Bale Financial Coaching

The Problem with “Pay Yourself First”

You hear the phrase “pay yourself first” all the time. I agree in theory, but when we look at it deeper, how does that affect other areas of your financial life? Is the “pay yourself first” mentality really the best way to make progress with your money?

Here’s the video version for those more inclined to the spoken word!

“Pay yourself first” is a frequently used phrase to just say, “Hey, you work hard for your money. Don’t let it get snatched up with frivolous and unnecessary expenses!” I agree, but I am here to challenge the thought process because I don’t think it takes into consideration one major factor — debt.

“Pay yourself first” is just another way to encourage saving. Saving for an emergency, saving for retirement, saving for a house or maybe a vacation.

Saving and investing are absolutely important! But I want you to think about why the “pay yourself first” movement resonates with you. Is it because you want to be able to handle an emergency? Are you afraid you won’t have enough money for retirement? Are you trying to ensure you don’t miss out on the magic of compound interest?

Consider this possibility

Paying off debt is a form of paying yourself first.

Compounded interest is great for sure, but only when you have it working for you. In the case of most debt, compound interest is working just as much against you as your investments are working for you.

Let me prove it with an example. In this, we’ll use the tool of net worth to explain. Boiled down, pay yourself first is essentially a strategy to increase net worth by taking advantage of compound interest combined with time. So we’re able to use net worth to create a quantifiable means of determining which situation is best in our example.

Net worth is what you own minus what you owe so the highest net worth in our example wins.

As one caveat, I understand this isn’t a perfect example by any means. It cuts out a ton of life variables that could affect it. This is merely a way to prove a mathematical point about pay yourself first.

Here’s an example

Let’s make this super simple and say you have $10,000 invested at a 5% rate of return. You also have $10,000 in credit card debt, also at 5% interest rate. In this case, your net worth is $0 because you have $10,000 in investments and $10,000 in debts.

Situation 1: Extra money to investments

If you had $1000 of extra money per year to put anywhere, “pay yourself first” would say, “Let’s throw it at the investments. Let’s take advantage of that compound interest!”

If you did this but neglected the growing debt, ultimately in 5 years, your net worth would grow by $5525. Your investments would be at $18,288 and your credit card debt would be at $12,763.

Situation 2: Extra money to debts

Now, on the other hand, if you took that $1000 and put it towards paying down the debt while neglecting to contribute more to your investments, your net worth would STILL grow by $5525. After these same 5 years, your investments would be $12,763 and your credit card debt would be $7238.

Which one wins?

In both examples, net worth is the same. However, in the second example, the risk is lower. Whenever your debt is lower, your risk is inherently lower.

Now, keep in mind, this example shows has an interest rate of 5% for both investments and credit card interest. This example would change significantly depending on the type of investments and debt you use within it. The average interest rate for credit cards in America is much closer to 15% whereas the federal student loan interest rate is about 2.75%. Clearly this wasn’t meant to be a perfect example. But it was meant to challenge the reasoning behind the “pay yourself first” mentality.

Paying off debt is a guaranteed rate of return

Here’s one more thing. When you make an investment in the stock market, you are hoping to receive a good rate of return. The average rate of return in the stock market is about 10% according to Nerd Wallet. But, nothing is guaranteed in the stock market.

What is guaranteed is the interest rate on your loans.

As we’ve already established, paying down debt is the same as increasing net worth because you are diminishing the amount you owe on the loan. If your credit card interest rate is 15%, you are effectively guaranteeing a 15% rate of return on the money you use to pay it off. That’s a pretty good return!

Get the full picture

“Pay yourself first” is a great way to handle your money if you understand the full picture. Saving money, investing, AND paying off debt all fit. As a financial coach, I just really want you to get rid of that debt. It’ll increase your net worth and decrease your stress.

So let me pass this question onto you. How do you look at debt relative to the pay yourself first mentality?

I’d love to hear from you in the comments down below!

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The Hidden Opportunity Cost of Every Purchase

Imagine you’re driving to work and realize you completely forgot your 20¢ iced coffee at home. I guess you gotta snag a quick cup of joe from the Starbucks on your way.

As you creep forward in the drive thru, you notice the price for a cup of their signature Pike Place is now $34. Oh geez, to caffeinate or no?

Here’s the video version for those less inclined to the written blog posts!

Opportunity Cost

Opportunity cost is defined as “the loss of potential gain from other alternatives when one alternative is chosen.”

