90,000 subject to taxation. Deductions help decrease a tax bill, often increasing your tax refund.

There are two types of deductions: standardized and itemized. You must choose one, as there is no way to use both in a given tax year. If you’re married and filing jointly, you and your spouse can only choose one way to file for both of you. The bottom line is that it is important to choose the option that will yield the highest overall deduction.

The standard deduction is a fixed amount taken from your adjustable gross income. This amount is based on your filing status. Single filers qualify for the smallest deduction, whereas those filing as head of household qualify for the greatest deduction. With the steady increase in the standard deduction, this is the route most taxpayers take.

Itemizing deductions is when you list out the specific expenses incurred over the year that decrease taxable income. It is done by filing separate forms in addition to the standard tax forms. There are instances when itemizing exceeds the standard deduction, especially if you have extensive business expenses. Taking itemized deductions could drastically decrease tax liability, as these expenses lower your taxable income. Itemizing takes more time and requires filing additional forms, yet it can be worth it to itemize if you save (or get back) far more than you would with a standard deduction.

DO I NEED AN ACCOUNTANT?

Whether to hire a professional to file taxes depends on your personal circumstances. The decision may vary year to year, so it’s worth exploring often. The only professionals qualified to help you file your taxes are tax lawyers, certified public accountants, and enrolled IRS agents.

Online Filing Resources

Online software walks you step-by-step through the tax filing process. You may even have access to additional video or chat support if you have questions. There are several organizations partnered with the IRS in the “Free File Alliance,” although notably, as ProPublica has reported, the “alliance” was formed when companies made a compromise with the federal government in which the government agreed not to make its own free filing system that all taxpayers could use, so businesses could keep making money off taxpayers. Under this agreement, for-profit businesses provide free electronic filing only to those who meet certain guidelines.

Online tools are going to be most efficient when your taxes are fairly simple. Simple means you have one W-2 and would benefit from the standard deduction. Although taxes may be a pain, online resources can lessen the burden.

ACCOUNTANT VS. ONLINE FILING

Which is best for saving money?

Online resources could be free or cost anywhere from $10 to $120. The cheapest tax professional will cost you in the low-hundred-dollar range. Clearly, the online program is the cheaper option, but you have to be confident that you know what you’re doing. I’m of the school of thought that if something isn’t enjoyable and I know a professional can do it better than me, I outsource it.

If you have more complicated taxes and you file incorrectly, this can have financial and legal implications. Many people find that it saves them money and stress to go to a tax professional. Tax professionals are usually able to increase your refund (not to mention save you time). In all likelihood, professionals know more money-saving avenues that you may not have considered. Do note that if you go through a tax professional, it may take several days or several weeks to get your tax returns back.

Are you planning to itemize?

You need to make sure you are accounting for all the deductions you are eligible for. Excluding an important deduction could cost you. A tax professional may be able to find a deduction that can save you far more than what you’re paying them. Especially with the way tax laws change, it’s hard to stay on the ball. It’s not hard to make mistakes when filing your own itemized deductions.

Online software depends on you entering your information. It can’t guess if you have life situations that may have tax consequences. A tax professional can take a more holistic approach, including information that online software might not ask for. A professional can also provide advice on current and future financial goals.

Have you had a major life change this year?

If you got married, bought a house, or had a baby in the last year, you might need some help. Chances are good that you’ve never had to include these events in your tax filings. A professional can make sure that these changes are properly incorporated in your tax filing, avoiding fees and unnecessary entanglement with the IRS. Tax professionals are also available to you year-round to help answer tax questions. They can help you plan out your taxes in advance. That way, any payments or refunds won’t be a big surprise and tax season isn’t such an overwhelming burden.

Do you own a business?

Trying to figure out quarterly taxes is enough to make your head spin. This is something a tax professional can help you figure out. They can also help you avoid making major mistakes, especially if this is a new business.

Do you owe taxes from a prior year?

If there are years for which you still owe taxes or you have to file several tax forms at once, a professional could help. They can work with the IRS on your behalf to create a payment plan and mitigate any negative repercussions. They can also review and amend previous tax returns, righting errors that may reverse the taxes owed. They may even be able to get you a refund from a prior year.

What Can Go Wrong?

There are three major tax penalties: one for not paying what’s owed, one for not filing a tax return at all, and one for not paying enough throughout the year or for underpayment. These penalties can be rather costly.

If you don’t file a tax return or an extension by the filing deadline, a penalty accrues starting the first day past the deadline. If you fail to pay your taxes, you will be assessed a penalty every month on top of your overall IRS debt.

If you are self-employed or you earn other forms of income, you can be subject to quarterly taxes. To see if you owe quarterly taxes, log in to IRS.gov and check your account. Earnings from prize winnings, investments, and stock options also fall under this category. These earnings may incur an underpayment penalty if not filed properly.

Even if you pay the taxes all in one lump sum, you can still be charged a penalty for underpayment. Estimated taxes should be paid on a quarterly basis. Avoid this penalty by using the IRS’s online withholding calculator to see what to withhold per quarter.

The best way to avoid penalties is to file on time, pay what you owe, and track your estimated taxes as you earn.

HUMAN ERROR

Human error is a real thing. Even a tax professional can make mistakes. Although tax software may be good at catching problems, it can only go off the information you provide. To decrease the chance of errors, be as prepared as possible.

Don’t worry, though: If you realize that you’ve made a mistake shortly after you send your taxes off, you can file an amended tax return with the IRS. If the IRS catches the mistake, they’ll send you a notice in the mail. They usually give you 20 to 30 days from the date you receive the letter to fix it.

SWITCHING JOBS

The perfect time to check in on your withholdings is when you start a new job. Withholdings are what your employer deducts from your paycheck to distribute to government agencies for tax purposes. You get a fresh start when you fill out that W-4 with the rest of your HR paperwork. Maximize your take-home pay by rightfully claiming the proper withholdings. When you overpay taxes, you are reducing the money you get paid. The government takes this overpayment and returns it to you in the form of a refund—essentially, you’ve given Uncle Sam an interest-free loan. No more!

Make sure you keep track of your W-2s from every employer over the course of the year. If you lost your job, the IRS wants a portion of your severance or your unemployment payments. You also owe taxes on the lump sum payout for accumulated vacation or sick time.

If you plan to itemize, one cool deduction you can take is the deduction from job searching. You can write off recruiter fees, agency fees, travel for interviews, and résumé prep. You can also deduct moving expenses from your taxes if you have to relocate.

CALCULATING SIDE-HUSTLE INCOME

Bringing in a little extra money on the side? Guess what—side hustle income is usually counted as self-employment. You gotta pay taxes on those earnings on a quarterly basis. Fortunately, there’s a way to minimize taxes by taking deductions. Make sure you track all your expenses related to your side income. Keeping good records can save you from overpaying taxes. Expenses like mileage and gas for driving for Lyft or website hosting fees for bloggers are all tax deductible.

A good rule of thumb is to open a separate checking account for your side hustle money. Use a credit card dedicated just to your business so that expenses aren’t commingled with your personal expenses. It’s good practice to put 25 to 30 percent of your side hustle income in a savings account to cover any upcoming tax bill.

If you’re doing work for a company, you’ll most likely get a 1099. That income is subject to quarterly taxes. Paying taxes after the tax filing deadline may incur underpayment penalties. This may be a good time to use the IRS’s online withholding calculator.

What If I’m Self-Employed?

The United States tax system is a “pay as you earn” system. If you are a W-2 employee, your job withheld taxes from your paychecks to pay them to the IRS on a regular basis. But if you are self-employed, you are expected to do this on your own. That’s where quarterly filings come in. Here are a few things to look out for when you are self-employed:

Save continually

A good rule of thumb is to save between 25 and 30 percent of your income for taxes all year. This way, you’re not scrambling during your quarterly filings. If you’re unable to pay on a quarterly basis, you’ll need to pay a lump sum when you file in April, so be sure to save.

Watch out for self-employment tax

This tax is used to pay for Social Security and Medicare, and you’re responsible for the total sum. If you were employed, you would only be responsible for half this payment because employers are responsible for the other half.

Use the 1040-ES form

This form is used to estimate quarterly tax payments. It contains a worksheet similar to the form 1040 that you would’ve received from an employer. Payment dates are usually April 15, June 15, September 15, and January 15.

Prepare your schedule C

When you file your annual return, you need to use a schedule C form to report the income and loss from your business. A schedule C form is a part of the standard 1040 to figure out total tax liability for the year.

Understand yourself as a business entity

When you are self-employed, you must decide what form of business entity to establish. Your form of business determines which income tax returns you have to file.

Consider home office deductions

If you use part of your home for a business, you may be able to deduct some of your home expenses for business use. This applies to both homeowners and renters. Similarly, you can deduct a portion of the internet and phone bill that you use for your business purposes.

Don’t forget to contribute to retirement savings

You can amass huge tax savings by contributing to retirement plans like a SEP IRA or solo 401(k). All contributions are tax deductible.

Calculate your health insurance premiums

If you’re paying for a health and dental plan out of pocket, you can include yourself, your spouse, and your dependents if you’re on the same plan. These payments can be deducted from your taxes.

Filing Aftermath

What happens after you submit that e-filing or mail off those returns? Once the IRS receives your taxes, it passes your form through an inspection. Your Social Security number is verified, and they ensure your dependents haven’t already been claimed.

Next, your files get reviewed. They look for math errors. They check to see if you owe back taxes, unpaid child support, or other debts. They also may need to make corrections. Any refunds are usually sent within 21 days of filing.

There may be a chance you get audited if your taxes look suspicious— for example, if you have excessive write-offs. But audits can also be selected at random. Your chances of being audited increase if you make math errors, fail to report some income, or claim too many deductions.

WHAT IF I OWE MONEY?

If you filed your taxes and found out you owe money, it may throw you into a state of shock. Remain calm. If you cannot pay the full amount of taxes you owe, you should still file by the deadline. Pay as much as you can to avoid penalties and interest. You should also contact the IRS to discuss your payment options. They may be able to provide short-term extensions and installment agreements. They may even be able to waive penalties.

If you’re like me and don’t play around with the IRS, you could also look into other options for payment. Taking out a low-interest personal loan at your credit union would be reasonable. You would use the loan to pay the IRS in full by the filing deadline. Then, you put the loan into your debt snowball. Pay that off without fear of having to pay penalties or be subject to wage garnishments.

WHAT IF I GET AUDITED?

Getting audited doesn’t necessarily mean that you did something wrong. Sometimes your filings are randomly selected. You’ll be notified of an IRS audit via mail. The IRS never calls or emails you without first notifying you by mail.

The IRS can audit you for the three years from the date that you last filed your return. You are legally required to keep all your tax documentation for three years. The IRS will request specific documents in the notification letter. The documentation is either reviewed in an in-person interview or via mail.

The audit may conclude one of three ways. The IRS can find no changes, meaning you have satisfied what they needed in the audit. They can propose changes, which you can agree or disagree with. If you agree, you’ll have to sign a form and you’ll be instructed on how to pay if you owe money. If you disagree, you can request a conference or file for an appeal.

HOW TO MAXIMIZE YOUR TAX RETURN

It’s our obligation to support the nation’s economy. We should be paying what we owe, without under- or overpaying. My goal is to break even with every filing.

The way to get ahead when it comes to filing taxes is to make sure you have all your ducks in a row. Have all your documentation squared away. This will make filing taxes way easier.

Tax planning is super underrated. If you hire a professional who can help you year-round, they’ll help you decide what to withhold. They can help you plan and file quarterly taxes, making sure you avoid penalties and error-related audits. More important, what you owe or get in a refund won’t be a surprise come tax time.

