An unusual event occurred last Friday: 10-year Treasury yields fell below 90-day Treasury yields. Why is this bad? Economists consider the inverted yield curve to be a reliable predictor of a coming recession.

### Is This Actually a Big Deal?

(Short version) Yes. The joke about predicting 30 of the last 3 recessions does not apply here. There’s been a lot of breathless doomsday coverage from the media, but few in-depth explanations. In this article, we’ll cover:

*   What causes the yield curve to invert
*   How the inverted yield curve doesn’t just predict recessions, it can cause them
*   How the Fed might turn it around
*   Why there could be a strong stock rally
*   Why some say this time is different

### Why Is This a Big Deal

(Longer version) Every recession in the past 60 years has been preceded by a yield-curve inversion (specifically by the one year Treasury yield surpassing that the 10 year Treasury yield). More tellingly, every inversion (with one exception) has been followed by a recession. The single exception occurred in the mid-1960s. In the 60s, the economy did slow drastically following a yield curve inversion, but fiscal stimulus prevented a full-blown recession.

### The Yield Curve Inversion Explained

A bond is a chunk of money an investor lends to a company or to the government. In return for lending money, investors collect interest. The annual return investors receive is called the yield. For example, if you purchased a $100 bond with a 5% coupon rate, then the yield is also 5%. The yield does not always equal the interest rate because bonds sell on the secondary market. If the original price of the bond drops to, say $80, the yield becomes 6.25% (you still collect $5 in interest because interest is calculated from the original face value).

#### Yield Curve

A yield curve is simply a graph where the y-axis is the bonds’ yield, and the x-axis is the maturity. Below is what a normal, healthy yield curve looks like:  You can see the 10-year Treasury yields 2.44%, but the three-month Treasury yields a slightly higher return of 2.46%. There are many yield curves we could look at, such as the 2-year and the 10-year, but the San Francisco Fed as well as the professor who “discovered” the significance of the yield curve inversion, Professor Campbell Harvey, specifically consider the 3-month/10-year to have the most predictive power. The last time the 3month and the 10-year yields were inverted was 2007.

### What Cause the Yield Curve to Invert?

The inverted yield curve is caused by two moving parts: long term yields decreasing and short term yields increasing.

#### Short Term Yields Increase: Blame the Fed

The main cause of the inverted yield curve is the Fed has been steadily increasing the federal funds rate, which affects short-term Treasury rates (though they paused the raises in March). The Fed does this to prevent a booming economy from overheating. If interest rates are too low, capital is easy to come by. This incentivizes speculative lending and can overheat the economy. In 2017, the New York Fed [surveyed 23 broker-dealers](https://www.newyorkfed.org/medialibrary/media/markets/survey/2017/dec-2017-spd-results.pdf) to gauge market sentiment. The respondents said they felt the Fed rate increases explain two-thirds of the decline in the yield curve’s slope since December 2015.

#### Long-term Yields Decrease: Blame the Bond Traders

**The reason that long-term Treasury yields are decreasing is investors are buying up bonds and driving up bond prices. When prices go up, yields go down.** For example, imagine that bond which originally issued for $100 with a 5% interest rate now sells on the secondary market for $120. This drives the yield down from 5% to 4.1%. Why are investors parking money in long-term Treasuries? The financial markets think the economy is headed for a rough patch. Bond traders anticipate a recession and think the Fed will lower interest rates in response. By investing ahead of this anticipated interest rate slash, traders lock in a higher rate.

### Can the Inverted Yield Curve Cause Recessions?

In addition to predicting recessions, they can also _cause_ recessions. There are two reasons for this. First, inverted yields cause banks to tighten lending.  Banks make money by borrowing short-term and lending long-term and profiting off the difference in yield. They pay customers a certain interest rate for the money in their checking and savings accounts. For checking accounts it is 0.06% on average. They then lend out this to homebuyers or small businesses at a much higher interest rate. When short-term interest rates become equal or even larger than long-term interest rates, banks can’t much of a profit lending out money. This can lead banks to extend less credit. In October 2019, the Fed asked banks how they would respond to a moderate inversion of the yield curve. Senior loan officers responded they would tighten lending across the board.

#### Why is this important?

When it becomes harder for businesses to borrow, many companies cancel or delay projects and hiring. Businesses lose access to credit, which in turn causes layoffs. When this happens, it takes about a year, on average, for the U.S. economy to slip into a recession.

#### A Self-Fulfilling Prophecy

Ironically, the fact that so many people think the yield curve inversion means a recession is coming can itself cause a recession. When consumers anticipate a recession, they spend less. When consumers spend less, business lay off workers, thus starting the vicious downward cycle. Alternately, when businesses perceive a recession on the horizon, they scale back hiring plans and capital investments. According to the Duke CFO survey, [82% of chief financial officers](https://www.cfosurvey.org/press-release/recession-considered-likely-by-year-end-2019/?mod=article_inline) believe a recession will have started by the close of 2020. When CFOs worry, hiring slows, capital expenditures drop, and companies tighten their belts.

### Before You Panic

We haven’t given you much cause for hope yet, but there are a few reasons you shouldn’t panic.

##### 1\. It's Only Been Two Days

**Professor Campbell Harvey who identified the predictive powers of the 3-month/10-year curve, also determined that the curve needed to stay inverted for at least 12 weeks to be a solid signal.** While it looks like the curve will stay inverted, we aren’t there yet and it could still change.

##### 2\. Stocks Won’t Tank Overnight

Even if the yield curve stays flat or inverted for an extended period of time, the stock market won’t tank overnight. Historically, it took between one to two years after the yield curve inverted for the recession to start.  “Historically, equity markets tended to produce some of the strongest returns in the months and quarters following an inversion. Only after \[around\] 30 months does the S&P 500 return drop below average.” He notes the following patterns from the inversions and ensuing recessions in 1978, 1989, 1998 and 2006:

1.  Given the low 10 year yield, investors reallocate to equities
2.  Following the inversion, the Fed stops hiking rates which also boost equity valuations
3.  As a result, the stock market performance is very high after the first onset of the first inversion.
4.  Given the strong equity returns and high valuations, the Fed resumes hiking rates, pushing the market lower and driving a recession.

##### 3\. The Fed has Backed off Raising Rates

The Fed appears to be cautious about recessionary headwinds. They paused raise rates in their March meeting. Charles Evans, Chicago Federal Reserve president, said he would even support a rate cut if the economy softened even more or if inflation decreases too much. In fact, Ray Dalio, founder of Bridgewater Associates, a hedge fund with \_ assets under management, said he thinks a full-blown recession is less likely given the “easier stance” taken by the Fed and other central banks.

### Is This Time Different?

*   Some argue that though a yield curve inversion has accurately predicted recessions in the past, this time it’s different.