In plain terms? Each opportunity you take means that another opportunity can’t be taken. Having said that, let’s go back to you in your car, sitting in the drive thru.

Would you purchase this $34 coffee?

It seems like a ridiculous question because it is. $34 is a stupid amount of money for a single cup of coffee, even for Starbucks. But that is effectively the opportunity cost of purchasing a $3 coffee today.

If you take that $3 and were to invest it at a 6% rate of return over 40 years, you’d have $34 more in retirement than if you bought that $3 coffee right now. If you buy one $3 coffee on every one of the 250 days you go to work during the year (well, during a normal, non-Corona year), that could turn into $8250 in retirement under the same situation. And that is from a single year of buying coffee every day on the way to work.

“Caleb, why do you have to ruin my morning ritual of coffee, man?”

Let me be clear.

I want you to enjoy a coffee if you want to buy one. But even more, I want you to understand the opportunity cost of purchasing a coffee, or an app, or a playstation 5 or even a gallon of chocolate milk (even though the chocolate milk is probably the best purchase of those options).

Go ahead, purchase coffee or whatever, but do it while using a budget. The budget will control the amount you spend in one category. That’s why Bailey and I spend any amount of money on fun things like restaurants or coffee or Go-Kart racing at Go Pro Motorplex in North Carolina. We pay for things intentionally, because we save and invest intentionally. And we want to have some fun while we’re at it!

But we understand the opportunity cost.

This principal applies to literally anything you purchase. Everything bought has its own opportunity cost. I just used coffee because people drink it every day (me included).

This isn’t to say Starbucks or any other coffee shop is bad. I enjoy a good Starbucks coffee. And there’s certainly nothing wrong with it if you’ve got a designated fund for making such coffee purchases in your budget. The key is just understanding that any purchase, coffee or otherwise, will cost your future more than you might expect.

How about you? What frequent purchase could you reduce or cut out to improve your future financial situation?

Ours is probably being more careful with what we purchase at the grocery store. Recently, we’ve gone over in our groceries for a few months in a row.

I want to hear from you in the comments below!

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What is the BEST Way to Start Investing in 2021?

What’s the best way to start investing in 2021? How should you choose what types of accounts to save your money in first?

Retirement will be here before you know it. Let’s begin preparing now!

Here’s the video version for those more inclined to the spoken word!

Let’s start with tax advantaged retirement accounts. The most common are the 401k and the IRA.

Just recently, we looked at the difference between these and what the tax advantages are. You can watch the video here.

Quick recap is that, generally speaking, a Roth version of the 401k or IRA is best because it provides the most tax saving benefits long term.

Today we’re going to look at the order of investing and how to choose where the money goes first, second, and third.

If we’re talking the baby steps of personal finance, after paying off all consumer debt and saving a full 3-6 month emergency fund, you’re at Baby Step 4. This is where you save 15% of your income for retirement.

In order, this is where you want to put this 15%.

Look at what your company offers

Do they offer a 401k or a TSP (government equivalent)? Do they offer an employer match? Find this out from your HR department if you haven’t already.

If your company does offer a 401k, start by investing in that.

If it’s a Roth 401k

Go ahead and put your full 15% into that. You’ll get the most tax savings this way.

If it’s a Traditional 401k

I would recommend you contribute the required percentage in order to get the full match from your employer. You don’t want to give up any free money!

Start a Roth IRA

After that, I would start a Roth IRA and invest the remaining percentage in this.

Let’s look at an example

Let’s say you are paid $1000 gross every paycheck.

If you have a Roth 401k

If you have just a Roth 401k that is offered at work like me, feel free to just put your full 15% (or $150) in that.

If you have a Traditional 401k

If you had a traditional 401k but your company matched 5% of your contributions, put 5% (or $50) into it to get that 5% match.

Then contribute to Roth IRA

Then I’d recommend starting a Roth IRA and put your other 10% (or $100) in that. Then you’re getting the advantage of the free employer match with the 401k but the greater tax advantage of the ROTH IRA after receiving the full match.

Now you’re invested!

Congrats!

Personally, I have Roth IRA but I haven’t been contributing to it because my 401k is also Roth. And even though the max I can put in my Roth 401k is $19,500 this year, 15% of my paycheck isn’t going to hit that maximum (not even close).

Chances are, unless you’re in stellar financial shape, you aren’t going to need more than these two options. The 401k and IRA are both tax advantaged accounts. The 401k has a max of $19,500 per year of contributions and the IRA has a max of $6000 per year of contributions.