Call to Action

When it comes to your taxes, keep in mind these important actions:

√Keep all your tax documents organized.

√Annually assess whether to use a tax professional or tax software.

√Avoid the chances of being audited by minimizing mistakes.

√Adjust your withholdings to take home as much of your earnings as possible.

√File quarterly taxes if you’re self-employed or you have a side hustle.

√Know how to avoid penalties.

√Consider hiring a tax professional for ongoing tax planning.

Step 6 › Invest in Your Retirement (If You like Money)

The key to building wealth is time in the market. That’s why people who begin investing early in their careers have the incredible ability to amass a fortune at almost any income level.

Sadly, so many young people miss out on this opportunity to grow their wealth because they aren’t privy to or are overwhelmed by this crucial step. Yahoo! Finance reports that 43 percent of millennials are not investing. In fact, many have invested less than $500 over their lifetime. All too often, people don’t invest because they don’t think they make enough money, they don’t trust the market, or they are intimidated by the process of selecting investments. In short, they don’t understand how to invest.

This is a problem—yet one that is easily overcome. There are tools to address each of these objections and to get your money working to earn you even more money. In this chapter, I will show you that you are already an investor. It’s all about focusing on the long term and knowing that you have what it takes to build real wealth. You’ll walk away from this chapter knowing:

♦The power of compound interest that works for you, here

♦Investing through a job vs. investing solo

♦The road map to start investing

♦How to invest even when you’re in debt, here

The Math Will Blow Your Mind

Retirement may seem so far away, but these are the years you can build a significant nest egg. Long gone are the days when we could depend on Social Security or a pension. It’s largely our responsibility to ensure we have assets available to us when we are no longer working. For this reason, think of investing as less about what you will do when you retire and more about what your net worth is and can be.

Retirement funds can be invested in a multitude of accounts. Within those accounts, the funds are invested in stocks, bonds, and annuities. You can access these funds at the full retirement age of 66, but you can also access them as early as 55 with no penalty. People born after 1960 have to be 67 to access Social Security.

Retirement accounts can be employer-sponsored or individually managed. Most people use a combination of both, as they have different tax implications. What’s awesome is that the government gives you a tax break for investing in your retirement.

The best retirement account for you is going to depend on whether you’re employed by a company, work for the government, or are self-employed. We’ll break down each plan in more detail later in this chapter. The most important thing to know is that you should be investing now.

I can show you far better than I can tell you how much investing early matters. The best time to start investing is as soon as you start earning an income. The second-best time is right now.

Let me hit you with a little visual example. Say the plan is to retire at 65 years old. Assuming a rate of return of 7 percent (which is the average rate of return), let’s look at what $100, $200, and $500 invested monthly would grow to by the time you hit retirement age. The chart also highlights the difference in growth when invested at the ages of 20, 25, and 30, assuming the investor starts with no investments at these respective ages.

AGE

MONTHLY INVESTMENT

INVESTED

GROWTH

INTEREST

20

$100

$54,000

$342,899

$288,899

$250

$135,000

$857,248

$722,248

$500

$270,000

$1,714,496

$1,444,496

25

$100

$48,000

$239,562

$191,562

$250

$135,000

$857,248

$722,248

$500

$240,000

$1,197,811

$957,811

30

$100

$42,000

$165,884

$123,884

$250

$105,000

$414,711

$309,711

$500

$210,000

$829,421

$619,421

Compound interest is a beautiful thing when it’s working with rather than against you. The graph in the above section perfectly highlights why getting an early start is so important—and how much time in the market makes a huge difference. Starting at 20 and leaving your money in the market for 45 years gives it a significant potential to grow. This is an opportunity.

If a 20-year-old saves $100 a month, over 45 years they would have contributed a total of $54,000 to their savings. Yet compounded in an investment account with a 7 percent overall return, this same figure could grow to $342,899. That’s a difference of $288,889 in straight-up interest—more than five times the amount originally saved. Do you now believe compound interest is the eighth wonder of the world? I sure do.

If you look at the chart here, you can see clearly the opportunity cost of waiting to invest: If you start investing $100 a month at age 30 versus age 20, those 10 years amount to a $177,015 opportunity cost—$177,015 is not in your pocket. At $250 a month, this same gap goes up to an opportunity cost of $442,537. At $500 a month, you’re looking at an opportunity cost of $885,075. As you can see with your own eyes, if you like money, investing early is a good idea.

If you’re thinking, Damn. I didn’t get started in my 20s, now all hope is lost, stop. Pump the brakes. Yes, the opportunity cost sucks. But guess what? Every dollar you invest now can prevent a future situation where you miss out on investment returns working for you. (Your 40-something self will thank you for whatever you invest now.) If you start to have thoughts about putting off investing, revisit this chart. Do your future self a major favor and invest right now.

Investing Through a Job vs. Investing Solo

The two most common vehicles to save for retirement are employer-sponsored plans and an IRA. They both have incredible tax benefits but different contribution limits and rules. The great news? Investing is not limited to one or the other; it’s possible to invest in both.

Companies may offer a 401(k) retirement savings plan for their employees. Government employees and teachers may have similar plans called a Thrift Savings Plan (TSP) or 403(b). Employers may “match” some or all of their employees’ contributions. What employees save in these accounts reduces their taxable income. The contribution limits are significantly higher than IRAs, meaning you can save more than triple: Currently, the maximum yearly contribution is $19,500 for a 401(k), TSP, or 403(b), versus only $6,000 for an IRA.

Individual Retirement Arrangements (IRAs) are usually set up through a brokerage or a bank, like Vanguard or Fidelity. With an employer-sponsored IRA, you can contribute no matter how much money you make, whereas with Roth IRAs, there are income limits. Employer and personal investment accounts also differ in tax restrictions, deposits, and withdrawals. But don’t you worry, we’ll go into more detail on these supercharged wealth builders now.

WHAT IS A 401(K)?

Named after a section of the Internal Revenue Code, 401(k)s are ways to save for retirement through an employer. They’re great because a person can decrease how much they pay in taxes today while saving for the future. Whatever amount you invest in a 401(k) is deducted from your paycheck before your income taxes are withheld, reducing the money that is taxed. While your money is invested and chilling until you retire, your funds are not being taxed, and they won’t be taxed until you start pulling out the money in retirement.

Participation in these plans is both voluntary and self-directed. For people under 50, the maximum amount you can contribute to a 401(k) is $19,500 a year. For those 50 and older, the contribution limit increases to $26,000. As an added benefit, employers may match portions of employee contributions.

Some companies might offer a Roth 401(k) option. Contributions made to this option are done with after-tax dollars, meaning that you are taxed prior to investment. A Roth 401(k) lowers your deductions, but you won’t have to pay taxes on that cash when you pull the money out in retirement. Contribution limits are identical to 401(k)s. There are income limits for Roth IRAs, whereas there is no limit with a Roth 401(k).

WHAT IS AN INDIVIDUAL RETIREMENT ACCOUNT (IRA)?

An individual retirement account is one a person sets up for themselves completely separate from what’s offered through their employer. You can set up these plans at a brokerage firm like Vanguard or a bank, although I would never recommend using a bank because the investment options are limited and the fees are typically higher. Currently, a person can contribute up to $6,000 each year to an IRA, but these amounts can increase over time. Notably, the maximum contribution of $6,000 is far less than the 401(k) contribution limit of $19,500.

Contributions to an IRA can only be made if the contributor can prove they are earning an income. Someone couldn’t fund an IRA for an unemployed child, for example. However, a spouse could fund one for their non-working partner. If money is withdrawn from these accounts before retirement age, prepare to get hit with a hefty penalty. There are various forms of IRAs, which are taxed differently depending on the type of IRA and whether your income is through self-employment.

TRADITIONAL IRA

A traditional IRA allows you to save pre-tax dollars in an account similar to a 401(k). The main difference is that contribution limits are much lower. In 2020, yearly contribution limits were $6,000 for people under the age of 50 and $7,000 for those 50 and over. A traditional IRA is a great retirement tool, but it should not be the only one in the shed. To live comfortably in retirement, we have to save more than this. Wealth is our goal, right?

Any money invested in this account is not subject to income taxes until you start pulling out the money. If you meet certain requirements, you can take a tax deduction for IRA contributions. However, in 2020, if you’re a single person who has a retirement plan through work and you make more than $75,000 a year, then you can’t take a tax deduction for any contributions to a traditional IRA.

ROTH IRA

A Roth IRA is similar to a traditional IRA in that they have the same contribution limits. However, you can never take a tax deduction as you’re making contributions. The upshot is that the money isn’t taxed when you start pulling it out later in life.

Roth IRAs do not have a required-minimum distribution like other retirement accounts. If the money isn’t needed in retirement, it can remain invested without incurring a penalty. This is a legacy-building tool, as you can pass this money down to future generations.

Roths have an income cap, so people with income over a certain amount are ineligible. In 2020, this amount is a modified adjusted gross income of more than $139,000 for single people. If you’re married and filing jointly with your spouse, the cutoff is $206,000.

However, there is a little tax loophole called a backdoor Roth. Initially, you have to invest in a traditional IRA, then you roll over these funds into a Roth IRA once a year. Doing so allows people with higher incomes to enjoy the tax-free withdrawals exclusive to Roths.

WHAT ELSE IS OUT THERE?

There are other forms of individual retirement accounts for businesses or self-employed people. The simple employee pension (SEP) IRA is similar to a traditional IRA with a much tastier contribution limit. In 2020, it’s 25 percent of the employee’s compensation or $57,000, whichever amount is less. These plans are typically easy to set up for small businesses, and employers can participate in the plan themselves. They are designed to incentivize businesses that otherwise wouldn’t offer retirement accounts. It’s mostly for sole proprietors, partnerships, and corporations.

A SIMPLE IRA can be used for small businesses with 100 employees or fewer. SIMPLE stands for Savings Incentive Match PLan for Employees (yes, the L is a stretch). Employers can choose to make a 2 percent retirement account contribution to all employees, or an optional match contribution of up to 3 percent. In 2020, employees can contribute up to $13,500 per year. Catch-up contributions are allowed for people over 50 to bring their annual max to $16,500. To participate in the plan, employees must earn at least $5,000 in the two previous calendar years and be expected to earn at least $5,000 in the current year.

A 403(b) plan is a retirement account for people who work in public schools and other tax-exempt organizations. The 403(b) is similar to a 401(k), but investment options may be more limited. Contribution limits are the same as with a 401(k), and there’s also a Roth option available. It’s important to note that if you have access to both a 403(b) and a 401(k), you can only invest up to the contribution limit in both accounts combined.

There may even be a faster way to contribute more using the catch-up benefit. Some 403(b)s allow extra contributions after 15 years at an organization. An extra $3,000 annual contribution can be made, up to a lifetime limit of $15,000.

The Thrift Savings Plan (TSP) is also similar to a 401(k) for federal employees and military personnel. TSP contributions can also be matched. Contributions are tax-deferred in the traditional TSP, and there is also a Roth TSP option for after-tax savings. Employees are able to roll old 401(k)s and IRAs into a TSP, and also roll them back out if they take a job in the private sector.

Business owners can save for retirement in a solo 401(k). It is designed for businesses that have no employees besides a spouse. You can make yearly contributions for yourself up to $19,500 or your total income—whichever is less—as an employee (yes, modernity is wacky and you can be an employee of yourself); as an employer, you can contribute $37,500. That’s a total of $57,000 annually that can be contributed in 2020. Those over 50 are eligible to contribute up to $63,500 per year. The drawbacks are that it might take a lot of work to set up and it may be hard to find a brokerage that offers a solo 401(k) at a reasonable price.