#### Quantitative Easing

Some financial analysts think the inverted yield curve is the result of quantitative easing, a once in a lifetime (knock on wood) monetary policy the Fed employed in the wake of the 2008 financial crisis. From 2008 to 2014, the Fed bought $4.5 trillion dollars worth of long-term Treasuries and mortgage-backed securities to stabilize their prices. This pushed long-term Treasury prices up and yields down. In fact, [one model published by the Fed](https://www.federalreserve.gov/econres/notes/feds-notes/effect-of-the-federal-reserves-securities-holdings-on-longer-term-interest-rates-20170420.htm) suggests that QE pushed down the term premium on 10-year Treasury bonds by 1%. The Fed has been unwinding its balance sheet since 2017, as the bonds it holds mature. Some speculate this could send the term premium back up over time and unflatten the yield curve.

#### It Doesn't Happen in Japan

Though the yield curve inversion has preceded every recession (minus one) in the US, that hasn't been the case in other countries. Japan has had many recessions, but it has never experienced an inverted yield curve. Meanwhile, Australia has experienced four yield inversions, but none of them were followed by a recession. UBS Wealth Management's chief economist, Paul Donovan [explains his skepticism this way](https://www.businessinsider.com/bond-yield-curve-inversion-2018-8): “The myth also suggests that the US yield curve has some magic ability to forecast the future, but other country's yield curves do not. The UK yield curve has inverted for years at a time with no recession. The Japanese yield curve has not inverted since 1991, in spite of one recession after another. ... If bond yield curves can predict, they should be able to predict everywhere. They do not.”

### Our Take

The four most dangerous words in investing are "This time it’s different." We heard similar arguments ahead of the 2008 recession. In fact, Alan Greenspan, Fed chair at the time, testified in 2006 before the Joint Economic Committee of Congress that there was [no need to worry](https://www.nytimes.com/2005/12/18/business/yourmoney/thrown-for-a-yield-curve.html) about an inverted yield curve. It had “lost its ability to forecast recessions.” We don’t doubt the inverted yield curve casts a real shadow over the markets and economy. At the same time, the news cycle makes it seem like a recession is coming tomorrow. If the past is any indicator, it should be on the order of months or years away, not days or weeks. Investors should focus on getting their finances in order, paying off debt, and making sure their investments are allocated to different asset classes in line with a risk profile suitable to his or her lifestyle.

The Yield Curve Inverted: Why It’s Not as Bad as You Think (Yet)

Back in 2018, Robert Shiller, founder of the eponymous Cape-Shiller index, warned that the housing market was becoming overheated. While it’s anyone’s guess whether we are due for another crash, we can look at market indicators for clues about where we are in the real estate cycle. 

The Four Phases of the Real Estate Cycle
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The real estate market isn't completely random. As far back as 1876, Henry George observed that housing is a cyclical business.

### Phase I: Economic Expansion

*   When businesses are growing and consumers are buying, the housing market tends to boom. Buyers flood the market and housing prices go up. It becomes a seller's market, as properties are frequently overbid.

### Phase II: Hypersupply

*   At some point, either developers overbuild or consumers can no longer afford the sky-high home prices. Houses sit vacant on the market much longer.

### Phase III: Recession

*   A combination of factors such as high housing costs, rising interest rates or a cooling economy contributes to a housing slow down.
*   Homeowners find their mortgages underwater and walk away. We see begin to see an uptick in foreclosures.

### Phase IV: Recovery

*   Eventually, property prices fall enough to lure buyers and investors back to the market. So begins the cycle again.

Economic Indicators of the Real Estate Cycle
--------------------------------------------

### Phase 1: Economic Expansion

In good times, when the economy is growing, unemployment is low, and wages are increasing, the real estate market goes through an expansion phase. A growing GDP means corporations hire more people, invest money into R&D, and open new offices. This leads to more building permits, new shopping centers, and more construction. Buyers, flush with more income, flock to the real estate market. As a result. housing inventory becomes tight. This is reflected in high property prices and fast appreciation.

#### Indicators

*   #### Case-Shiller Index
    
    The Case-Shiller index tracks the prices of detached, single-family homes. It measures appreciation using the repeat-sales method. In other words, it tracks properties that have been sold at least twice to measure how quickly the properties are appreciating.  since mid-2012 in February. This suggests the expansion phase is losing steam.

 The chart above shows the home prices index displayed along with the CPI, which measures inflation. Not only are housing prices setting new highs, but they are once again running ahead of inflation. 

### Phase 2: Hyper-supply

In the hyper-supply phase, new construction initiated during the expansion phase begins to flood the market. With enough new inventory, supply begins to outpace demand. If developers aren’t aware of the softening conditions, or if they don’t react quickly enough, the market will head towards a downturn.

#### Indicators

The first sign that we are headed to oversupply is an increase in unsold inventory as reflected by the amount of time homes are sitting unsold on the market.

#### Monthly Supply of Housing  

Months of supply is the measure of how many months it would take for the current inventory of homes on the market to sell, given the current pace of home sales. For example, you can see the ratio peaked to 12.0 at the height of the 2008 crash. This means, for every 12 houses sitting on the market, one is selling each month. The Months of Supply was 6.0 in March 2019. Though we are nowhere near 2005-2007 highs, the indicator has been trending up over the past few years. In hot markets like California, we are now seeing the highest months of supply of homes in places like San Diego and Los Angeles, since 2012. As a rule of thumb, six months (or fewer) of supply indicates that we are in a seller's market. By contrast, six months or greater of supply indicates an excess of inventory.

#### Unaffordability

In this cycle, unaffordability is the reason for the housing sitting vacant longer, rather than overbuilding (as was the case in 2008). In the most competitive markets, for example in California, [household incomes just](https://www.doctorhousingbubble.com/the-housing-market-is-turning-and-millennials-are-unhappy-about-their-home-purchases-california-has-highest-months-of-supply-for-homes-going-back-to-2012/) do not justify current property prices. When home prices become unattainable to most people, something has to give. We might be in for a round of price reductions to bring valuations back in line with wage growth.

### Phase 3: Recession

In the latter parts of decline, real estate prices drop significantly and foreclosure inventory jumps. In decline, inventory can sit for a long time. Recessions go in hand with high unemployment trends and a larger contraction in the economy. Right now, unemployment rates are quite low and GDP growth is still decent, but if macro-economic conditions worsen, we would see it reflected in the housing market. It's also worth mentioning that not all recessions are the same. And there are good reasons to think we won't experience the same hard landing we did in 2008.

1.  Banks have much stricter lending standards. The great recession of 2008 so severe in large part due to systemic problems in the mortgage and financial industries.
2.  There isn't nearly as much excess housing supply as there was in the years leading up to 2008
3.  The Fed is keeping interest rates low. Even in an overheated market, low mortgage rates are really effective in getting buyers to bite.

### Phase 4: Recovery

Eventually, prices find a bottom and start to stabilize. Buyers come back on the market because the economics of buying are now better than the economics of renting. Investors come back on the market when they find deals that allow them a high cash on cash return.