So unless you are planning to invest $25,501 this year, you’ll only need the 401k and IRA.

Here’s the third option

For those of you who are absolutely killing it, I’d recommend talking to a financial advisor to find a good mutual fund to invest extra money into after having maxed out my 401k and IRA.

You’ll have to pay taxes on the money you put in as well as the growth that occurs as a result of the mutual fund growing. There are no tax advantages but you’ll still see way more growth on average than the traditional bank account, money market or otherwise.

Stocks? Bonds? Crypto?

What about other forms of investing?

Generally speaking, as financial coaches, we don’t recommend investing in single stocks because growth is entirely dependent on a single company.

We like averaging — it’s a bit more predictable. That’s why 401k, IRAs and other mutual funds are great. They average the growth of sometimes 200 companies from different industries.

And bonds? Those are safer and much more predictable than single stocks. However, they have a much lower rate of return than mutual funds. Incidentally, many mutual funds actually have some bonds as a part of the portfolio, just to give the fund a little more predictability and safety than otherwise.

Cryptocurrency isn’t something that I invest in because it’s not something that I entirely understand. I understand the general nature of it, but it feels different because it isn’t something physical that I can hold. Also, it can be far more volatile.

But who knows! Maybe crypto will be the money of the future.

So I’ll pass this question onto you: What are you investing in right now? Or how will this affect what you invest in in the future?

I want to hear from you in the comments below!

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How Much Do You Need to Invest for $1 Million in Retirement?

We’ve talked about investing and retirement, but what’s the magic number you need to have saved by the time you retire? And how much do you need to invest per month to hit that number? Is retirement actually a myth?

Here’s the video version for those less inclined to read a blog post!

What you need in retirement is going to depend on a number of variables.

How old are you? The younger you are, the easier it will be to hit your number.
How much do you have saved right now? The more you have saved, the easier it will be to hit your number.
When do you want to retire? The further out, the easier it is to save for it!
How do you want to live? If you’re going to travel a lot, that might be a bit more pricy than hanging out with the grandkids every day.

I’m not going to pretend I know the right investment number for everyone watching this. But what I can do is make some assumptions and give you a very possible scenario.

Also, I can tell you that you should go to a financial advisor for professional advice on investing. By no means should you take my word as gospel for investing.

Here’s an example

First of all, let’s say you are shooting for $1M invested when you retire. This will allow you to live off the growth every year without withdrawing any of the $1M. At a 6% rate of return adjusted for inflation, that would give you $60k to live on per year. Completely reasonable if you have your house paid off and aren’t traveling all over creation!

Now, let’s look at 4 ages and the amount you would need to invest per month at each in order to hit $1M by the age of 65. Each example is assuming no retirement savings have been made as of that age. Also, it assumes you’ve completed baby steps 1, 2, and 3, (check out the blog post here for a complete rundown of the 7 baby steps of personal finance) and are ready to invest!

Age 25

If you’re 25 years old, we’re in about the same boat! You got a lot of time left but don’t use that as an excuse to hold off on your investing! To hit a million dollars by 65, you have to put $503 per month into a 401k and/or an IRA. Make sure you go Roth!

Use the investment calculator yourself by clicking here.

Also, your contributions total only 24% of the $1M, nice! The rest is growth!

Age 35

If you’re 35, you’ve got a little less time but it’s still very doable. To hit that mythical 7th figure, you’ve got to put away $996 per month. You can do it!

Your contributions total 36% of the $1M. 64% is growth, not bad!

Age 45

If you’re 45, it’s time to crank up some heat. But don’t get discouraged! You’re going to need to invest $2165 per month to hit your $1M.

Your contributions to your $1M will be just over 50%. All things considered, not bad.

Age 55

It’s going to be a challenge, but keep your focus on the goal. If you have nothing saved, you’ll need to put $6103 in per month to hit $1M by your 65th birthday.

Your contributions will be 73% of the total $1M. 27% will be growth.

What can we learn from this?

Okay, the lesson to learn here is SAVE NOW! Whatever age you are at right now, save save save.

I talked in a recent video about compound interest and how that significantly impacts your retirement. Compound interest has one friend, time. The younger you are, the easier it is to take advantage of compound interest.

That’s clear from the percentages above. At 25, you only have to contribute 24% of your $1M. At 35, it’s 36%. At 45, it’s 52%. And at 55, you’ll be contributing 73%.