FREELANCERS AND INVESTING

I hope you’re feeling like a CEO, because the IRS sure is going to treat you like you’re a business. Investing as a freelancer is an excellent way to both save for the future and minimize taxable income.

A traditional or Roth IRA both have the same contribution limit. The difference is that with the traditional IRA, the tax savings are upfront. With the Roth, the tax savings are when you withdraw. The Roth also has an income limit. Both are relatively easy to set up through a brokerage; the only hard part is deciding which one is best for you.

Solo 401(k)s give you the same pre-tax benefits as the 401(k) with an employer, except you can contribute much more. The annual contribution limit is $57,000 or 100 percent of your income, whichever is less. There is also a Roth solo 401(k).

A defined benefit plan is similar to a pension, offering a guaranteed stream of income in retirement. It is expensive to maintain and hard to set up. It may be challenging to find a firm that offers this plan.

There are several brokerages that set up these accounts for freelancers. They make the paperwork easy and walk you through the process. To know which plan is best for you, it’s advisable to work with an accountant.

The Road Map to Start Investing

Invest as much as you can, as early as you can.

The very minimum should be 10 percent of your annual income. The goal is to invest all the way to the contribution maxes. The more you invest, the faster your path to wealth.

Be consistent.

Once you start, don’t stop—EVER. Even when the market sinks, invest. When the market is up, invest. Set a minimum and never stop investing at least the minimum.

Do not leave free money on the table.

If an employer offers a match, this is the first place to contribute.

Follow this investment hierarchy.

Invest up to your employer’s match. After that, or if there is no match, start investing in a Roth IRA, if your income allows. Consider a backdoor Roth if you are above income limits. After the IRA is fully funded, continue to contribute to the work plan. Once that’s maxed, invest in a taxable brokerage account. You probably won’t get all the way through this hierarchy, but do your best.

WHAT TO INVEST IN

So far, I have only explained the accounts investment funds are housed in. When it comes to choosing what to invest in, I like to keep things simple. Personally, I am a big fan of low-cost index funds. Index funds behave like the stock market overall. If the stock market goes up, the funds go up; if the market is down, the funds go down. Instead of trying to beat the market, these investments cruise alongside it. Index funds are accessible through brokerage accounts and employer-sponsored plans. A great place to track a fund’s performance over time is Morningstar.

Take some time to understand personal investment risk. Most investment platforms have a risk calculator tool that will assess risk tolerance. These can inform you what mix of investments to choose. People in their 20s and 30s have time on their side, so making riskier investments usually has a greater payoff.

In general, the best place to invest is where fees and account minimums are low. The top discount brokerages are Vanguard and Fidelity because they have low-cost index funds with no or very low fees.

Thanks to the advances in financial technology or “FinTech,” there are also multiple robo-advisors to invest through. Robo-advisors are digital financial advisors that make investing decisions based on an algorithm. These fees are higher but still reasonable in comparison to index funds through a discount brokerage. And they are far cheaper than actively managed accounts. Algorithms manage the investments based on self-identified risk tolerance. I think these tools are a great option for people who are not overly sensitive to fees but don’t want to pay the cost of active management.

YOU READY FOR THAT FIRE?

FIRE stands for Financial Independence, Retire Early. It’s a movement of people who aggressively save and invest to be able to retire well before the traditional retirement age.

Those seeking to attain FIRE intentionally maximize their savings rate. This is done by finding ways to increase income or decrease expenses. They are often categorized as extreme savers and may save and invest up to 70 percent of their income.

The goal is to save until the resulting passive income provides enough money to cover living expenses. A person is considered to have reached their FIRE goal when they have saved 25 times their annual living expenses. If a person’s annual expenses were $40,000, they would need to save $1 million. Investments are usually in a combination of retirement and brokerage accounts and real estate.

What If I’m Living Paycheck to Paycheck?

Listen, there are a lot of people who are living check to check. The cut-and-dried solution is to grow the gap between your income and expenses. This allows you to invest, which exponentially increases the value of each dollar you put away. The opportunity cost of not investing as soon as possible is too great. Even if you can only find a few extra dollars a month to invest, do it.

Now is a great time to revisit Step 2: Know What’s Coming in and What’s Going Out. Make sure you understand exactly what’s coming in and what’s going out. Create a plan to decrease expenses or grow income. If it helps, create a “frugal” budget and a “bougie” budget. Aim to fall somewhere in between.

The biggest bang for your buck when reassessing monthly costs is to restructure transportation and housing. For most people, these costs consume the majority of their budget. Renting out a room in the place where you live or using public transportation or car-sharing can bring in hundreds to thousands of extra dollars a month. Commit to investing as much of the extra income as possible.

Even when money is tight each month, build that investing muscle. I mentioned previously that 10 percent of your take-home pay should be an investing minimum. It’s much more important to start wherever you are right now. Anything is better than nothing, but remember that the less you invest, the more you cheat yourself. Set up automatic contributions so you don’t have to spend any mental energy asking if you will or will not invest this month. If you’re in a pinch, start with just 1 percent of your income. Every quarter, set a reminder to increase your contribution by 1 percent. Doing so will gradually ease you into investing. You won’t necessarily feel a big hit in your take-home pay, but you are consistently putting money away for your future.

Retirement means living your life to its fullest potential without having to worry about a paycheck. Doesn’t that sound lovely? It’s no longer just for people who age out of the workforce. The key is to start investing now, with whatever you can.

The United States does have Social Security, and you contribute to it. But in just 35 years, AARP says it may dry up or start making smaller payments to people. It’s super important that you take your retirement savings into your own hands, even if it’s bit by bit.

Remember that even though time is on your side, you cannot make up for lost time in the market. Allow compound interest to work its magic. And take a gander at the compound interest chart (see here) whenever you consider slacking on your investment contributions. Think about how much those dollars today will grow down the line.

Call to Action

If you like money, investing in your retirement should be a priority. Let’s get to work.

√Trust the magic of compound interest and don’t delay investing.

√Come up with a number that could be comfortably invested and maintained long term.

√Increase the amount you contribute by at least 1 percent every quarter.

√Follow the investment hierarchy.

√Never leave money on the table. If your employer offers a match, get that money.

√Maximize that freelance income by using a retirement account to reduce tax liability.

√Work on increasing your savings rate to make early retirement possible.

Step 7 › Play the Market Long Game

Now that you understand how retirement investments work, it’s time to learn how to make some real paper. Understanding the stock market and how it works is fundamental to wealth building. The market is the most powerful wealth-building tool we have access to. Research has shown that the stock market has performed better than any other class of investments historically.

The key is to save what you earn and add to your investments. Make that money work for you. Ever heard of making money in your sleep? Instead of you having to work to make money, the money makes its own money. The more money you are able to contribute, the faster it grows.

Still, the market can be fickle. There are ups and downs, so planning how to react is essential. Everybody is happy when the market is rising. But your wealth depends on what you do during the times it’s down.

When people try to time the market (think “buy low, sell high”), they jump in and out of the stock market, often losing money. But you’re not going to be a jumpy investor: You’ll have faith in the market and in the long game you’re playing. Here, we’ll talk about the best ways to stay the course. Look out for:

♦Stock market fundamentals and the key phrases associated with investing, here

♦How to invest for the long term, here

♦Whether to work with a financial manager, here

♦What to do when the market crashes, here

♦How real estate investing fits into a long-term investing strategy, here

What Is the Stock Market?

The stock market is where investors can buy and sell shares of particular companies. When you buy stock in a company, you own a piece of that business. The stock market is made up of all the companies that are publicly traded.

The stock market is not just a tool for the wealthy. Advances in technology have made investing more readily accessible to the public. Today, there are many free and low-cost investment options, such as low-cost index funds or no-cost exchange traded funds (ETFs) to get into the market with very little money upfront.

Most transactions in the market are handled electronically. Once an account is set up through a brokerage, funds are digitally transferred from your bank into the brokerage account. Trading stocks is done by complex technology that can instantly buy and sell shares across multiple exchanges.

Despite numerous economic downturns and recessions, the stock market has always gone up. Most investors are in it for the long haul and plan for the volatility. Even through some of the country’s most troubling times, the market (often with government support) has a way of rallying. There may be market dips that reflect crises or shifts in public perception, but eventually (so far) we have seen it gradually rise.

WHAT ARE STOCKS?

A stock is a piece of ownership in a company. Stocks are bought and sold on stock exchanges or the stock market. Historically, they outperform all other investments over the long run.

A person who owns stock is a shareholder with a claim to a company’s assets and earnings. Shareholders buy stock so that they can earn money when the stock rises in price. They also might receive dividend payments when companies distribute some of their earnings. They get the ability to vote at an annual shareholders’ meeting to influence the leadership and direction of the company.

Companies sell stocks to raise funds for their operating expenses. Stocks might be issued to pay off debt. They can also be used to increase product offerings, expand into new markets, or build new facilities.

There are two main kinds of stock: common stocks and preferred stocks. Although there are some companies that offer both kinds of stock, most companies only offer common stock. When people refer to stock purchases, they are more than likely referring to common stock. Common stockholders are entitled to a vote at the shareholders’ meeting. They also get the right to receive dividends. A person with preferred stock usually doesn’t have voting rights. However, they can receive dividends before common stockholders do. They have priority over common stockholders if the stock goes bankrupt and assets are liquidated.

WHAT ARE MUTUAL FUNDS?

Mutual funds are a great way to have a diversified investment portfolio. Funds are spread across stocks, bonds, and short-term investments. Money is pooled from multiple investors who each buy shares in mutual funds. Each share represents ownership in the fund—you’re not a partial owner of a company that provides goods and services, but rather a partial owner of a fund that makes investments. Mutual funds are usually run by fund managers who make sure the investments in the fund perform well.

Mutual funds boast larger fees the more they are actively managed by a professional investment manager. More frequent buying and selling of stocks and the expense of professional management can drive up the price. However, most mutual funds are less actively managed, so the fees associated with them are lower. This makes them accessible to the average investor who likely won’t be making too many changes or need a lot of professional management.

Mutual funds are appealing since they give the individual investor the option to invest in multiple companies for a fraction of the price of buying various individual shares. And since they are professionally managed, the burden of picking individual stocks is lifted from the investor’s plate.

WHAT ARE ETFS?

ETF stands for exchange-traded fund. ETFs hold a collection of securities but trade as one fund on an exchange just like an individual stock. If a stock is like a bag of mini Snickers, an ETF is like a variety pack of chocolates. ETFs can contain stocks, commodities, bonds, and other types of investments. Investors buy shares of the ETF fund but do not own any of the assets held in the fund. Yet investors are still able to benefit from dividend payments and capital gains yielded.

ETFs have the same advantages of diversification as a mutual fund, but they are traded throughout the day just like an ordinary stock. This adds an extra layer of volatility, as prices could change drastically throughout the day. But ETFs can be a great investment alternative to mutual funds: They have lower investment minimums, and they offer lower fees or broker commissions than buying stocks individually.

Some of the most popular ETFs track markets like the S&P 500, where the top 500 US companies are traded. Although companies like Fidelity offer no-fee ETFs, ETFs can also be actively managed. Similar to mutual funds, portfolio managers are more involved with the buying and selling decisions within the fund.

WHAT ARE BONDS?

A bond is a way to lend money to a government, municipality, or corporation for a set time. In exchange, you are promised to be paid a specific rate as well as have the principal returned. Typically, a bond pays interest twice a year. Bonds are usually used to balance out the risks when investing.