So Where Are We in the Cycle?
-----------------------------

*   Keep in mind that the housing market is really thousands of local markets: it can be the case that Seattle is cooling while Pittsburg is just getting started. However, looking at national indicators, it does seem that we are in the Hyper-Supply phase of the real estate cycle.
*   Properties are sitting on the market for longer, and we are seeing a record number of vacancies.
*   Whether this is a temporary slowdown or the harbinger of worse conditions to come is anyone's guess.
*   However, buyers should be especially restrained about dropping a lot of money on real estate this late in the game.

Where Are We in the Real Estate Cycle in 2019?

By: Camilo | The Financial Twins Being an identical twin, I got used to standing out a little more than the average person. An ordinary walk around the grocery store with my mom and siblings would often lead to strangers asking us if we were twins (duh, we are literally genetic clones) or simply pointing at us in amusement. On top of that, growing up in a relatively homogenous town in Minnesota as a Latinx immigrant, it was easy to feel different. But while it’s hard to think of things more isolating than growing up in poverty, one thing comes to mind. Being poor in the Ivy League and feeling like you are the only person there who didn’t come from a wealthy family. _Note: Latinx is the gender-neutral form of Latino/Latina._

Graduating from Penn, an Ivy League university, changed the trajectory of my life.
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If it sounds like I am complaining about having had the opportunity — no, the blessing — to attend an Ivy League university, let me make a few things clear. No other single experience or community has more profoundly affected my life. It allowed me to go from being a Latinx immigrant, raised in poverty, in a single-parent household, to earning more than 6 figures in my first job out of college. My. First. Job. Even writing that feels silly to someone who grew with a household income that bounced around the poverty line. The fact that I was able to attend a university with a financial aid policy that said that students who come from families that earn less than $100,000 per year could attend for free is not lost on me. The thought that I received a degree that cost a quarter of a million dollars still gives me chills. The profound impact my college degree has made on my life has been nothing short of mind-numbing. I am one of the lucky ones. But it wasn’t all rainbows and sunshine, and I learned a few lessons about money along the way.

\[caption id="attachment\_1781" align="aligncenter" width="650" class="thumbnail"\] The eight universities in the Ivy League\[/caption\]

But my time there wasn’t easy. The academics were the least of my worries.
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I shared a bedroom with Francisco, my twin brother and proud co-founder of this site, my entire life until I left home in Minnesota at eighteen years old to attend the Wharton School of Business at the University of Pennsylvania in Philadelphia. I arrived alone with my entire life packed into a single suitcase because that was all I could afford to bring with me on the flight to the East Coast. Not having enough money to cover the taxi ride to Penn, I took public transit from the airport, which dropped me off a few blocks from campus. As I walked up to the outside of my dorm, the realization that most of the other students were being dropped off by their entire family hit me like a ton of bricks to the chest. I hadn’t even been in my adopted city for more than an hour, and I already missed the warm embrace of my mom and the comforting presence of my two brothers. I was embarrassed that no one was able to come and drop me off, and I was worried my new classmates might wonder whether I was loved by my family or not, even though I knew my mom and brothers would have given anything to be there with me.

At first, I thought the move-in weekend was a car show.
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I vividly remember wondering if the German automobile industry-sponsored my university’s move-in weekend. The procession of proud parents entering to drop off their children for college seemed to indicate that you could only participate if you were driving a Mercedes, BMW, or Audi — cars that I was familiar with and had driven, since I had worked at a car dealership from the age of 15 — stuffed to the brim with mini refrigerators, televisions, bean bag chairs and other items that I definitely could not afford. Throughout the semester, I met the children of celebrities, hedge fund managers, and other titans of industry. I also met other students who came from backgrounds more similar to mine, and some who came from even rougher backgrounds than I did. Broken homes, victims of abuse, and even homelessness. But meeting people I could relate to was like finding a needle in a haystack while blindfolded.

I was embarrassed and felt the need to lie about being poor…
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Birthday celebrations for my friends often included trips to restaurants off campus. But I never had the cash to spare for a meal that wasn’t included in the campus dining plan, so I always had to come up with an excuse for why I was unable to attend the birthday festivities. Being poor when surrounded by people who aren’t poor, ultimately forces you to come up with lies or excuses as to why you are too busy to join for costly outings. Mostly, out of fear that they won’t want to be friends if they know the truth. I also had a healthy dose of shame, as if it were my fault I was poor. Many of these special outings were trips to restaurants, and I wondered what it’d be like to try sushi or Indian food for the first time. Spring break often involved exotic trips abroad and winter break trips to the Rockies to hit the slopes and rub elbows with the rich and famous. Something I had only ever seen in movies. But my school breaks consisted of going home to Minnesota and working. Am I hoping to get your sympathy? No, because I realize that many people currently face this reality. I had a credit card (which I opened on my eighteenth birthday in order to begin to establish credit) so I could always have said yes to my friends and lived beyond my non-existent means, but I was sick of being poor and wanted to do everything I could to try to change that. During that time, there wasn’t a single month where I carried a balance on my credit card. I was one of the lucky ones.

… But I knew living beyond my means would only make things worse.
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I also could have borrowed thousands of dollars in student loans to give myself more breathing room, but it never felt like a good option since I knew I’d need any money I’d make after college available in case my mom or siblings had a financial emergency. I had seen creditors harass my mom, and I could think of nothing sweeter than to one day be able to tell them to stop calling because we had already paid. When my freshman roommate asked me why my mom never visited me at college, I told him that she just didn’t have the time to visit since she was constantly working. While that was true, since my mom really was always working around the clock, the real reason she never visited was that she just never had the money. So, instead, we were forced to speak on the phone to stay in touch. Today, we still talk on the phone daily, a ritual from not being able to see each other in those trying early college years. This taught me that distance and financial difficulties are not good enough excuses to let relationships fall by the wayside, but rather a reminder to foster those relationships and make them even stronger. It is those relationships that will buoy you during your darkest moments. My brothers and I finally bought her a plane ticket so she could see me graduate 4 years later. It was her first vacation in over a decade.

Even though I had something in common with all of my classmates, I only seemed to notice the ways in which I was different.
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On the first day of classes, amongst all the guys wearing Sperry boat shoes and women sporting Longchamp bags and black leggings, I felt like I was the only student who didn’t have a trendy new outfit. Did I somehow miss the memo about the unofficial dress code? Surely, everyone else had coordinated their outfits. When you can’t afford those things, you become hyper-aware of everything you have, and even more aware of the things you don’t have. Today, it’s easy for me to take a step back and realize that comparing myself to others is the fastest path to misery, but as an eighteen-year-old thrust into a foreign place with peers who seemingly had it all figured out, it was basically impossible to avoid it. I was an outsider, and I knew it. I had been poor my entire life, but never felt as poor as when I was surrounded by people who seemingly never had to worry about money. I started college in 2007, the relatively early days of Facebook, so I can’t imagine what it must be like now, with Instagram being the museum of choice on which to display the rosy perfect life that no one actually has.