Compound interest and your investment growth curve

Compound interest allows us to make the growth curve actually a curve. The less time you have, the less compound interest you get and thus, the straighter the line. We want our line to be curved!

In our 25 example, You can see our line is nicely curved.

At 35, it get’s a little straighter but still very curved.

At 45, it’s just a little straighter.

At 55, it’s completely straight.

So how does this change your perspective on saving for retirement? Do you think you can do it?

Obviously many of these factors may change. You may receive a higher average rate of return over the years. You may need more than $1M set aside because of the lifestyle you want to have. You may need less than $1M. You may have some money invested already which will really help! It really depends on what your goals are.

So I’ll pass this question on to you. What are your financial goals for retirement? I want to hear from you in the comments below!

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Disclaimer

Do your own research. My content is intended to be used and must be used for informational purposes only. It is very important to do your own analysis before making any investment based on your own personal circumstances. You should take independent financial advice from a professional financial advisor when considering your retirement options. Though I teach financial principals, I am not an investment advisor and none of my advice constitutes legal, tax, or investment as a professional. Everything I share is based on my own research and is intended for your benefit.

401k vs IRA: What You Need To Know About Each for Retirement Savings

When it comes to retirement, I’m sure you’ve heard all the letters and numbers: 401k, IRA, 403b, TSP, etc. Confusing, right? What’s the best one?

That’s why today we’re going to look at two of the most popular — the 401k and the IRA. We’ll look at the pros and cons of each so you know which direction to go with your retirement savings.

Here is the video version for those of my audience who are less inclined to the written word!

Have you noticed it seems like everyone is like “Oh, save for retirement! You need to get ready for retirement!” It would be a lot easier if you could just throw the money you need in your savings account and be done with it.

Sadly, that won’t cut it.

We’ve got to take advantage of what Einstein called the “Eighth Wonder of the World”: Compound Interest.

This is where if you have $100 invested and you’re receiving a 10% interest rate, you’ll earn $10, totalling $110. Then you’re earning 10% interest on not only your $100 but also your $10. Next time you’ll be adding $11 to your total, bringing it up to $121.

Every year, it gets higher because you’re earning interest on interest!

That’s what your retirement accounts are going to do barring any economic disasters. They’ll use your money in the stock market to increase your rate of return over a normal bank, making that compound interest so, so sweet.

So, let’s get into retirement accounts.

401k Rundown

This is an employer retirement account.
You can invest up to $19,500 of your income per year straight from your paycheck.
You can take advantage of an employer match.
It’s restrictive on where it’s invested as it must be with your employer’s 401k provider of choice.
You are not able to withdraw with no penalty until you are 59 ½ years old.

IRA Rundown

You can invest up to $6000 per year as of 2021.
You can have a lot of flexibility about where this is invested. Many companies have IRA’s you can choose from like Vanguard and Charles Schwab.
You can take contributed money out without any penalty before 59 ½. The growth must stay in unless you want to pay a 10% tax penalty.

Roth vs. Traditional

Now, within each retirement account, there are a couple options — Traditional and Roth.

With traditional (in either 401k or IRA), the money that is contributed is contributed pre tax. Meaning, money is pulled out for the paycheck before tax is removed.

With Roth (in either 401k or IRA), the money contributed is done post tax. Meaning, the gross paycheck is taxed, then a part of the remaining amount is invested for retirement.

Just looking at those, you’re like wait, one is taxed and the other isn’t? Traditional is the way to go! Here’s the kicker.

While the traditional 401k or IRA has contributions that are made before taxes are taken out, everything you take out of that account when you retire will be taxable income.

With Roth, your taxes are taken out first then contributions are made BUT, when you retire, EVERYTHING including the growth will be able to be withdrawn from your account TAX FREE.

What does that mean for your money?

This is significant. If you’re about my age and have 40 years of work left before retirement, you can expect about 25% of your end retirement account’s value to be your contributions (using a 6% rate of return adjusted for inflation).

The other 75% is all growth! If you have $1 million by the time you retire and that is in a Roth account whether 401k or IRA, that means the 75% that is growth ($750k in this case) is not taxable.

Versus, if you have $1 million in a traditional account, you have to pay the taxes for your contributions and your growth.

Generally speaking, this is the better option for anyone young to middle age as it can save you thousands if not hundreds of thousands of dollars in taxes.

So what do you think about all this retirement stuff? Maybe a little less confusing now?