There are three main types of bonds. Corporate bonds are debt issued by private or public corporations. Municipal bonds are issued by states, cities, counties, and other government entities. US treasury bonds are issued by the US Department of the Treasury.

A major benefit of bonds is that they are exempt from federal income tax. They may also be exempt from state and local taxes for residents in the states where the bond is issued.

Bonds are looked at as less risky, but they do carry some risk. They can go into default if issuers fail to make payments. Interest rate changes can affect the value of the bond. If the bond is sold before maturity (or before the set time is up), it may be worth less than the initial investment.

WHAT ARE TREASURIES?

Treasuries are bonds issued by the US government. They are viewed as one of the safest forms of investment. There are long-term and short-term bonds. The shortest maturity issued is called a treasury bill, which matures in a year or less. Funds that mature in two to 10 years are called treasury notes. There’s also a 20- or 30-year bond called the “long bond” or T-Bond.

All treasury bonds are purchased at an online auction in $100 increments. Interest rates are lower than any other bond because there’s ultimately no credit risk. They are considered low-risk because they are backed by the US government: Both the interest and the principal are guaranteed as long as they are held to maturity. That does not exempt them from having some risk. They are vulnerable to inflation, which erodes the value of the bond’s principal and interest earnings and often drives bond prices down.

Treasuries can be purchased from the Treasury Direct website, through banks, or through brokerages. Investors can also invest in mutual funds or ETFs specializing in treasuries rather than buying them individually.

HOW IS THIS DIFFERENT FROM MY RETIREMENT FUND?

The main difference between investing in a standard (taxable) investment account and your formal retirement funds is accessibility. With a standard account, you can withdraw earnings prior to the age of 59.5. Retirement accounts grow tax-free, whereas standard investment accounts incur taxes on realized capital gains and dividends or interest earned. (Basically, you pay on what you earn.) Standard, taxable accounts are a good option if you’ve maxed out an employer-sponsored plan or are over the contribution limits for IRAs. Money can be used in a taxable account for anything that you see fit. This includes saving for a car, college, or early retirement.

What Do I Have to Gain?

Investing in the stock market is your greatest wealth-building tool. The longer money is able to sit and grow, the greater your chances for financial success. This is a good way to ensure you have money well into your retirement (and that you can leave a legacy for future generations, or become one of those people who leaves a vast estate to their small dog, or whatever floats your boat). Patience and persistence are going to be your best weapons here. Create a plan to invest on a regular basis and leave the investments to work for you.

My recommendation is to start investing in index funds and/or ETFs. Set up a minimum monthly investment and increase it over time. Refer back to the investment hierarchy in Step 6.

Having a solid investment strategy will decrease the temptation to jump in and out of the market when there is volatility. When you plan to be in the market for the long haul, you should feel a level of confidence whenever everyone else is panicking.

DAY-TO-DAY VS. LONG-TERM MANAGEMENT

Picking an investment strategy and sticking to it may be a challenge. But the only thing you need to be thinking about on a daily basis is optimizing take-home pay to increase the amount of money you invest. There is no need to check in on your accounts on a daily basis. As a matter of fact, it’s not advisable. It could be upsetting, and it might lead you to make a rash decision.

Set a date once a month to invest in accounts outside of any employer-sponsored plans. This date can also be used to evaluate your work-related retirement accounts. During these monthly check-ins, you can ensure your investment goals are being met. You might even take this opportunity to increase your contributions.

In addition to the monthly check-in, be sure to set aside time to do an annual evaluation of all your investments. This may take a more practiced eye, so working with a financial adviser on it may be a good option. Depending on your proximity to retirement, portfolios may have to be rebalanced annually. Tax-loss harvesting may be necessary; this is when lower-performing stocks are sold off at a loss to decrease your annual capital gains taxes.

DO I NEED A FINANCIAL MANAGER?

In a perfect world, I would advise everyone to work with a financial advisor. They are investment experts trained to grow your money. But let’s face it: They are professionals, so they cost a pretty penny to work with. If you’re making simple contributions to your employer-sponsored plan, a financial advisor may be unnecessary. When things are more complicated or you need more strategic advice, financial advisors can be very advantageous—and worth the extra money.

If you do work with a financial advisor, my advice is to make sure they are a fiduciary. Fiduciary advisors are legally and ethically required to put your best interest before their own. You would think this is standard practice, but it’s not. The way financial professionals are compensated varies depending on whether they are a fiduciary. A fee-based professional receives ongoing compensation based on a percentage of the assets they manage for you. Their pay rises and falls with the value of your assets. The advisor charges an upfront fee for advising and doesn’t make any money off the sale of products like life insurance.

I strongly recommend working with a fee-only planner, as their services are more comprehensive and they have no incentive to sell you a product that may not be beneficial for you. There are trustworthy, client-focused professionals who are commission-based, too. Do note that if a professional doesn’t take the time to explain the costs of their services or the fees associated with your investments, that’s a huge red flag.

You should work with a financial manager if:

♦You plan to invest outside of retirement accounts

♦You want help planning for taxes

♦You want to create a legacy-building plan

♦You want to make sure you have all your insurances in place and are getting the best bang for your buck

♦You want someone to ensure you’re on track to meet your financial goals

AVOIDING FEES

Understanding fees is one of the most important aspects of investing. Fees can make a huge difference when it comes to your money’s overall growth and performance. High fees eat away at investment returns.

Before working with an investment advisor, make sure that they outline all the fees clearly in a way that’s easy to understand. It’s important to know that even outside of working with an investment advisor, investments are subject to fees, so be sure to ask your company’s retirement plan representative about how investments are assessed. Determine whether there’s any way that you can reduce the fee structure in your investments.

At the same time, not all fees are bad. It does cost money to manage investments, and this is where the majority of fees are going. But you should never invest in anything unless you understand how you’ll be charged.

A LESSON FROM WARREN BUFFET

Warren Buffett is a real master when it comes to investing. Here is the sound advice he offers:

→Before you invest in the stock of a company, first make sure you can understand how the company makes money in under 10 minutes. If Warren can’t do this in 10 minutes, he moves on to evaluate another company on this basis.

→The secret to getting a better return on investment is to buy a stock and forget about it. He believes in having a buy-and-hold mentality. He insists on holding stocks for decades. If you constantly buy and sell stocks, it’ll take away a significant percentage of your returns in the form of trading commissions and taxes. It’s better to buy great stocks and hold them for a long time.

→Keep your investing costs as low as possible. Low commissions and fees mean you can invest more over time.

→When major declines occur, there is an extraordinary opportunity to build wealth. Those who are riddled with debt may miss out.

→Always keep cash on hand. Build an emergency fund. When stock prices decline, buy more: They’re on sale!

What If the Market Crashes?

Market crashes are the nerve-racking aspect of investing. But honestly, crashes are baked into the returns: They’re the price paid for higher interest. The mark of a strong investor is not what they do when markets are good, but the actions they take when the markets are crashing.

What should you do when the market crashes? First, do not panic—do not automatically sell off your investments. On the contrary, this may be a good time to invest more, as the market is, in essence, on sale.

Crashes should be part of your financial plan. Crashes often last 18 months to two years. During this time, you need to have a strategy to access cash outside of your investments. Pulling money out of the market while the market is down is how you lose money. This is when you don’t want to touch the funds in the market. There should already be a plan to tap into savings or bonds that are reaching maturity.

One of the things that investment advisors do best is talk people out of rash action. When a person feels nervous or compelled to deviate from their plan, they should seek professional guidance.

Investment advisors can also help you assess risk tolerance. Risk tolerance is what you’re willing to deal with when you’re investing. Risk tolerance could also be affected by life factors like having a child, going back to school, or being close to retirement. Investment strategies have to be created around your tolerance. Creating a balance between stocks and bonds is a way to leverage risk. This is why investment diversification is super important. Trust in diversification.

Outside of investing, it’s good to make sure that during market declines you have a good amount of cash on hand. Mass job loss often coincides with market crashes. While you are employed, beefing up an emergency fund is a must. Look at ways to cut expenses and increase savings. Always have a plan for a possible job loss.

All in all, the focus should be on the long term. Turn off the financial news and don’t focus on the market. People who stay invested during crashes are the ones who gain the greatest financial successes. You don’t lose money in the market until you pull money out. And the worst time to pull money out is when the market is down.

What About Property Investment?

Investing in real estate is a way to diversify your investments. There are four ways to make or save money through investing in a rental property: appreciation, cash flow, equity, and depreciation. Appreciation is the increase in the property’s value over time. Cash flow is what’s left over from the rent after your expenses are paid. When properties are financed, paying down the principal increases your equity—the amount of the property you own. Investment properties come with unique tax benefits in the form of depreciation.

Primary residences aren’t typically considered investments. Sure, they can appreciate over time, but this is not guaranteed. A property can’t be considered an investment unless it is bought with the intent to sell. One way to turn your primary residence into an investment is to rent out part of the property to offset your own housing costs.

There are several avenues that you can take when investing in property. There is buy-and-hold investing—the property is bought with the intent to keep it long term. There is also house flipping—a distressed property is bought at a low price, restored, and sold for a profit.

There are also ways to invest in properties without actually owning any real estate. Real estate investment trusts (REITs) are dividend-paying stocks that invest in real estate. REITs are bought and sold like regular stocks. They are a great investment strategy for people who want to get regular income through dividend distributions.

Buying and holding property is a great long-term investment strategy. Leaving property to the next generation is also a great way to build generational wealth.

Call to Action

This is the most exciting chapter of the book because this is where wealth is built. When investing, please consider the following:

√Determine whether you need a financial manager.

√With any investment, make sure you understand the fee structure.

√Investing is a long-term game. Create a plan for when the market dips so that you can take advantage of the lows and avoid damage to your long-term gains.

Step 8 › Prepare for Big-Ticket Expenses

Good on you. You’re crushing your debt with a budget that’s on point. You’ve automated to save aggressively, and you know how to invest wisely. You have committed to your financial freedom and laid the foundation to build your wealth—sooner rather than later. So what happens when life takes over, when big-ticket items threaten the vision you so carefully crafted? This chapter will lay out how to plan for and optimize the purchase of big-ticket items that pop up along the way.

As an internet-savvy, smartphone-wielding human, you have the ability to comparison-shop on everything from home buying to choosing a bathroom soap. When it comes to major expenses, that means you have information at your fingertips to make wise decisions. As poet and philosopher Thiruvalluvar put it many centuries ago, “Nothing is impossible for those who act after wise counsel and careful thought.”

Not every situation in this chapter will apply to all readers. The important thing is to implement what does apply. You can revisit it if anything becomes relevant in the future.

In this chapter, we’ll cover:

♦What you can do to maximize coverage and minimize the cost of health care, here

♦When insurance is worthwhile, here

♦How to plan for potential future expenses like weddings, here

♦How to optimize your first home purchase, here

♦How to estimate and plan for the cost of having children, here

♦What you can do to prepare to care for aging parents or relatives, here

Can’t Ignore Health Care

Health care is one of the things that makes adulting so hard—an often overcomplicated and expensive burden that can literally be a matter of life and death. Yet planning for health-care costs is one of the most important things to do to protect your wealth. Medical debt is the leading cause of bankruptcy in the United States. Take a minute to think about that. The biggest reason people file for bankruptcy is that they are trying to get the care they need to stay alive.

The average American spends about $5,000 per year on healthcare costs, according to the US Bureau of Labor Statistics. That is a pretty hefty sum. It’s more than what one person typically spends on groceries in a year. And health-care costs can increase dramatically in the event of illness or injury.