But then I realized everyone struggles with their own problems. Even people who seem to have it all.
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While I felt like the rest of my classmates were lucky to have attended prestigious private high schools and boarding schools, I was surprised to see that they were also stressed about pending midterms, papers, and exams. Their lives weren’t as perfect or easy as I had thought. I think about the classmate who grew up in an exclusive Southern California community and would travel to and from school on the family’s private jet. He confided in me that he was having a hard time adjusting to college, the last thing I’d thought we’d have in common. It was during these years that I began to realize that no amount of money was going to give me sustained happiness. As I compared the happy childhood that I had with my brothers, to the stories I heard from my peers, of parents who were too wrapped up in their careers to give them attention, it dawned on me that the traditional definition of success might not be what I expected. It wasn’t easy losing my dad to cancer when I was only seven, and I still remember seeing all of the other dads on the sideline of the soccer field and wishing I had my dad there to cheer for me. But I will always be grateful that our mom showered us with love and attention whenever she was home with us, something that many of my classmates, and millions of people, sadly, cannot say.

\[caption id="attachment\_1783" align="aligncenter" width="650" class="thumbnail"\] My proud mom and me on my graduation day from Wharton. Her first visit to campus\[/caption\]

As I got ready to graduate, I was blinded by money. And I learned I already had the most important things.
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As graduation approached, I was lucky to have landed what was then my dream job of working in investment banking on Wall Street. Lured by the money, I had a general idea of what I’d be doing, but even more important to me at the time, I knew exactly how much I’d be getting paid. A LOT. Enough to help my mom pay some of her monthly bills and still be able to save. Naively, I thought I’d be making enough to never have to worry about money again, but New York City has a funny way of making even rich people feel broke. Now that several years have passed, I can look back and reflect on the way I struggled with the shame and embarrassment of being poor at an Ivy League university. Was the experience worth it? Definitely. Would I have done anything differently? Of course. For starters, I wish I would have known that I wasn’t alone and that I’d make an incredible group of friends. A diverse group who didn’t care from where or from whom I came. They simply judged me based on the content of my character and my ability to bring them joy, laughter and happiness. I wish I wasn’t embarrassed to say I couldn’t go out to dinner because I didn’t have the money. I wish I had had more faith in myself and more confidence that I deserved to be at this elite institution like the rest of my classmates. I wish I had known that I wasn’t the only one who struggled with this “imposter syndrome”. While I do wish I had this knowledge back then, I am proud of my experience. Whether it was luck, hard work, or a combination of both, I am proud that I was able to live within my means and graduate with only $5,000 in student loans, a fraction of the national average, thanks to generous financial aid. I am proud that I was able to leverage my undergraduate degree to work on Wall Street followed by an incredible fashion start-up. Subsequently attending Harvard for my M.B.A. was the cherry on top. My proudest college moment wasn’t graduating or getting my dream job. It was seeing my mom beaming with pride at my graduation — validation for the tremendous courage she had to raise three sons by herself in the U.S., when she could have retreated to Colombia, a familiar place surrounded by extended family. Yes, being a poor Latinx at an Ivy League university was isolating and may have felt embarrassing at times, but I now realize that I didn’t have anything to hide. With more confidence in myself and less fear about what others think, I’ll be able to continue to make the most of every opportunity. And so will you. Republished with the permission of [TheFinancialTwins.com](https://thefinancetwins.com/being-poor-in-the-ivy-league/).

Being Poor In The Ivy League And Lessons Learned

Here's the latest post in the Rockstar Finance Money Match-Up series where two money bloggers argue opposite sides of an issue. Today's issue is certainly an interesting one -- is debt a tool or something to be avoided at all costs? We'll start with Mike from [Miked Up Blog](https://www.mikedupblog.com/) who is in favor of using debt as a tool... ------------------------------------------------------------------ Before you write this post off because of some past experience or personal vendetta against debt, let me challenge you to open up your mind. Just a little bit. And let’s peer over that massive wall that separates those that hate debt with the fire of 1,000 suns from those that casually use it to get ahead in life. I know you’re wondering so I’ll answer. Yes. Educated and experienced people do willingly choose to use debt as a money tool. And if you’re not willing to consider doing the same, you’re effectively shrinking your financial arsenal. Effectively using debt isn’t for everyone. But if you know what you’re doing and the situation is appropriate, using debt to your advantage can be one of your best moves! ...Yeah. I said it... _**Debt can be good. And here are 6 great examples of when to use debt to get ahead:**_

Debt and Personal Finance:
--------------------------

**1\. Refinancing your mortgage or student loans** When my wife graduated from dental school 4 years ago, we found ourselves inundated with student loan debt. Sure, the total number was terrible, but almost as bad was the fact that she had over a dozen loans spread across 3 different lenders. Each sum was different as were their interest rates and repayment terms. The 1 constant was that each interest rate was between the 5.8 - 7.9% range. Just terrible. When we decided to [get control of our debt](https://www.mikedupblog.com/unorthodox-path-debt/) (the student loans made up only about 32%!!), we were determined to use all of the financial weapons available. We ended up refinancing all of these loans with one lender. By wrangling all of these student loans under 1 roof, we were able to create 1 payment term (10 years), 1 monthly payment, and - probably most importantly - 1 interest rate (5.25%). Now, we are able to make the same “minimum” payment that we had been making previously to effectively reduce our repayment term (estimated 7 years) and total interest paid (by over 5-figures)! Granted, you’re not taking on more debt in this example. But you are restructuring the current debt you have to make it work more effectively on your behalf. No matter your opinion on student loans, they are an investment in your future self, and an example of using debt to advance your financial position. **2\. Investing in real estate using leverage** If you’re on the FIRE (Financial Independence / Retire Early) path, pay off debt path, or (insert any) path - after you’ve cut all unnecessary expenses there isn’t much room left for improvement. Unless you increase your income, that is. A popular way to boost that income is through investing in real estate. I don’t know about you but I don’t have an extra $100,000 lying around to buy a duplex. So, we’re left with the alternative of financing. Some options include seller financing, finding an outside investor, or a good old-fashioned bank loan. The idea here is that your income gained (rent) exceeds the cost of debt and maintenance on your rental unit(s). If the equation is in balance, you’ve just advanced down your respective path a few big steps further. And unless you’re independently wealthy (me either - not yet), that was done using debt as a tool. Nice work! **3\. True emergency** Let’s face it - most of us want a plump emergency fund. Those of us with young kids also know that you don’t always get what you want. What if you’re establishing your emergency fund and thanks to Murphy, something happens before you’re fully funded? This isn’t an ideal scenario, but there may come a time when you can’t scrape together enough cash to pay for the \_\_\_\_ (medical procedure, dead car, accident, etc.). What can you do when the worst happens? Well, you could not pay… And deal with the ramifications that follow. Or - you could ask for a personal loan from a friend or family member, take out a home equity loan (if possible), or reach out to a bank about a quick personal loan. Many banks will lend a few thousand up to tens of thousands within a week to borrowers with good credit history. It’s not a perfect world and sometimes we need imperfect weaponry. Paying interest is less complicated and comes with fewer side effects compared to not paying and defaulting on medical bills (or the like).