Let me know in the comments below! I want to hear about your retirement dreams and goals. I personally want to do some traveling with Bailey. There are a lot of places in this world we have yet to see.

Give this post a like if you will as it really helps my blog. Also, give my YouTube channel a subscribe so you can stay up to date on videos I’m putting out to help you take forward strides with your finances! Videos come out on Mondays and Fridays.

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Are you overwhelmed by debt and feel like there’s no way out? Feeling intimidated by budgeting?

The 6 Do’s and Don’ts of Budgeting

Consider this: The median household income of Americans in 2019 was just over $68,000 according to the Census Bureau.

If starting a budget caused you to save even 1% more of your yearly income, that would be an average of about $56 a month of savings. When $56 is invested per month over your 40 year work life at a 6% rate of return (adjusted for inflation), you would suddenly have an extra $110,000 to use in retirement.

Just. From. Budgeting.

Do I have your attention? Sweet.

Last Friday, we made an example budget to show you how it’s done. Now, let’s go over 6 do’s and don’ts of budgeting that will help make your budget a success in 2021.

Here’s the video version for those less inclined to the written word!

Tip 1: Do track purchases after each transaction

Every dollar of your income and expenses is important. So each transaction you make should be recorded.

That’s why I like using a budgeting app so much. If Bailey or I get out of the grocery store, we can immediately pull out our phones and input the chocolate milk purchase (or whatever you buy at the grocery store).

Now, you might be more of a sit-down-a-couple-times-a-month-and-track-expenses type of person. That’s fine. But if you want the fewest surprises possible, track each expense right after you’ve made it.

Then you won’t have to track a lot of expenses at once and realize you have no money left for the rest of the month!

Tip 2: Don’t go budgeting alone

If you’re married and you’re the numbers person, don’t do the budget without your spouse knowing what’s going on as well! You need to do this together. I’m not saying you have to make the budget together, just that you should agree on it together.

Then everyone get’s a say in where the money is going and there will be fewer surprises along the way.

If you’re single, ask a friend or family member to keep you accountable. It’s not like you have to ask them to go through your bank statements every month to ensure you aren’t spending too much money on pillows. Just let them know what your financial goals are as well as tough areas of budgeting and ask them to check up with you occasionally to see how it’s going.

It might save you from that frappuccino next time you’re out. Though, frappuccino’s are incredibly delicious.

Tip 3: Do stick to your budget

This is obviously important because knowledge won’t in and of itself get you to a dignified retirement!

You have to act. If you budget $100 for restaurants every month but spend $200, that budget does you no good. You gotta stick to it.

Tip 4: Don’t beat yourself up for failing

You will fail. Use it to learn, though. You’re going to need somewhere around 60-90 days to get really comfortable with budgeting and be able to predict it accurately.

Until then, you’ve gotta give yourself some grace. And after that, you have to realize your budget will change because life is unpredictable. That’s why you need an emergency fund!

Tip 5: Do make your budget before the first of the month every month

This is going to make it just that much easier for you to be consistent and form a habit. If you don’t create your February budget before February 1, it makes it a lot harder to track every expense. Then you fall behind.

I’ve done it before and catching up is never fun.

Tip 6: Don’t give up on it

Keep it up and be persistent! A budget is so much easier to do after you’ve gotten in a habit. Remember, 60-90 days of budgeting is going to really help you form that habit!

One more thing

And those are my tips!

I want budgeting to be as easy for you as possible. If even one of these works for you, that a success in my book.

Also, can we go back for a second and think about how serious $110k is if you started to budget? As one of my favorite YouTubers, Robuilt, would say, “That’s the equivalent of 15,714 chipotle burritos!” We won’t even talk about how much chocolate milk that is.

And that’s only from an extra 1% savings per month. That’s a low estimate in my opinion. If we jump it up to 2% saved and invested over a 40 year period, you’re looking at closer to a quarter of a million dollars.

Wild!

Did I miss any do’s or don’ts of budgeting? I want to hear from you in the comments below!

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Are you overwhelmed by debt and feel like there’s no way out? Feeling intimidated by budgeting?

How to Make Your First Budget EVER Using EveryDollar

Happy Friday!

Today I wanted to share with you a step by step process for creating your first budget ever. I know budgeting can be intimidating, but it’s really simpler than you may think. In this post, we look at budgeting through an app called EveryDollar.

I wrote about some great budgeting apps here, EveryDollar, YNAB (You Need a Budget), and Mint.