The best way to manage costs is to understand your health insurance coverage in advance. Are you insured individually or through an employer? Call the toll-free number on the back of the insurance card (for real, you should do this) and speak to a benefits specialist. Ask about co-payments, co-insurance, and out-of-network costs. Include these costs in your budget.

Determine whether you have a Flexible Spending Account (FSA) or a Health Savings Account (HSA). Either, not both, may be offered by employers. It’s important to understand how they work and how much to contribute. This could save you from having to pay out of pocket.

If you’re not covered by an employer, you can often get insurance through a state-regulated insurance exchange mandated by the Affordable Care Act. Alternatively, a health-sharing plan may cover you if you meet certain requirements, even though these plans are not traditional insurance. Health-sharing plans are often run by religious organizations and have some morality clauses. If your values align with the organization, the savings can be substantial.

I have been spoiled working for health-care organizations my whole life with very few out-of-pocket expenses. When I began working only six days a month and had to depend on my partner’s insurance (he’s in education), I was in for a surprise. New bill, who dis? I went from zero premium payments and a $20 co-pay to paying $1,600 a month for coverage for our family of three plus over $4,000 in out-of-pocket fees for the delivery of my youngest daughter. Believe me when I say I know the struggle.

When factoring in the cost of health care, there are three main types of medical expenses to account for. There are monthly premiums for health insurance. If you’re employed, these typically come directly out of your paycheck. Then there are out-of-pocket expenses like prescriptions, dental procedures, or vision services. These are more or less planned and should be a line item on your budget. Finally, there are unexpected costs that may be hard to budget for. These may be covered by a sinking fund or emergency savings.

It’s not much fun to think about health, particularly if you’re currently healthy and you take that for granted. But part of building wealth is building a life for yourself; health is fundamental to your well-being. With the right planning, you can use your money wisely to take care of your body and mind in the way that makes sense for you.

PRIVATE VS. PUBLIC HEALTH-CARE OPTIONS

Health-care costs in the United States are extremely high. This is partly because, unlike most industrialized countries, the United States does not provide universal health-care coverage. In other countries, medical care is available to all, and the government regulates some costs, like the costs of treatments and drugs. In the United States, these costs are determined by the market.

A majority of Americans are dependent on their employer for private health insurance, but there are some public options. Under the Lyndon Johnson administration, the Social Security Amendments of 1965 established Medicare and Medicaid. Medicare provides health insurance to everyone over 65 and many people with disabilities over and under 65; Medicaid helps states provide medical insurance for low-income families.

In 2010, the Affordable Care Act (ACA), also known as Obamacare, was enacted as a way to help those who fall outside of what Medicare and Medicaid cover. The ACA has dramatically reduced the number of uninsured people by increasing access to insurance.

The Children’s Health Insurance Program (CHIP) helps children whose families don’t qualify for public services but can’t afford private coverage. In some states, pregnant women can also get coverage through CHIP.

HEALTH CARE BY STATE

Health care can vary depending on your state of residence. There are decisions made at the state level that affect the overall health of the state’s population. Policy decisions govern the health-care system, which includes insurance, pharmaceuticals, and health information. At their best, states serve as a bridge for people who don’t qualify for public insurance but may not be able to afford private insurance.

One way that states control costs is by requiring proof of medical coverage, infusing funds into the system, and—in theory—lowering costs for coverage and treatment. The idea is to get more healthy people insured so that people with fewer health-care costs are balancing out people with greater costs, making coverage less expensive in the long run for everyone. Getting more people insured also means that people will have better access to preventive care and, in the long term, stay healthier and save the state (and themselves) money.

The individual mandate assesses penalties when people do not have insurance that complies with that state’s laws. States that have individual health-care mandates are California, the District of Columbia, Massachusetts, New Jersey, Rhode Island, and Vermont.

State legislators make tons of health-care policy decisions. The way individuals receive care is a political decision.

IN SICKNESS AND IN DEBT

According to the Bureau of Labor Statistics, Americans spent about $5,000 on average on health care in 2018, including $3,400 on health insurance. Even if you’re both healthy and insured, you should plan for certain costs.

A deductible is the amount of medical cost a person must pay in a year before insurance starts to cover more of the cost. For example, say you’re a crime-fighting turtle and you crack your shell while you’re doing martial arts. Your deductible is $1,500, and the shell-repair surgery costs $3,000. If you haven’t paid for any other medical costs out of pocket this year, then you’ll pay the $1,500 deductible, and your insurance will pay the remaining $1,500 for the surgery. Different plans vary significantly, but the deductible on a typical plan for a single person is $500 to $1,500.

Even after you reach your deductible—again, let’s say it’s $1,500— you will likely still pay for health costs until you reach what most insurance providers call your out-of-pocket maximum or coinsurance. Coinsurance can range from 10 to 25 percent of the services provided. (The Affordable Care Act puts a limit on coinsurance payments. In 2020, the cap for an ACA plan was $8,150 for an individual and $16,300 for a family.)

When you are reviewing potential health-care plans, be sure you review this number, as it is the amount you might owe annually (excluding non-covered health expenses). You have to iron out the specifics of which plan is best for you, but it is important to note both the deductible and that sneaky out-of-pocket maximum. It’s this maximum you’ll want to include in your budget, along with non-covered costs.

Co-payments are what you pay upfront when you visit the doctor, go to the hospital, or purchase medicine. These payments are fixed charges, depending on your plan. Typical co-pays range from $15 to $50 for primary care and specialty doctors, and $75 to $300 for urgent care and emergency room visits. The average prescription cost is usually around $1,200 a year.

Medical transportation costs can vary widely. For example, ambulance costs are regulated and are typically a few thousand dollars. These costs may or may not be covered by insurance. No matter who you are or how healthy you feel, it’s important to plan for medical costs in advance.

SOME GOOD NEWS

There are some awesome tax advantages associated with a Health Savings Account, or HSA. An HSA is a great addition to any retirement savings plan. It helps people with high-deductible health plans pay for medical expenses. What’s nice about an HSA is that it allows you to set money aside to cover medical bills.

Money contributed to HSAs also reduces your taxable income. As long as you use the money to pay for medical expenses, you don’t pay taxes on it. Money in the HSA can be invested in the market, too, and there are no taxes on the gains in the investments.

If it’s an option to you, be sure to make use of FSA or HSA accounts so that you’re putting aside pre-tax dollars for health expenses and saving money in the process. And always have funds set aside in your savings for medical expenses.

Is Insurance Kind of a Scam?

Let’s dive into the very adult topic of insurance. Insurance is a contract between you and an insurance company that gives you financial protection or reimbursement against losses. Insurance companies pool the risk of insuring many people at once, which makes your individual payments more affordable. Insurance can be pretty overwhelming and sometimes confusing, but it is also a great protector. Still, not all insurance is created equal, so it’s important to know what’s right for you.

CAR

The car insurance market is very competitive, so taking advantage of the pricing wars is a great way to save money. Most people only need the required minimum insurance. Get familiar with what the minimums are to avoid paying too much or getting upsold into coverages you don’t need.

Every state in the United States, with the exception of Virginia and New Hampshire, mandates car insurance. Every state has its own minimum requirements. The best way to find information relevant to you is to contact the agency in your state that regulates motor vehicles.

Using comparison sites is a good way to shop for coverage because companies compete on price. And, if possible, you can take advantage of multiple-policy discounts through the same company. Use the information from the comparison sites and choose the most affordable plan.

Since rates and personal circumstances fluctuate, it’s also a good idea to shop rates annually. I set a reminder on my phone to do it a month before my current policy renews.

DISABILITY

Disability insurance is quite possibly the most underrated form of insurance. Policygenius reports that one in four people will have a disability during their working years. But your bills don’t stop due to a disability that prevents you from working. Disability insurance provides an income during these times.

There are two types of policies: long-term and short-term. Most short-term disability policies are through employers. They usually kick in after seven to 14 days and last 90 days to 180 days. Somewhere around 90 to 180 days, a long-term disability policy would then kick in. Long-term disability is a tax-free benefit that covers 60 percent of gross income. It can also be used to supplement group insurance until you make a full recovery and return to work.

If you’re between 22 and 65, I recommend enrolling in a plan and locking in the price of coverage while you’re younger and the prices are low. You can also buy an individual short-term disability policy, but these policies are expensive and generally not worth the cost.

LIFE

Life insurance is a tax-free lump sum payment that goes to your chosen loved one or loved ones in the event of your death. Think of it as a financial safety net for your family if you’re no longer around to bring home a paycheck.

Your life insurance policy should not break the bank. Term life insurance is all most people need. Your coverage amount should be 10 to 12 times your annual income—that generally means that the life insurance from your employer isn’t enough (and, since it’s tied to your job, you lose it if you leave your job). The amount and length of the coverage (the term) depends on factors such as the age of dependents. Typically, a 15- to 20-year term will suffice. Any minors protected should be adults by then and no longer dependent on you.

Are People Still Getting Married?

There are financial benefits to marriage, including tax breaks and insurance discounts. Still, marriage rates are steadily on the decline, and, according to the Pew Research Center, that’s especially true for younger people. The fact of the matter is that not everyone will get married and not everyone wants to get married.

In case you do want to get married, marriage ceremonies can cost a good chunk of change. According to a study conducted by The Knot, an online wedding-planning hub, the average wedding in 2019 cost $28,000. Obviously, this is a very large one-time expense. Choosing how much to spend on nuptials could change your financial trajectory.

Here are the dos and don’ts of wedding expenses:

♦Don’t feel pressure to keep up with the Joneses. The Joneses could be broke! Strive to keep your wedding expenses as low as possible. Heck, be like me and get married at the courthouse. I think I paid $30. (Maybe I got what I paid for, ha!)

♦Do create a wedding budget—and stick to it. Anticipating costs from the jump and planning for them can save you money in the end.

♦Do make sure you shop around for services and negotiate prices. Get multiple quotes. Talk to your friends who’ve gotten married recently. Pay attention to every line item. Vendors are betting on people being so excited about the ceremony they won’t pay attention to the cost or negotiate.

♦Do scale down. The COVID-19 pandemic has shown us that less is more. It can also be used as an excuse to keep the guest list minimal. Planning for fewer people saves you money.

♦Don’t have a wedding in the peak wedding season if you can help it. Expect higher prices in the summer months and early fall in warm climates. Consider a wedding in January or February; maybe have the wedding on a less popular day of the week, like a Sunday or a weekday.

♦Do consider nontraditional venues. Skip the ordinary. I have a friend who rented out a horse stable for her wedding. They also used the ranch for the rest of their ceremony. As they are country music lovers, it fit perfectly into their country theme.

Buying Your First Home

I could write a whole book on this subject, so we’ll just cover the basics here. The first lesson? Buying a house isn’t as affordable as it used to be, in a big way. Just look at my grandfather, who was able to snag a house on one income working as a street sweeper. In 1961, he bought a house in the San Francisco Bay Area for less than $20,000; it’s now worth over $1 million.

This is not just about inflation; $20,000 in 1961 is equivalent to about $174,000 in 2020, according to the Bureau of Labor Statistics calculator. Meanwhile, the median home price in a metropolitan area (like the Bay) is a whopping $765,000, according to Zillow. It’s no wonder today’s generations are overwhelmingly opting to rent, especially in these expensive markets.

The reality is that homeownership is not for everyone. You can choose to rent for your entire life and still be wealthy (with the right strategy). Still, if you’re yearning to buy a home, your dreams are not hopeless. Don’t let the American dream of being a homeowner fool you—buying a home could be financially taxing. Do be critical about the pros and cons of renting and buying.

RENTING

BUYING

PROS

With month-to-month or year-long leases, it’s best for those who don’t want to commit to a home or area right away.