Debt and Businesses Finance:
----------------------------

As a disclaimer, business finance vs. personal finance can be apples and mint chocolate chip ice cream (e.g. not in the same realm). While on the family or individual level, debt can produce excess strain, stress, and sleepless nights (the Big-Three). Alternatively, businesses need to see debt through a completely different lens. **4\. Starting a business** Similar to the real estate investing example above, we don’t always have the capital required to buy or start a business. For example, my wife and I recently [bought a dental practice](https://www.mikedupblog.com/we-bought-a-dental-practice/). Goodwill, tangible assets, and Accounts Receivable aren’t cheap. If the equation of earned income versus monthly expenses is in balance, you would expect this new asset (your business) to earn you more income and ultimately make you wealthier. Granted, the variables that comprise that equation are more abundant and intricate than I have time for here, but the following holds true. Just like I didn’t have the $100k for the duplex, I didn’t have the ($100k x (X)) for the dental practice. And in order to advance our family’s future income, we chose to open a business using debt. If we were to go the route of “Save up and pay cash” for the business, it’s likely that we wouldn’t have been in the market for at least the next decade. As long as you successfully conduct your due-diligence and your income equation is in balance, taking out a business loan is an excellent and effective way to break into the entrepreneurial game. **5\. Leveling up your business** There may come a time when an influx of cash right now is needed to produce a significant profit later. Examples of this situation are numerous (i.e. launching a new product, hiring, offering an additional benefit to current employees, …, or opening a new physical location). Our business gave us experience with the latter. Before signing on the dotted line, we were unable to secure a long-term lease with the previous landlord. As a condition of our purchase, then, we needed to find a new location and determine all facets of the plan to build out this new space. It was great that we would have a brand new office. But… Brand new offices don’t grow on trees. Although we were able to get a discount on the business purchase, we still needed to come up with a significant amount of money to build our new office. After determining we were out of wealthy relatives and random donations, we were left to secure financing. We took on more debt now to secure the possibility of future profits. **6\. When the tax benefits are hard to ignore** Fortunately, there are diverse options available for business owners when it comes to raising additional cash. Depending on the size and type of your business, two common options are to either get a loan or raise equity through outside investors. Putting aside the other variables (e.g. giving up equity, repayment terms, gaining value through mentorship, etc.), comparing the tax advantages of these two decisions may help determine your decision. The reason: business interest payments are tax deductible. That is to say that if all other things are equal - if Business A finances with debt and Business B finances through outside investors, Business A will produce higher profitability. All because Business A chose to use debt as a money tool.

Conclusion
----------

We’re not talking about consumer debt, car loans, or Pay Day loans here. I’m not going to plant my money matchup flag on any of those hills. No. The debt I discuss above encompasses more graduate level topics. Trying to reduce taxable income indirectly or total interest paid in combination with increasing your business cash flow while retaining that precious equity. When you get to decisions at that level, your arsenal requires sophistication. I’m not advocating that you go out and secure More Debt just for the sake of doing so. Don’t be foolish. What I am advocating though, is for you to understand all of your options, including their ideal circumstances and eventual effects. Sometimes you need to take a step backward or sideways in order to move forward. Be tactical. Use all of the firepower available to you. This way, you’ll be more likely to keep that white flag in your pocket. ------------------------------------------------------------------ Now let's go to Chris from [The Cash Dad](https://thecashdad.com/) who doesn't like debt at all...

Debt: The Burden that You Don't Even Realize You're Carrying.
-------------------------------------------------------------

He struggled up the long windy country road. The clink of metal on metal interrupted the otherwise peaceful morning. His companion glanced at him with an inquisitive look. What was he doing? They were supposed to be out for a nice morning walk. The chains that the man was dragging behind him seemed to be more of a hindrance. "Why did he bring them along", his unencumbered companion asked herself. "Couldn't he leave them at home?" The man couldn't take a step to the side or forward without pulling the mess of chains along with him. All the while he was muttering to himself, "Let's talk a walk she said." "It'll be fun she said." \*\*\*\*\*\*\*\* You may think this is a ridiculous story, and you'd be right!! I've never seen anyone with a bird's nest of chains tagging along wherever they went: Marley brothers' style (Muppet's Christmas carol). And you haven't either. And yet, here we as fun-loving Americans are, with over 13 TRILLION dollars in total household debt!!! That's trillion: with a "T"!! Debt is just like that chain that you're dragging along with you wherever you go. You can't get away from it. It'll haunt your waking hours and give you nightmares. This is the stuff that horror movies are made of. And the worst part? Most people think they're doing just fine - thank-you-very-much. They have no idea how much of a mess they're in. And they're so used to dragging that heavy burden around, they don't know life without it.

Why is Debt so Bad?
-------------------

**1\. Debt Payments Restrict Your Cash-flow.** As soon as you sign on the dotted line for that loan, mortgage, car note, or any other type of debt, you're on the hook to start paying it back. You don't even get a reprieve. They'll want the first payment THIS MONTH! And depending on the type of debt you signed for, your payments could vary depending on the interest rate and balance. Think: credit cards or student loans. There is only so much room in your budget for loan payments. At some point you'll be tapped out. And all your money will be going to someone else. If you had no debt, just think of what you could do with all that extra money you have. You could be [investing and saving](https://thecashdad.com/secret-wealthy-1/), or traveling. But you've restricted your monthly cash flow with debt payments, because you couldn't delay gratification. **2\. You Can Never Have Freedom With Debt.** When you have debt, you're always in bondage to someone. Your lender will always have power over you. That's part of the agreement you entered into when you signed. They could call your debts, leaving you in some deep trouble. The Bible says, "The [borrower is slave to the lender](https://thecashdad.com/debt-makes-me-a-slave/)." A slave doesn't have freedom. We've already discussed how your income is earmarked for their bank account instead of yours in the form of payments. You're free to use some of your income for your pleasure and gain, but never all of it. You're a slave to your lender and debt. **3\. If You Have to Use Debt, You can't Afford it.** The thought process that we go through before we borrow money goes something like this. "I want to buy \_\_\_\_\_\_\_\_ "- fill in the blank. House, car, boat, college education, vacation, or even furniture. "That "thing" costs X number of dollars. I don't have X number of dollars." "I can't wait to save up the money. I'll go talk to someone who does and borrow it from them. And so, what if I have to pay it back over the next 30 years. That's called leverage, and it's what all the smart, rich folks are doing." No, that's called dumb!! And for every "smart, rich person" you see doing that, there are 50 more people trying to the same thing, and failing miserably. And ending up in bankruptcy and losing everything. Because they couldn't afford that "thing" in the first place!!

Conclusions
-----------

Personal finance comes down to behavior and attitude. The numbers and math are secondary. If we could understand that our future is built on our choices today, we might make better choices today. Choosing to never borrow money again is one of those choices. Debt restricts your cash flow and robs you of freedom. People around you may not ever see the chains of debt you're lugging around with you. But you know they're there. You can feel them. And you know that if you had never signed for that debt, you would be in a much better place right now. But there is always hope. You can start today to turn things around. Make a list of your debts, and start attacking them one-by-one. And once you've freed yourself from the chains of debt, NEVER EVER GO BACK!! ------------------------------------------------------------------ So, those are the two sides of the issue. What do you think?