Given the nature of this being more of a tutorial, I am only sharing the video from my YouTube Channel because it’s far easier to follow along as you create a budget. I hope budgeting can serve you as well as it has served me over the last three years!

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Are you overwhelmed by debt and feel like there’s no way out? Feeling intimidated by budgeting?

Money doesn’t have to be confusing. You can be the master of your own finances. But you have to start today.

Here’s the First Thing You Should Do with Your $600 Stimulus Check

Boom we made it! 2020 is over! On to better years.

Yesterday, a friend of mine texted me that he just got his $600 stimulus check direct deposited. I was like “Oh dang, I wonder if we got ours.”

Sure enough, we did.

That spurred an idea for a good blog post: A reminder of financial priorities during a crisis such as Covid-19.

Americans have been losing their jobs for months now. I don’t doubt people know the importance of some bills over others. However, in a crisis where everything feels like it’s closing in, it may be difficult to pinpoint how to prioritize expenses.

So, let’s get started! Here’s what you should do first with your $600 stimulus check (if you received one).

Here’s the video version for those who are less of written learners

First thing’s first: The Four Walls

As a financial coach, Ramsey Solutions taught me how to help people with their finances while they are going through a crisis. 2020, what a crisis, am I right?

Though if you’re watching this, 2020 is now in the past.

Congrats! We made it!

What we were taught is that goal number one is to protect the 4 walls.

If you are in crisis mode right now, this is where your focus needs to be with the your next stimulus check. And focus on it in this order.

Wall 1: Food

Make sure you feed yourself and your family! I make a lot of jokes about chocolate milk here and on the YouTube channel. Maybe this isn’t the top priority during a crisis but ensure you have all of your basic food needs met.

Chocolate milk can wait for a little bit. Though I think we can all agree 2021 needs to have more chocolate milk in it.

Wall 2: Utilities

Make sure your water keeps running, your lights keep lighting, and your furnace keeps heating. A shelter is only about as good as the utilities that are available. So keep paying those utility bills.

We like it when utility companies are happy.

Wall 3: Housing

The third of these four figurative walls you need to protect is actually your physical walls: housing. You need to protect the roof over your heads.

My recommendation is that if you can at all afford it, make sure you pay your rent or your mortgage payment.

The government has set up rent protection and mortgage forbearance to help people like you get through this crisis. But, this doesn’t mean you get off scot free. Sorry! As things are currently set up, it means that you don’t technically have to pay right now because no one is allowed to evict tenants or foreclose on homes due to the hardships that are occurring.

This won’t last forever, and when the protection ends, mortgage companies and landlords will be allowed to take your housing away from you if you have not been paying. That is a bad situation you don’t want to be in!

Protect your housing.

Wall 4: Transportation

The last wall is transportation. You need money for protecting these four walls so if you are still blessed to have a job, make sure you prioritize the gas and maintenance necessary to get wherever you have to go!

Just make sure ol’ Mater is still up and running.

The four walls are A-Ok. What next?

What if you have these four walls taken care of already?

Here’s some suggestions:

Pay off consumer debt with it! Generally speaking, this is going to be a suggestion I make for any extra cash you have.
If you’ve paid off debt, put it towards your fully funded emergency fund! (This is 3-6 months of expenses).
Put it towards your kid’s college savings (did someone say 529?).
Put it on the principal of your home mortgage.
Stimulate the economy. I understand this argument given the difficult situations many restaurant owners are in right now. However, please remember it is easy to justify spending just to “stimulate the economy.” This can be a dangerous argument if you just want to spend. Consider this: paying off debt is also stimulating your own, personal micro-economy.
Give it away! I know someone who is doing just that because he and his wife don’t actually need it. They’re sending it straight to organizations who are helping those who need it most right now.

What will Bailey and I do? Probably a combination of giving and home renovations. Our house looks like a construction zone right now. Dust. Everywhere.

Where will you put your stimulus check? I want to hear from you in the comments below! I’ll respond to every comment.

If you found value in this, hit the like button. Check out the YouTube channel as well to stay up to date on financial videos!

Remember, money doesn’t have to be confusing. You can control your finances!

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Are you overwhelmed by debt and feel like there’s no way out?

Money doesn’t have to be confusing. You can be the master of your own finances. But you have to start today.

How to Pay off Debt Quickly in 2021 (2 Strategies)

Debt sucks. Nobody likes debt except bankers. Payments take away from your ability to do what you want!

How am I supposed to splurge on chocolate milk if I have collectors knocking at my door?