Paying down the principal provides equity (although the home is not really an asset unless the plan is for you to sell).

You have no property taxes or maintenance, as the owner assumes these expenses.

Mortgage interest is tax deductible. This might make buying property cheaper than renting.

There’s a refundable security deposit rather than a high upfront down payment.

You can modify your home, making improvements that increase the property value.

It’s much simpler to move out when you choose to.

When the house is paid off, it’s yours as long as the taxes are paid.

CONS

Rental costs are not fixed and usually increase over time. Inflation is positive as a homeowner, but it can be prohibitive as a renter if you are not subject to rent control or wish to move.

The cost of maintenance and upkeep can be expensive.

When you spend money on rent, it’s gone forever. You’re not investing in anything.

Property values don’t always go up. There are times when properties decrease in value or don’t keep up with inflation.

You can’t write off rent on your taxes.

You have to come up with a lot of money upfront to cover the down payment and closing costs.

The property is not yours and you could be asked (or sometimes forced) to move.

It’s harder to move.

THE 7-STEP MINI-PLAN FOR FIRST-TIME BUYERS

Here is a 7-step mini-plan to launch into homeownership in a way that will accelerate your wealth building.

1.Get preapproved for a home loan. Use the preapproval to display your creditworthiness. Understand rates and fees so that you can use them to better negotiate. You will be prequalified for more house than you need—and that’s a trap. Buying a house that costs more than two times your gross income puts you in a position to be house poor.

2.Gather your financial paperwork into an organized folder. Expect to provide the mortgage underwriters with bank statements, W-2s, tax returns, and proof of employment at the very minimum.

3.Never assume the lenders have your best interest at heart. Question every line item and shop for the best rate. Always ask, “Is that the best you can do?”

4.Boost that savings account. Start accelerating your savings to cover the desired down payment, plus 3 percent of the purchase price for closing costs, and three times your expected home-owning expenses, several months before you plan to buy. Put that money in a high-yield savings account and let it grow. Don’t start house hunting until you’re at least 95 percent of the way to your goal. Instead, ask a realtor what the taxes and average fees are for the homes in your price range so you’re fully prepared.

5.Get your credit score all the way up. Ensure that all your accounts are in good standing. Keep credit card balances under 30 percent. Ideally, pay off your balances.

6.Look for first-time homeowner programs. These programs can help you with the down payment. There are also programs like the Neighborhood Assistance Corporation of America (NACA) that offer mortgages with no down payment. These are loans meant to level the playing field for those of us without rich families—the equivalent of someone getting a gift for a down payment. Every member that goes through NACA’s program is counseled and prepared for homeownership.

7.Buy a house that is going to be an investment. Use this home as a stepping-stone to financial freedom. It will not be your forever home. Get the cheapest, safest house you can afford. If you need help paying the mortgage, plan to rent out a room, unit, or level of your home to offset your housing costs.

THE PEOPLE AND INSTITUTIONS YOU NEED TO KNOW

Squad up to ensure you get the best deal on your home purchase. Not all will be allies, but standing firm on what you want can bend them to work for you.

An agent will help you find your home and negotiate the sales price. Be clear on your desired price range and desires for the property, and beware of the upsell. Agents are not required to put your financial interests first, so you should interview several agents to make sure they seem trustworthy.

Lenders can be a bank or a broker that will finance the purchase of the property. Never assume they are giving you the best deal. Every line item is negotiable. Stand firm on what you want and shop around. All mortgage inquiries within 30 days count as a single inquiry on your credit report.

The seller is the person or entity you are buying the property from. Try to understand their motivation for selling. Use that to your advantage to get the best deal.

Home inspectors will inspect the home you’re planning to buy. Scrutinize their report and question anything of concern. They may be able to expose weaknesses in the property that you could use in price negotiations.

The escrow company facilitates the process of the property sale. They make sure that all documents are explained and signed. They check that no one else has a claim on the property and file records with the county.

JUSTICE IN LENDING

Lending discrimination is when a decision on a mortgage application is based off factors outside of creditworthiness. These factors include a person’s race, color, sex, religion, nation of origin, disability, or family status. The subject is especially sensitive for me because, as I write these words, I’m fighting my own battle against lending discrimination. A lender put me through an excessively long approvals process for a loan with a way higher interest rate than I should have gotten; in the end, the lender proposed charging me $10,000 in fees when they offered me a loan with a “better rate.” Ugh.

Though this form of discrimination is illegal, it’s still very common. The Fair Housing Act has prohibited discrimination based on the identity factors mentioned above since 1968. Yet Black and Hispanic homebuyers are denied mortgages at higher rates than whites. They are also more likely to end up paying more for their loans than white applicants.

There are several types of lending discrimination, some more overt than others. Here are some things that may signal discrimination:

→Delays in the processing of your application or requests for excessive documentation

→Not being approved while on maternity leave

→Being offered an interest rate higher than what you qualify for

→Being charged excessive fees

It may be hard to prove, but it’s important to trust your instinct. If you feel like you’re not getting the best rate or you’re getting charged extra fees, question it right away. First, try to resolve the issue with the lender. If it’s not resolved, then file a complaint with the Consumer Financial Protection Bureau. Never feel pressured to take a loan you are not comfortable with.

SMART MORTGAGE MATH

Mortgage affordability is based on several factors. It takes into account:

♦Total gross household income

♦Total expenses outside of housing costs

♦The amount of down payment

♦Credit score

There are countless affordability calculators you can search for on the internet. The problem is that they’ll show you’re qualified for way more house than you should be purchasing. The purchase price for a home should be no more than two times your gross household income.

For kicks, I just input my information into one of these calculators. It qualified me for a mortgage more than twice what I would be comfortable paying. Please don’t be tempted by these calculators. Following the two-times rule will keep you from being house poor. It also allows more room in the budget to save and invest.

To avoid this common pitfall, let’s look at the real cost of buying a house. First, there’s that hefty down payment you’ve been saving for. If the down payment is less than 20 percent, expect to pay mortgage insurance. This is to protect the lender against your default; without it, you often wouldn’t qualify for the loan.

When the home is first purchased, expect to pay closing costs. These cover the loan costs and the costs associated with transferring ownership. These costs are variable and negotiable, so make sure to review every line item. Typically, closing costs are 3 to 5 percent of the price of the house. You should account for closing costs in your down payment savings fund.

Then there’s Uncle Sam. Property taxes can vary greatly by state, city, even block. These taxes help fund schools, parks, and other public services.

To protect your home against hazards, you also have to pay for homeowners insurance. If you are buying a condominium, you also have to pay homeowners association fees, commonly referred to as HOA fees. These fees pay for maintenance and repairs to the building and grounds. Homeowners insurance is usually included in the HOA fees.

When you’re saving to buy a home, you should also save for maintenance and repair costs. If something goes wrong when you rent, you can call your landlord to fix it. Now, you’re the landlord. A good rule of thumb is to estimate 1 to 2 percent of the total home value to be put toward maintenance and repair costs annually.

WHAT IF I CAN’T PAY MY MORTGAGE?

Although the hope is that none of us have to go through this, I’ve actually been there. During the 2009 recession, I lost two homes to foreclosures and two homes to short sales—which are basically home sales made under financial distress for less than the balance of the mortgage. Here’s what I learned the hard way: If you can’t pay your mortgage, this should serve as a financial wake-up call. It is a moment to evaluate how you found yourself in this situation. I was highly over-leveraged, meaning I had way more debt than I was able to handle, with no savings. This is an essential time to create a plan to decrease spending and increase your income.

Here are a few actions to prevent missing payments:

♦Refinance. It is a great option if you have good credit.

♦Rent out space or the entire house.

♦Sell. Know when to fold.

If none of these steps work and you find yourself in this situation, the first step is to contact the lender immediately. Delays in taking action can set you back in ways that can take years to recover from. For example, a mortgage payment more than 30 days past due can drop your credit 100 points. Ask the lender what options are available to you, and ask about their financial impact.

To avoid foreclosure, explore these options:

♦Work with the lender to create a repayment plan. A lender gives you a fixed period to repay the late amount by adding a portion of what is past due to the regular payment.

♦With reinstatement, you pay the loan servicer the entire past-due amount, plus any late fees or penalties, by an agreed-upon date.

♦Loan modification lowers your payments by changing the terms of your loan through an agreement with the lender. In 2010, I was able to get my principal reduced from $200,000 to $75,000 in a loan modification agreement during the housing market crash. There are several types of modifications with different financial implications.

♦Forbearance is when mortgage payments are reduced or suspended for a set period. At the end of that time, your regular payments will resume. A lump sum payment or additional partial payments for a number of months will bring the loan current.

♦A short sale may be necessary if the home value is less than what’s owed.

♦Bankruptcy is an absolute last resort, but in some cases, it’s the only option. It’s possible to keep your house with a court-approved repayment plan for a three- to five-year period.

Children Aren’t Cheap

Not everyone chooses to have children, but if you go down that path, you need a plan. Before I had my first child, I remember a well-known financial personality saying that a child increases expenses by about $2,000 a month. She advised saving $2,000 a month as a way to prepare.

According to the 2020 Better Money Habits Millennial Report sponsored by Bank of America, more than half of millennial parents underestimated the costs of raising kids. Planning for costs is especially strange when you’re having your first child. I relentlessly scanned items at the baby store for my registry and created a budget to limit spending on essentials like car seats and strollers. For my second baby, I challenged myself to have a no-spend baby. I got tons of gifts and relied on buy-nothing groups, which are collectives of people dedicated to reducing consumerism and waste by giving things they have in abundance or for which they no longer have any use to others in their community. I only spent $50 of my own money on Baby #2.

When you’re expecting, beef up that emergency fund. Pause aggressive savings and investing so that you’re paying minimums to free up your available cash. There are about a million prenatal visits. With these visits come screenings, lab work, and other tests. Check your insurance coverage for out-of-pocket expenses.

Plan for time off (if you have a partner, coordinate with them). Calculate expenses and save. Check your benefits, your partner’s benefits if applicable, and state benefits that can supplement costs.

Finally, set a budget for diapers, formula, and any other essentials for when the baby gets home. If you are returning to work and don’t have family to help with childcare, plan for this hefty expense. According to MarketWatch, childcare costs are about $10,000 per year. Don’t worry, it doesn’t end there.

The United States Department of Agriculture calculates that it costs $234,000 to raise a child from birth to age 17. This estimate excludes higher education savings, if that’s in their plan. If you tack on college and splurge on activities and family vacations, those costs add up even more.

And children get more expensive as they age. When they’re teenagers, they eat you out of house and home. They do more activities and increase your overall transportation costs (maybe they even drive?!). The good news is, the more children you have, the less you spend on each child, due to economies of scale. They share space, toys, clothes, and other things that don’t have to be bought again.

Parents and Relatives

Being raised by a single dad, I had to learn how to do my own hair as a five-year-old. This morphed into a hustle when I started making money braiding hair for my friends and the kids I babysat. From the first dollar I made, I was expected to contribute to the household. At the very least, I had to cover my nonessentials. This continued through college, as I would send my dad money here and there to help him out. For me, it wasn’t an obligation—it was the right thing to do.

And I am not alone. According to a BuzzFeed News analysis of US Census data, 1.4 million millennials supported their parents in 2016. Some of these people have the responsibility of supporting family in the United States and abroad. Others are still supporting family after their own job or housing loss. Some have family with health issues or disabilities. Other family members may have made poor financial decisions.

For others, it’s just an expectation that at a certain age, they are responsible for their family. There may even come a time when this person becomes a family member’s caretaker. As a caretaker, a person might have to miss time at work or outright leave the workforce.