Money Match-Up: Is Debt a Money Tool or Some Form of Evil?

By: Marc | [Vital Dollar](https://www.vitaldollar.com) Many of us grew up hearing that owning a home is a great investment and renting is just like throwing money away. Because I heard that a lot, I never really questioned it or took the time to look at the numbers for myself. Owning a home just seemed like something I was supposed to do as an adult, so when the time came, that’s exactly what I did. Back in 2007, my wife and I bought our first home. We had been married for about 6 months and were excited to take a big step in our lives in becoming homeowners. We bought a two-bedroom condo in New Jersey (Philadelphia suburbs) for $159,000. Our plan was to live in the house for about 5 years and then move out and keep it as a rental property. But plans changed (more on that later) and in 2010, just over 3 years after we bought the condo, we sold it for $150,000. After realtor fees and other fees that we paid as the seller, we had to take a $7,000 check to the settlement to pay off the mortgage. I always expected to take money to the settlement when I was buying a home, but not when I was selling. In addition to that $7,000, we spent about $1,000 for repairs after the home inspection and we had already spent about $2,000 getting the place ready to be listed. In total, it cost us about $10,000 to sell the house. Losing $10,000 wasn’t exactly what we had in mind for our first home, but to be honest, we were pretty fortunate. The market had tanked during the 3 years that we lived there, and many of our neighbors were in worse situations. The were several other units that were listed for less than ours and had been sitting for months. We got an offer after only 4 weeks on the market and with only 4 people coming to look at the condo. Like many other situations in life, failing with real estate was a great learning experience. Here are 10 of the lessons that I learned.

1\. Real Estate Isn’t a Guaranteed Investment
---------------------------------------------

When we bought the condo I knew there was no guarantee it would increase in value. I knew it was possible to lose money on a home, but the reality of actually going through the situation was a very powerful learning experience. I had heard and read so many times that owning a home is a good financial decision that I just took it as the truth without really trying to decide if it was the best move for us at that time.

2\. Selling a House is Expensive
--------------------------------

When we bought the house we had all of the typical costs and fees like closing costs, the appraisal, the inspection, and property taxes. Looking at those numbers was pretty depressing. It didn’t sting quite as bad because we looked at the big picture and we planned to own it for a long time. When we sold it, we had to pay 6% in realtor fees, a portion of the closing costs that we agreed to pay for the buyer, as well as some other smaller fees. On top of that, we paid several hundred dollars (I think it was close to $1,000) to get our stuff transported to our new house. And depending on the situation, as the seller, you may need to spend more money to get the house ready to sell. As I mentioned in the intro, we spent about $2,000 to help our condo stand out since there were several very similar units already listed. Spending that money hurt since we knew we were already going to lose money on the sale, but I don’t think it would have sold at all if we hadn’t spent that money. The [costs of buying and selling a home](https://vitaldollar.com/costs-of-buying-selling-home/) are very significant, and it’s not something that you should do often if you can avoid it.

3\. Buying Isn’t Always Better Than Renting
-------------------------------------------

Looking back, we would have been much better off to rent a condo for those 3 years. There were plenty of units that were almost identical to ours that we could have rented. The monthly rent would have been about the same as what we paid for our mortgage, taxes, and HOA fees, but we wouldn’t have had any of the costs related to buying or selling. There are a lot of factors that you should consider when you’re [making a decision to rent or buy](https://vitaldollar.com/renting-vs-buying/), and one of the biggest factors is the length of time that you expect to own the home. In general, if you expect to sell the home in 5 years or less, renting is usually the better financial decision. In our case, we had originally planned to keep the condo long-term, so we didn't give much thought to this.

4\. Sometimes Life Changes Your Plans
-------------------------------------

Although we planned to live in the condo for about 5 years and then keep it as a rental property, we didn’t anticipate career changes that totally threw that plan out the window. When we bought the condo, we both had fairly stable jobs that we had been in for 2 years. But not long after we bought the condo, I started a business on the side and in 2008 (after we’d been in the condo for 1.5 years) I left my full-time job and entered the world of self-employment. I was working online from home, and that meant that I could work from just about anywhere. We started to think about moving to an area with a lower cost of living. We were able to buy our condo for a great price, but in order to move up to a single-family home in our town, we would have had to make a major jump in price. In early 2010, my wife transitioned to a different role within her company that allowed her to work from home. At that time we started looking for houses a few hours away. Although we had hoped to keep the condo as a rental, we didn’t want to try to manage it from a long distance, so we decided it was best to sell. At that point, our lives were completely different than they had been just a few years earlier, and it was a change that we couldn’t really have anticipated. Although there are a lot of [factors that you need to consider before buying a home](https://rockstarfinance.com/feed-items/top-10-things-to-consider-when-buying-a-house/), sometimes your life changes unexpectedly and there’s not much you can do about it.

5\. Renting Gives You More Flexibility
--------------------------------------

Once we were both able to work from home, we had the ability to choose where we wanted to live. The problem was, we had this condo that needed to be sold in order for us to move. Not only did we need to sell it, but the market was pretty bad for sellers in 2010 and we knew it was possible that the house would sit for a long time before it sold. If we had been renting during those 3 years we would have had far more flexibility to move whenever we decided it was time. Without that flexibility, we started to look at houses but we couldn’t make an offer to buy until we had our condo under contract. We actually found a great house that we wanted to buy, but we couldn’t pull the trigger because our condo was still sitting on the market with no offers. Fortunately, a week after we saw the house that we loved, we got an offer on the condo. About another week later we had made it through the 3-day attorney review period required for selling a house in New Jersey and we were able to move forward with an offer on the other house. The lack of flexibility didn’t cost us too much, but we saw that it easily could have prevented us from being able to buy the house that we wanted. In my opinion, greater flexibility is one of the major benefits of renting over owning a home.

6\. The Glass May Be Half Full Instead of Half Empty
----------------------------------------------------

While taking a $10,000 loss on our first home wasn’t what we’d planned, not everything was bleak. The market was bad for us as sellers, but we were also buyers looking for another house, and we benefited from lower prices. The single-family house we bought in 2010 was available at what we felt was a very good price, and would have probably sold for more just a few years earlier. Feeling that we got a good deal on that house made the pain of losing money on our condo a lot easier to handle. Instead of obsessing about the fact that we lost $10,000 on our condo, we focused on the bigger picture, and that definitely included getting a single-family home at a good price. We were actually happy with the end result, considering everything that had led up to that point.