There are major two schools of thought on paying off debt and we’ll look at them here. If you’re more of a video learner, check out the video I posted this morning on my YouTube channel!

Method 1: Highest Interest Rate First

The first school teaches that to make the most sense, you should line up your loans from highest to lowest in interest rate and then pay off the highest interest rate loans first and move down the line. This’ll get rid of the loans that will cost you the most in the long run.

This shows debts lined up largest to smallest in interest rate. Minimum payments are made on all debts except the highest interest rate loan. All extra income is put towards that loan’s principal.

Obviously you pay the minimum on the rest of your loans as you pay down the highest interest rate loan. This is method is more mathematically based.

Method 2: Lowest Principal First (The Debt Snowball)

The second school teaches the method that is more momentum based. It’s called the debt snowball method.

Did you ever play in the snow as kids and make your own snowman?

I suppose this example might exclude you Southerners..

You take a small snowball, rolling it across the lawn (picking up every sad autumn leaf) until it gets big enough for the snowman’s body? It works because as you roll it, the snowball picks up more and more snow, making it get bigger and bigger.

The debt snowball works just like this.

Line up the debts you have smallest to largest regardless of interest rate. EVERYTHING not including your mortgage (because this goes in Baby Step 6). We’re talking phones, credit cards, bank loans, student loans, car loans, cat loans, whatever. Then you’re going to pay the minimum on each debt every month.

Anything left over (and I mean anything) is going to go straight to paying off that smallest debt. If you find a dollar at the office, that goes to paying off your smallest debt.

Here we can see the debts lined up in order of smallest to largest. Minimums are paid on each but all extra money is placed on smallest loan.

Once you get that paid off, you move onto the next one. This time you’ll have more money to throw at the second smallest debt because you’ve already paid off the smallest.

Here the smallest loan is paid off and then all extra money, including what was being used for the smallest loan (credit card), is then used on paying down the second smallest loan (car).

Once you get that paid off, you move to the third smallest debt and take the money you were using to pay off the first two to pay off the third.

Similarly, after the second smallest loan is paid off, all extra money from other payments is thrown at next debt.

Each loan you pay off, you gain more momentum. It makes it easier to pay off that large loan because you’re building your cash flow up as you rid yourself of those smaller loans. Then you’re debt free!

Let’s Compare Both Methods

Method 1: The pro of the first method is that it will save you money because you’re paying off the high interest loans first. The con — it’s harder to push yourself in your debt payoff when the debt is so large that it’s hard to see past it.

Now, as in the case of our above example with pictures, the highest interest rate loan might be the smallest loan. But in many situations, this is not the case. Sometimes the highest interest rate loan will be the largest, but it’s then that it may be more difficult to muster the motivation to pay off the largest loan first.

Method 2 (The Debt Snowball): The pro of the debt snowball is you get to build momentum through your debt payoff. It’s easier to start paying off the small debts first and continue the process. It’s motivating to get rid of a payment even if it is a small one! The con – it doesn’t get rid of the highest interest loans first necessarily. You might pay more in interest.

My Preference

Personally, I believe momentum is far more important in this case. Sure, you might save money on high interest loans but that only does you any good if you have the discipline to pay off the loan.

And in the grand scheme of things, if you are working your butt off to pay off your debt as quickly as possible in 2021, you’re actually not going to lose that much money in interest by using the debt snowball method.

There isn’t a magic trick to paying off debt. You just have to work hard, control your spending, and hit your debt payments with all you’ve got. You signed up for it, now get rid of it.

Debt Consolidation?

What about debt consolidation? I mean, you could. It is an option and many people do benefit from it.

Though it might help make payments less confusing and get you a lower interest rate overall, you need to get rid of your debt ASAP. Paying it off with the gazelle intensity that Dave Ramsey talks about is the best way for you to knock it out.

When you pay off debt quickly, debt consolidation really doesn’t do you much good. For one, there might be a fee involved. Two, you might not save that much in interest given you’re paying your debt off so quickly. Three, you lose your ability to gain momentum in your debt payoff because now you have one big debt instead of many small ones.

Again, I get it, the debt snowball isn’t the mathematically correct way to do things. I am an engineer by trade so I get the math argument.

But as Dave Ramsey says, if you were doing math, you wouldn’t be in this mess in the first place. Talk about some tough love! This applies to the vast majority of debt circumstances. I understand some situations don’t apply like with many types of medical debt when there’s no other options.

How Do We Get Rid of Debt Faster?