As family members transition into old age, it may fall onto a person to help with their caretaking expenses. Depending on the income and insurance coverage a family member has, this can be extremely pricey. AARP found that in 2016, caregivers spent an average of almost $7,000 a year on out-of-pocket caregiving expenses. The same report showed the financial strain of caregiving was substantial: Caregivers dedicated about 20 percent of their income, on average, to caregiving. Whether it’s a joy or a duty (often a bit of both), caretaking carries serious financial, emotional, and social implications.

ASSESSING YOUR OPTIONS

A 2015 TD Ameritrade survey found that millennials supporting family members were spending $18,250 per year on average. This hefty sum is largely spent on parents’ food and housing costs. The same study revealed that while supporting their parents, the contributing child was often in debt and sacrificing saving for their future.

The problem is that if left unchecked—if the debt is not managed and the opportunity costs of saving and investing are not reconciled—this situation will leave that child in the same position as their parent. The cycle of financial instability is vicious. So where do these children draw the line? This can be tough and may result in difficult conversations.

My hope is that everyone reading this strives to build wealth to help others. You can’t give from an empty cup. As discussed earlier in the book, I recommend creating a line item in your budget for giving. Something that’s manageable as you pay down debt and contribute to retirement savings. It’s also okay to say no. When my giving budget is spent, I have nothing left to give.

As parents get into their 50s and 60s, it’s a good time to discuss long-term-care insurance. Discuss what your parents’ or other relatives’ plans are for caretaking as they age. See if there are ways to help them financially prepare. It’s okay to ask for help. No one should assume that the weight is solely on them to help out a parent or family member. Share the responsibility with siblings, if you have them, and other family members.

MANAGING THE COST OF AGING

Knowing the aging costs to plan for can help you prepare for your own old age.

First, get with an estate-planning attorney to ensure that your relative’s end-of-life documents are in place. This usually costs between $800 and $3,000. They might even hook you up with a better price if you get yours done at this time, too. It’s a good idea to get an end-of-life plan in order early, especially if you have kids.

Next, see if your relative has purchased long-term-care insurance. Plan to buy this for yourself in your mid-50s—it covers care not covered by life insurance. The average annual premium is around $3,000.

Once your underlying long-term documents are in order, decide where their care will be. Here are a few average costs for elder care, according to the senior living advisor company A Place for Mom:

♦Assisted-living costs: $4,015 a month

♦Board and care home costs: $1,500 to $10,000 a month

♦Home care costs: $23 an hour, or $4,385 a month full-time

♦Nursing home costs: $7,513 a month for a shared room, or $8,517 a month for a private room

It’s unpleasant but important to think about funerals, too. AARP reports the median funeral costs about $7,500.

Discuss your options and how to fund them. Do not depend on wills or life insurance.

Call to Action

We have the power to change our financial trajectory just by making better decisions about the things we spend a lot of money on. Here is your call to action around big-ticket items. As with most things in life, use what applies to your situation.

√Create a plan for covering current and future health-care costs.

√Consider the cost of a wedding. Put a dollar sign next to what you are comfortable with and discuss it with your partner when the time is right. If you plan on spending a life with someone, it’s never too early to talk cash.

√Determine the true cost of buying a home and decide whether renting makes more sense. Run the calculations so you can compare real dollars. Do your research and consider at least two creative alternatives.

√Know that kids are expensive and don’t help with wealth building. There’s no technical action item here. Just really get it.

√Plan for the costs of taking care of any aging relatives, and start having open, honest conversations with them about your respective needs.

Step 9 › Live Your Best Life

Now you can pat yourself on the back (or send a thank-you text to the loving relative who bought you this book). Even if you haven’t perfected every step of your financial future, you’ve exposed yourself to the right steps. You now know what’s possible for you. Money is no longer taboo, and—with a clear plan—your financial future is bright.

Now I want to inspire you to dream a bit bigger. Tweak your plan a little to get to where you want to be faster.

Today, we know how to change the game faster than any other generation. We are keenly aware that approaching retirement will look nothing like it did for our parents. Cushy pensions and Social Security are not guaranteed. Instead of letting this hold us back, we are blazing new trails. Heck, the FIRE movement was popularized by millennials wanting to live a more fulfilling life.

Let this final chapter inspire you to greatness. Find encouragement in the following:

♦Tips on how to increase your savings rate to make paid work optional sooner rather than later, here

♦Replicable stories of people making big money moves, here

♦How to get on the same page as your significant other to rock your financial goals, here

♦Sticking to your plan even when others think you’re weird, here

♦The daily actions that will ensure you meet your wealth-building goals, here

Create an Even More Aggressive Savings Plan

Here is an introduction to FIRE, which stands for Financial Independence, Retire Early. People on this path aggressively save and invest to be able to retire well before the traditional retirement age. This high rate of savings is achieved by finding ways to increase income and/or decrease expenses. An average American saves about 3 percent of their income. It is commonplace that people pursuing early retirement save 50 percent of their income or more.

The goal is to save until the resulting passive income provides enough money to cover your living expenses. A person is considered to have reached their FIRE goal when they have saved 25 times their annual living expenses.

This movement is by no means compulsory, but it does offer some savvy ways to help set you up to build wealth faster. Here are some tools used in FIRE to up the ante on savings.

Max out all your pre-tax retirement accounts.

This includes deferred compensation plans (529s) and health savings accounts (HSAs). Invest in low-cost index funds. Save on fees and diversify your investments at the same time. Every employer-sponsored retirement plan is required to have at least one index fund option. Roll over old employer retirement funds into a traditional IRA (see here). These can be opened at a discount brokerage like Vanguard or Fidelity.

Keep housing and transportation costs as low as possible.

Never buy a house that’s more than twice your annual household income. If possible, rent out a room to offset your housing costs. Use public transit, walking, or biking to get around. If you need a car, try a used model that’s two to three years old.

Side hustle to freedom.

Have multiple ways to generate income. Put all your extra money into brokerage accounts invested in low-cost index funds.

Never stop investing.

This applies even when there are market downturns—in fact, especially when the market is down. It is when everything is on sale. Who likes missing out on a good deal?

Keep credit-card hacking your way to cash rewards and free travel.

If all your credit cards are under control, assess new credit card opportunities to reap new travel perks and rewards. But be careful: This game is still rigged against you.

HOW JAMILA AND WOODY SOUFFRANT SAVED $169,400 IN TWO YEARS

Jamila and her husband, Woody, were doing well by most people’s standards. Their combined take-home net pay, including retirement contributions, was about $194,000. Not rich, considering they live in New York City, but certainly comfortable. Jamila was a commercial real estate executive and Woody a schoolteacher.

In 2016, sitting in hours of traffic on her commute to work, Jamila decided she’d had enough. She stumbled on the FIRE movement. Now using her commute to her advantage, she binged personal finance podcasts.

In her early 30s, she set a goal to retire by 40. She and her husband came up with a plan to drastically boost their savings. Not all the way on board at first, Woody soon came around as he saw the plan coming together.

They maxed out Jamila’s 401(k). The maximum contribution in 2016 into a pre-tax retirement plan was $18,000, not including an employer match. They were over the income limit to contribute directly into a Roth, so they funded backdoor Roths. Having both the 401(k) and Roths gave them diversified retirement income. Upon retirement, they will be able to access the money put into the IRA tax-free, as opposed to the money in their 401(k), which will be taxed when they access the funds.

As a teacher, Woody had access to 403(b) and 457 pre-tax plans. Both plans have a contribution limit of $18,000 each. The couple had the opportunity to save up to $36,000 a year pre-tax. It took numerous conversations and spreadsheets for Jamila to show Woody how they could still enjoy their day-to-day lives on less income. Ultimately, he agreed to increase his contributions to half his salary. In 2016, even with a late start, they were able to contribute $16,600 to his 403(b) plan and $12,000 to his 457 plan.

Initially, the goal was to fund a college savings plan for their kids. Becoming more disillusioned by the educational system, Jamila and Woody decided to hold off setting up a 529 education plan. Instead, they earmarked $5,800 in savings for their kids’ college. In 2018, they decided to move the funds into a tax-advantaged account.

They then put $15,000 from their savings into low-cost index funds. This was invested in a Vanguard after-tax brokerage account. They committed to paying off their mortgage early, setting aside an additional $800 a month for that goal. In 2016, they paid $6,900 total toward the principal balance.

Let’s look at these numbers again:

401(k) contributions: $18,000

Two backdoor Roth IRAs: $11,000

403(b): $16,600

457: $12,000

College savings: $5,800

Brokerage account: $15,000

Mortgage principal: $6,900

Total: $85,300 toward wealth-building goals in 2016

In 2017, Jamila and Woody set a lofty goal to save $93,100. Their goals shifted later in the year, but they were still able to save and invest $84,100. Here’s the 2017 breakdown.

401(k) contributions: $17,500

Two backdoor Roth IRAs: $11,000

403(b): $18,000

457: $18,000

Brokerage account: $11,600

Mortgage principal: $8,000

$84,100 toward wealth-building goals in 2017

$85,300 + $84,100 = $169,400 saved in two years

There were a number of things that changed for Jamila and Woody in 2017. They were paying an additional $800 a month toward the principal loan balance on their mortgage. They refinanced in October from a 30-year mortgage to a 15-year mortgage. They stopped making the extra $800 payment in October, as their new payment was $500 more per month.

They also pulled back in the latter part of the year to focus on beefing up their savings. They found out they were expecting their third child and wanted to have more liquid cash available.

Over the course of the two years, Jamila and Woody have an average savings rate of 44 percent. See how impactful increasing your savings rate can be?

How to Talk About Money with Your Peers

Money conversations can be challenging or awkward. Yet communication is vital when it comes to getting on the same page financially.

There are some general best practices to have in mind when having these tough talks. Money talks should happen as early and as often as possible in a serious romantic relationship. You’re an adult, and you need to get comfortable discussing money with any serious romantic partner. With friends, it’s also very important to be able to set boundaries, despite the awkwardness.

As much as it would make things easier, the fact is that you can’t move toward your financial goals all alone and in secret. You’re a person. That means that you have friends and loved ones who are part of your life, and it means that if they have no idea what you want to accomplish through new financial habits, they might pressure you to go back to your old ways. You’ve decided to take the reins in your financial future, and you need to make sure that you’re not going to let go (even when someone close to you really, really wants you to).

TALKING DOUGH WITH YOUR SIG-O

Having these money conversations won’t come naturally at first. You can start by mentioning you’ve been learning more about how to manage your money. Would they be willing to talk about money together? Be sure to tread lightly: When it comes to talking to a partner about money, their beliefs often go back to their childhood and how they were raised. This adds an emotional layer that’s important to recognize.

Here are some ways to start discussing money before having full-on conversations. Try hypothetical questions like these as baby steps:

“If you won the lottery, what would you do with the money?”

“If you had a choice between a perfect credit score or $100,000 cash, which would you choose?”

“Would you pay for a car with cash or finance it?”

“What does wealth look like to you?”

If you’re in a long-term committed relationship and the plan is to get married or file for domestic partnership, you need to discuss the role of finances in a committed partnership before the big day. The more upfront you are about potential trouble spots, the easier it will be to manage them when they arise. Here’s one potential talk-track:

“I’ve heard that arguments about money are the leading cause of separation. I think it’s important for us to be open about our finances as our relationship moves forward. Can we talk about what’s important to us and where we are financially right now? I want to be able to discuss goals with you and work on them together.”