7\. Stretching on a Mortgage Isn’t a Good Idea
----------------------------------------------

When we bought the condo in 2007, we were only able to pay about 5% as a down payment. We had no problem qualifying for the mortgage, but the small down payment meant that we had a higher monthly payment, plus we had to pay private mortgage insurance (PMI). Not to mention, there are a lot of other [costs involved with owning a home](https://vitaldollar.com/costs-of-owning-a-home/). The small down payment also meant that we had very little equity in the house, and when property values dropped it meant that we owed more than the home was worth. We were in a hurry to buy our first place, but we really should have waited until we were in a better financial situation. The PMI alone was an unnecessary expense that I wish we would have avoided. Waiting until you have 20% for a down payment can be pretty challenging in cities with a high cost of living, but in our situation (buying a condo for $159,000) we could have waited until we had the 20% saved. When we moved in 2010 we put 20% - 25% down and avoided the same mistake.

8\. The Sale Isn’t Done Until Everything is Final
-------------------------------------------------

We were extremely excited to get an offer on our condo and get it under contract, but we were nervous about the deal the entire time. The market was bad, and we knew if the deal fell through we might have to wait a long time until another buyer came along. The appraisal was my biggest concern because property values were dropping quickly at the time. But the appraiser gave the property the exact amount that we needed, so we were in the clear there. We were scheduled to close on the condo on a Tuesday morning in May of 2010. The night before closing we got a call from our realtor. The buyer’s mortgage had been rejected at the last minute and it didn’t look like it was going to go through. All of our stuff had already been moved out and was being delivered to our new house later that week, so it was a pretty stressful time. Two months later, the sale eventually went through, but only after the buyer went to a different broker for the mortgage. When it was finally done, we were thrilled to close that chapter and move on.

9\. Surround Yourself with Competent People
-------------------------------------------

The only reason the sale of the condo eventually went through was because of our realtor and her connection to a good mortgage broker. The mortgage lender that the buyer had been using said all along that she would get it done, but after a few months of trying she wasn’t able to do it. Eventually, our realtor forced the buyer to work with her contact for the mortgage or else we were going to kill the deal an put it back on the market. Her contact was able to get the mortgage approved and wrapped up in just a few weeks. That experience showed my wife and I the power of working with qualified professionals. Our realtor had many years of experience and she often referred business to this mortgage broker who as also very experienced. The buyer’s agent was a full-time police officer who got a real estate license on the side and this was his first deal. The buyer was one of his co-workers. The mortgage lender they were using was a family friend. The inexperienced realtor and the family friend mortgage lender weren’t able to get the job done. Our experienced realtor and experienced mortgage broker were able to get it done. Without them, we would have had to take a bigger lose or keep the property as a rental and try to manage it from a few hours away. Thanks to that experience, I’m very careful about the professionals I choose to work with. It seems like everyone has a friend or family member who is a realtor. Don’t hire someone just because they’re a friend or family member. Make sure you hire someone qualified or else you could regret it.

10\. Some Things are Out of Your Control
----------------------------------------

When it comes to finances, and life in general, we can plan and try to make the best decisions possible. But in the end, some things are beyond our control. My wife and I planned to own the condo for longer than 3 years, but situations in our life changed and that’s not a bad thing. The issues with the real estate market and the economy as a whole are also outside of our control. We could have done a much better job of considering the possibilities and planning, but other factors were beyond our control. Although we had a bad experience with our first home, I don’t regret buying it. If I had known we would be working from home and moving just a few years later that would be different, but that wasn’t even something we were considering at the time. Sometimes you just have to accept a loss, learn something from it, and move on.

10 Lessons I Learned by Losing Money on My First Home

By: Nextgen-Wealth.com The 401k; our main bucket of retirement plan savings. Like it or not, that’s what we have, and it looks like that’s what we’re going to continue to have for the foreseeable future. If you’re like most people, you eventually got around to putting money into it at some point – let’s just hope this epiphany of saving for your retirement hit you sooner than it did for a lot of people. It’s not easy to do when you’re in your twenties. There are plenty of other things on your mind than saving money out of your paycheck that you’re not going to touch for the next 30-40 years. In our instant gratification society, it’s a tough pill to swallow and an even tougher concept to teach. However, if you’re reading this today, then you’re probably well on your way to contributing to your 401k and, most likely, maxing it out on an annual basis. To that, I say congratulations… you have made a great achievement. For 2018, the new maximum contribution has increased to $18,500. And, if you are 50 or older, then you can contribute an additional $6,000 for a total of $24,500. That’s a lot of money on an annual basis. On top of that still, you have your employer’s matching contribution – if you’re lucky enough to have one. For most 401k’s, that’s typically in the 3-4% range – if you’re getting more than that, then you should give your employer a nice big hug because they are more generous than others. Now, you might be asking yourself, “So, if I’m maxing out my 401k annually and getting matching contributions from my employer, what is the issue?” You wouldn’t think there would be an issue and I never did either until I started to do a little research into how some employers match contributions.

**How You Could Be Missing Out On Your Match If You’re Maxing Out Your 401k**
-----------------------------------------------------------------------------

There are really two issues at hand here:

1.  How your employer contributes the match – lump sum or every paycheck
2.  When you max out your 401k during the year

So, let’s start with number one. If your employer is simply putting in one lump-sum of matching contributions for you – typically at the beginning of the following year – then you are all good, and there’s nothing to worry about. You are getting your full match and can stop reading – but, you’ve made it so far, so you might as well expand your knowledge just in case you change jobs. The issue is if your employer is making their matching contributions on a paycheck-to-paycheck basis. This is pretty common with smaller employers in the 1000 or less employee’s range – which, of course, employs by far the most amount of people in our country. Now, let’s move on to issue number two. If your employer makes their matching contributions at every paycheck, but you don’t max out your 401k at some point during the year, then you’re in the clear. But, if your employer makes their matching contributions at every paycheck and you max out your 401k at some point during the year, then you might have an issue. Just think about it for a second. Okay, if you didn’t have that “aha” moment yet, then let me help. If you’re no longer contributing to your 401k because you’ve maxed it out for the year, then you’re no longer going to be receiving your match because you’re not making any more contributions! If your employer makes matching contributions on a paycheck-to-paycheck basis and you don’t have any contributions being made, then, as crazy as it sounds, they aren’t going to make their matching contributions either! I know, it was pretty eye-opening for me when I was doing the research. So, if you’re one of those people who try to max out their 401k as early as they can during the year – or even if you just end up maxing out later in the year – then you could be missing out on a serious amount of matching money and, even worse, the compound growth of that money.