Okay okay, we’re paying off debt fast and building momentum but how do we pay it off even faster?

Get another job, snag some overtime hours, deliver groceries, drive for Uber, start a side hustle, hit the like button to help my blog. Your income is your greatest wealth building tool which means it’s also your greatest debt-destroying tool. Increase it and you have more to work with.

Conclusion

This debt snowball is a proven method that Dave Ramsey teaches in order to help people get out of debt and it’s what we’re taught as financial coaches. And millions have become debt free this way. Don’t take my word for it. Take the word every person who has gotten rid of their debts by this same method.

So I pose this question to you. If you have debt, how is your debt payoff going? Which method are you using and is it working?

Comment below and let me know! I’ll respond to every one.

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Are you overwhelmed by debt and feel like there’s no way out?

Money doesn’t have to be confusing. You can be the master of your own finances. But you have to start today.

7 Reasons You Need a Budget in 2021

Hello and happy Monday!

It is a happier Monday than normal given Christmas is this week!

I find a lot of people think a budget isn’t necessary for them. They’ve got things under control despite 79% of Americans living paycheck to paycheck.

So for that reason, here are 7 reasons I believe budgeting is essential for everyone! I also posted a video on this earlier today.

But here we go for the more written word focused individual.

7 Reasons You Need a Budget in 2021

1. A budget helps you be proactive instead of reactive with your money. It gives you control.

John Maxwell, a big name in the leadership world and one of my personal favorite authors, said this,

“A budget is telling your money where to go instead of wondering where it went.”
– John Maxwell

Have you ever wondered where your money went by the end of the month?

“No no no, that account had 4 digits in front of the decimal 2 weeks ago.”

If so, budgeting is for you!

Budgeting is a proactive approach to your money. If you have financial goals or even just an inkling of where you want to be with your money in the future, you’d rather make those moves yourself instead of reacting to life with your money.

Time to be in control.

2. A budget protects your future and helps you achieve your financial goals.

Okay, it’s debatable if this is any different from the first one but I’m counting it.

Close your eyes, look to the future and tell me what you see. What are your retirement dreams you are envisioning?

Budgeting every month is a sure fire way to hit those goals.

3. A budget gives you freedom instead of restriction.

I mentioned this recently but I don’t think Bailey and I would eat out much if it weren’t for our budget. I would feel guilty every time we ate out because of where that money could go otherwise.

But since we have a budget, we are given permission to go out to eat.

Guilt free.

Do you feel guilty whenever you spend money? A budget will actually give you permission to spend money guilt free. Just do it responsibly.

4. A budget keeps your money in check.

Unfortunately, finances is just a big math problem. But not one of those crazy, Jim-walked-into-the-grocery-store-and-purchased-27-watermelons math problems.

Quite a summer party, huh Jim?

You have income, you have expenses. Your expenses MUST be equal to or less than income. Otherwise, the answer to the equation is debt and interest owed. And that is not a sustainable answer!

A budget will help keep your money in check and help you keep the income higher than the outgo.

5. A budget reduces stress.

Have you ever worried you wouldn’t have enough money in your account to pay the mortgage or the credit card bill when it comes due? A budget will give you confidence there is enough money there!

Like what I was saying about the income to expenses ratio, if you know for a fact there is more income than expenses, that’s a huge stress reliever.

And then you can sleep better at night. It’s a lot easier to count sheep when you aren’t counting dollars.

6. A budget helps you prepare for hard times.

2020 was one big, gigantic hard time. People getting sick, losing jobs, what a disaster! By having a budget, you’re able to prepare for those times by curbing your spending and saving more for emergencies.

Why not ensure that you are in as good of a financial position for 2021 as possible?

7. A budget shows your priorities (and helps you correct them).

Zig Ziglar, a well known author, once said,

“Show me your calendar and your checkbook, and I will tell you what is most important in your life.”
– Zig Ziglar

This is the same with a budget. If you look at your budget, it will show you what’s most important to you. This might be scary and you will have to potentially deal with some shame of where you put your money.

“We spent how much money on chocolate milk this month??”

But it’s vital you do it! Let it awaken you to change your financial ways! Let it spur you into better money habits!

And that’s my list!

You may have a poor view of budgeting but if you can just give it a shot, I promise it will pay off. Maybe even to the tune of a million dollars if you start investing.

So here’s my question for you: if you budget already, What are the benefits of a budget you find for yourself? Did I miss any?

Comment below and let me know!

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