If you are early in your marriage or partnership, have a brainstorming session about your future hopes and goals. It could look something like this:

“Let’s dream together. What would it look like for us to be financially independent? What does this term mean to you? What things can we do now to get there? If money were no object, would you stay at your current job? If you knew that working hard and saving aggressively for 10 years or less would free you from ever having to work again, would you do it?”

If you and your partner have weathered some financial storms or have mismatched financial values, here are a few ways to begin tackling these obstacles:

“This year was challenging, but the upside is that there are so many areas where we have learned and grown together. Finances have been no exception! I’ve learned [state what you’ve learned].”

“I know we come from different backgrounds, but I believe it’s important to create our own financial future together. Right now, I don’t feel like we’re on the same page, but I feel confident we can get there. Can we discuss some ways we can work together and support each other toward financial goals we mutually agree to?”

DINNER WITH FRIENDS WHO MAKE MORE (OR LESS) THAN YOU

Listen, now that you’ve decided to embark on this journey, you are officially weird. Unfortunately, anything that is counter to our consumerist, instant-gratification culture is strange. If we can come to grips with this, we won’t get offended when our friends and loved ones look at us sideways when we share our financial goals.

That’s why it’s super important to get clear on your budget and your goals. It’s easy to fall into overspending to keep up with others or to help out others who make less than you. Remember, your wealth-building plan should reflect your values and what’s important to you. External influences should have no bearing on how you spend.

When it comes to dining out with friends, know what you want to spend before going into the event. Stick to that. If they want to split the check evenly and it doesn’t fit within your spending plan, politely decline. If you are not prepared to have a conversation with your friends or to stick to your budget, you know the answer: It’s best for you to stay home. Don’t set yourself up for failure.

This doesn’t mean you no longer have a social life. Empower yourself to think of creative ways to affordably share quality time with your friends. Can you organize a picnic in the park? Host a potluck? Saving might force you to create moments that are even more memorable than that overpriced dinner.

The same goes for activities friends may suggest. On my budget, this would fall under sports and entertainment. There are so many activities that could bust your budget. If it exceeds the budget, opt for free or low-cost alternatives.

Travel has always been important in my family. That’s why I have a sinking fund where money is always being saved with travel in mind. If there is a vacation friends want to take that can’t be funded with this account, I don’t feel bad. I’ll just save for the next one or do what’s in my budget.

There are going to be situations where a person wants to or is expected to help out friends who have less. The way I handle this is to budget money for giving. I help out to the extent that there’s money left to give. Once that money is spent for the month, that’s it.

Day-to-Day Management

Believe it or not, everything you have right now is the consequence of your daily habits. You can create so much of what you want with the right habits. Day to day, there are small things you can do to support wealth building. To keep up the habit, I recommend using a daily habit tracker or app to track completion. I use a simple chart with little boxes to check off.

Check in with a net worth tracker like Personal Capital at least weekly. Ensure that you are on track. Get used to seeing market fluctuation in your investment account. Find solace in the fact that you are investing regularly.

Your brain likes it when you complete the things you set out to do. And now that you know what’s possible, you can’t unsee it. It’s time to get to work.

Here’s how to level up:

Be the person you strive to be

Don’t wait for life to happen to you; start making your life happen for you. Make decisions as if you are who you want to be. Think daily, “What would my millionaire self do?”

Habits create who you are

If you want to change your circumstances or the person you are, you have to change your ways. Rinse and repeat actions to build wealth until those habits are second nature.

Find your Jamila and Woody (see here)

Jamila is my actual friend; we vacation together and always share a room at our personal finance conferences. By surrounding myself with people who have ambitious saving and investing goals, I can’t help but be a money boss, too.

Develop a marathon mindset

Things won’t instantly change. Along the journey, you’ll unlock freedoms that will level up over the course of your life. Remain patient and enjoy the journey.

It ain’t always gon’ be cute

There will be stumbling blocks. You will make mistakes. Even with inevitable hurdles and setbacks, chances are you’ll still end up miles ahead of where you started if you commit to this journey of financial freedom.

Call to Action

Use this chapter as motivation. Let it be your hype person. You got this! There is nothing standing between you and building wealth. You should be able to:

√Create a plan to save at an aggressive rate for an early retirement.

√Start having money conversations with your partner and expressing your financial goals to your loved ones.

√Change who you are by altering your daily habits through the use of habit trackers.

√Take action to level up into the lifestyle you deserve.

Glossary

401(k): a tax-advantaged, employer-sponsored retirement savings plan for company employees

403(b): a tax-advantaged retirement savings plan for employees of public schools and other tax-exempt organizations

457: a deferred-income, tax-advantaged retirement savings plan that reduces your taxable income for employees of public schools and other tax-exempt organizations

APR: the annual rate of interest charged to borrowers and paid to investors

APY: the annual interest rate earned on a savings deposit or other investment taking into account compounding interest (essentially, your balance will grow slightly faster)

bankruptcy: a legal proceeding involving a person or business that is unable to repay their outstanding debts

compound interest: interest on the initial principal sum plus the accumulated interest of a deposit, loan, or debt

exchange-traded fund (ETF): a bundle of stocks that trades on an exchange, just like a single stock

fiduciary: a person or organization that acts on behalf of another person or persons to manage assets; requires being bound ethically to act in the asset holder’s best interests

Financial Independence, Retire Early (FIRE): a financial movement defined by frugality and extreme savings and investment. By saving up to 70 percent of their annual income, FIRE proponents aim to retire early and live off small withdrawals from accumulated funds.

foreclosure: the action of taking possession of a mortgaged property when the mortgagor fails to make their mortgage payments

health savings account (HSA): a tax-advantaged account to help people save for medical expenses that high-deductible health plans don’t cover

hella: slang term originating in the San Francisco Bay Area meaning “a lot”

house hacking: when you live in one of the multiple units of an investment property as your primary residence, and have renters from the other units pay your mortgage and expenses through their monthly rent

index fund: a portfolio of stocks or bonds designed to mimic the composition and performance of a financial market index, which is a measure of stock market performance over time

mutual fund: a professionally managed investment program funded by shareholders that trades in diversified holdings

opportunity cost: the loss of potential gain from other alternatives when one financial decision is made. For example, say you spend $40,000 cash on a car that wasn’t a necessity. If you had invested that money over five years, you could have made more than $16,000 in interest. This means the real price of the car, including the opportunity cost, is $56,000.

Roth individual retirement account (Roth IRA): a retirement savings account that allows your money to grow tax-free, funded by after-tax dollars, and when you withdraw at retirement, you pay no taxes

savings rate: an amount of money, expressed as a percentage or ratio, that a person deducts from their disposable personal income to pay down debt, save, and/or invest

short sale: when a financially distressed homeowner sells his or her property for less than the remaining balance on the mortgage

side hustle: any type of employment undertaken in addition to one‘s full-time job

Thrift Savings Plan (TSP): a retirement investment program open to federal employees and members of the uniformed services

traditional individual retirement account (IRA): a retirement savings account for which you may be able to deduct your contributions, which can reduce your tax bill in the year you contribute, and for which you do not owe income taxes until you withdraw the money in retirement

Resources

Websites

AwardWallet.com: This is a great tool for tracking credit card spending and rewards.

CallistoMediaBooks.com/smartmoney: Visit this site to download PDFs of the budget worksheets in this book.

ConsumerFinance.gov: Here you can report unfair banking and lending practices.

Investopedia.com: Want to know what the heck a financial term means? Their plain English definitions and quick videos provide awesome clarity.

MagnifyMoney.com: I love the rating system that tells you all about the best offers for credit cards, balance transfers, and much more, and the service is so easy to use.

NerdWallet.com: This is my favorite comparison site and educational resource for all things personal finance.

StudentLoanPlanner.com: This is a great site for managing your student loans, especially if you have over $100,000 of student loan debt.

Vanguard.com: This is my go-to site and where I hold the majority of my investments.

Books

The Black Tax: The Cost of Being Black in America by Shawn Rochester. This book describes the United States’ history of wealth inequality and what we can do to mitigate it.

The Simple Path to Wealth: Your Road Map to Financial Independence and a Rich, Free Life by J. L. Collins. This book taught me that I didn’t need a PhD to invest.

App

EveryDollar: This is a zero-based budgeting app I used to pay off my massive debt.

References

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Bureau of Labor Statistics. “Consumer Expenditures – 2018.” September 10, 2019. BLS.gov/news.release/pdf/cesan.pdf.

Coates, Ta-Nehisi. “The Case for Reparations.” The Atlantic, June 2014. TheAtlantic.com/magazine/archive/2014/06/the-case-for-reparations/361631.

Consumer Financial Protection Bureau. “Submit a Complaint.” Accessed August 27, 2020. ConsumerFinance.gov/complaint/getting-started.

Doerer, Kristen. “The Most Common IRS Tax Forms You’re Likely to Come Across When Filing.” ProPublica, July 9, 2020. ProPublica.org/article/the-most-common-irs-tax-forms-youre-likely-to-come-across-when-filing.

Doyle, Karen. “43% of Millennials Aren’t Investing—and That’s a Problem.” Yahoo! Finance, June 27, 2019. finance.yahoo.com/news/43-millennials-aren-t-investing-090000387.html.

Elliott, Justin, and Paul Kiel. “Inside TurboTax’s 20-Year Fight to Stop Americans from Filing Their Taxes for Free.” ProPublica, October 17, 2019. ProPublica.org/article/inside-turbotax-20-year-fight-to-stop-americans-from-filing-their-taxes-for-free.

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Florant, Aria, JP Julien, Shelley Stewart, Nina Yancy, and Jason Wright. “The Case for Accelerating Financial Inclusion in Black Communities.” McKinsey & Company, February 25, 2020. McKinsey.com/industries/public-and-social-sector/our-insights/the-case-for-accelerating-financial-inclusion-in-black-communities.

Ganotis, John. “How Much Does a Credit Card Cost? Credit Card Fees Explained.” Credit Card Insider. Last modified April 24, 2020. CreditCardInsider.com/learn/credit-card-fees-explained.

Hunter, Marcus Anthony. “22 Million Reasons Black America Doesn’t Trust Banks.” Salon, February 18, 2018. Salon.com/2018/02/18/22-million-reasons-black-america-doesnt-trust-banks_partner.

Internal Revenue Service. “Forms, Instructions & Publications.” Accessed August 27, 2020. IRS.gov/forms-instructions.

Karl, Sabrina. “What Is a High-Yield Savings Account?” Investopedia. Last modified February 10, 2020. Investopedia.com/articles/pf/09/high-yield-savings-account.asp.

Keshner, Andrew. “Child-care costs in America have soared to nearly $10K per year.” MarketWatch, March 8, 2019. MarketWatch.com/story/child-care-costs-just-hit-a-new-high-2018-10-22.

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Acknowledgments

I first have to thank my family for putting up with all my weirdness through the years. Much love to my boo for life, Jon; without him, this book for sure wouldn’t have been possible. Thanks for holding me and the girls down, always. Love ya, babe! Also, thanks to my assertive and strong-willed girls, and thank God they are cute, WHEW! They inspire me and simultaneously tell me how dumb I am. Much love to my personal finance homies! Thanks for having all the inspiration and encouragement.

About the Author

Author Naseema McElroy.Naseema McElroy is the creator of the Financially Intentional website and the Nurses on FIRE podcast. She discusses how taking control of her finances has enabled her to overcome bankruptcy and divorce, and how she broke the cycle of living paycheck to paycheck. She helps others thrive by sharing the lessons she learned on her path.

Naseema is a mom of two girls and a labor and delivery nurse. By shifting her mindset around money and by being consistent and intentional, she has paid off nearly $1 million in debt and grown a six-figure net worth in three years, without living in deprivation.