**The Money You’re Giving Up**
------------------------------

Let’s take a look at an example so you can see it in real life. Let’s say you make $360,000 a year all in – including salary, bonus, commissions, etc. Because you’ve always heard that you need to save at least 10% for retirement, you contribute 10% to your 401k, and your employer provides a match of 4%. Let’s say you get paid once a month, and your employer makes their match once a month right alongside your contribution. So, that would mean you contribute $3,000 a month to your 401k, and your employer contributes $1,200. At the 2018 maximum of $18,500, you would have contributed the max in your July paycheck. At that time, your employer would have contributed a little over $7,200 – let’s just call it $7,200 to make things simple. While $7,200 is nice, **YOU’RE ACTUALLY MISSING OUT ON ANOTHER $7,200 FOR THE LAST SIX MONTHS OF THE YEAR! **That’s right; you could have been doubling your match had you just spread out your own contributions – which again, I’ve never known anyone who was aware of this issue. But, I don’t blame you because you just thought you were doing the right thing by saving for your retirement the way you were taught. If no one ever told you this was happening, which I’ve never seen an employer that does because I’m not even sure they’re aware, you’re probably never going to find it out. To make things even worse, you’re missing out on the compound growth of that $7,200 every year. **IF YOU MISSED OUT ON THIS $7,200 FOR 20 YEARS AND AVERAGED A 7% RETURN, YOU WOULD HAVE MISSED OUT ON $315,829!** It’s actually way more than that because I’m not even including the growth you would still get once your contributions stop at retirement. **WE’RE TALKING HUNDREDS OF THOUSANDS OF DOLLARS!**

**So What Do You Need To Do?**
------------------------------

First of all, you need to check with your employer to find out how and when they match your contributions. If they do it once a year as a lump sum, then you’re in the clear. If they do it on a paycheck-to-paycheck basis, then you just need to do a little math to find out the ideal contribution so you can get the full – or close to the full – company match. Let’s go back to my original example and run some numbers. We need to divide $18,500, the max, by your annual income of $360,000. This comes to about 6.2%. This would be the amount you would want to change it to in order to spread out your contributions over the entire year, ensuring yourself of getting the full $14,400 match (_on a side note, your 401k may not allow you to contribute a tenth of a percent so I would simply round down to ensure you get the full match_). And, that’s it. **THIS ONE SIMPLE CHANGE OF SPREADING OUT YOUR 401K CONTRIBUTIONS OVER THE ENTIRE YEAR COULD SAVE YOU – AND BRING YOU – HUNDREDS OF THOUSANDS OF DOLLARS IN THE LONG-TERM**. It seems so simple, yet not many of us really don’t think about because, again, it feels like we’re going above and beyond if we max out our 401k as early as we can in the year (_on another side note, if you work with a financial advisor and they haven’t told you this, then you might want to pass this along_). **Good luck and go get your full match!** _Republished with the permission of [Nextgen-Wealth.com](https://www.nextgen-wealth.com/blog/max-out-401k-employer-match)_.

Why Maxing Out Your 401k Could Mean Missing Out On Thousands

By: My Money Wizard Let’s imagine you stumble onto a suitcase bursting at the seams with cash. Hey, isn’t this game fun!? Maybe you’ve got a rich uncle, or your side hustle as a gray market arms dealer just took a lucrative turn. Or maybe, more realistically, you’re like most readers of this site. You’ve started making decent money, and you wisely want to set yourself up as a financial wizard. But there’s just one problem… **_What do you invest in first? What’s the right order of investing?_** If our hypothetical suitcase isn’t enough to max out every account and pay down every debt, we’ve got some choices to make. There’s mortgages, student loans, index funds, 401Ks, HSAs, IRAs, VTSAX, and jkfsd;jak. And yes, that last one was a random mash of the keyboard, because that’s what all the investment options can feel like sometimes. For all those aspiring investors who’ve ever wondered whether they’d be better suited paying off this instead of investing in that – this article is for you. Behold:

The Definitive Guide to Investing in the Right Order
----------------------------------------------------

All comes with the big ‘ole caveat that every situation is different. If I tried to cover every single scenario, this post might grow so long it’d break the internet and blow up my keyboard. BUT, there are some general guidelines most of the population can follow to make sure they’re putting their hard-earned money to work in the most optimized way possible. Let’s dive in:

### 1\. Build Up an Emergency Fund

**. But that’s a few more steps away in our _Definitive Guide to Investing in the Correct Order_.

### 2\. Contribute Enough to Your 401(k) to receive the full employer match.

 matches provide an instant, **_guaranteed_**, 100% return on your investment. The g-word is all but forbidden from the dictionary of finance. So this is big. Say your employer matches the first 5% of your retirement contributions, and you make $50,000 a year. This means the first $2,500 you invest in your 401K instantly doubles to $5,000. There’s not an investment in the world that offers risk-free returns like that. The stock market doesn’t. Rental property doesn’t. Even a lucky run in Vegas can’t compete. Your company wants to give you a free multi-thousand dollar bonus every year. Take it. So when it comes to taking advantage of company 401K matching, be like Nike. And just do it.

### 3\. Pay off credit card debt

.

### 4\. Pay off higher interest rate debt

As a rule of thumb, “higher interest rate” debt can be classified as anything 4-5% above the 10-year US treasury rate. Usually, the treasury rate is 2-3%, (**[See the current rate here](https://www.cnbc.com/quotes/?symbol=US10Y)**) which means you want to focus on any debt higher than 6% or so. Most student loans fit into this category. Once this stuff is knocked out, you’ll be amazed at how much income you’ll have to optimize the rest of your finances.

### 5\. Max out Your HSA

If you’re eligible, Health Savings Accounts are a unique double dose of tax advantages. When used for medical expenses, they’re tax free on both contribution AND withdrawal, which edges out both Traditional and Roth retirement accounts. If you never get around to using your HSA contributions, the HSA turns into a Traditional IRA at age 65. And for early retirees, the HSA might actually be **[the ultimate retirement account](https://www.madfientist.com/ultimate-retirement-account/)**.

### 6\. Max out Your IRA

Either Roth or Traditional… just max it out! If you expect to be in a lower tax bracket in retirement than you are today, Traditional IRAs have the advantage. If you expect to be in a higher tax bracket in retirement than you are today, Roth IRAs have the advantage. On the other hand, feel free to flip a coin, because **[Traditional versus Roth doesn’t matter as much as everyone thinks](https://mymoneywizard.com/correct-order-investments/The%20No%20Stress%20Solution%20for%20Deciding%20Between%20a%20Roth%20or%20Traditional%20IRA)**. I like to make my IRA the opposite my 401K is. That way I’m covered for both scenarios. To get specific, I have a Traditional 401K and a Roth IRA, which means one account will benefit either way.

### 7\. Finish maxing out your 401(k)

Again, the tax advantages here are too big too ignore, which is why the 401K outranks after-tax investments. I save over $6,000 per year on my taxes just from maxing out my 401K. Like the IRA, the decision between Traditional vs. Roth 401K is a decision of future tax brackets. But don’t stress too much – it’s hard to go wrong when you’re saving thousands a year.

### 8\. Pay off lower interest rate debt

“Lower interest rate” is 2-3% above the treasury rate, which usually means debt with interest rates between 4-5%. Note that this includes lower rate student loans and most car loans, but _does not_ include most mortgages. These interest rates (4-5%) are slightly less than the historical returns of the stock market (~7%), but I still prioritize debt paydown over taxable stock market investing due to:

*   The uncertainty of market returns vs. guaranteed debt paydown returns.
*   The financial flexibility and mental benefits of becoming debt free.
*   The tax obligations of after tax investing

### 9\. Invest in taxable index funds

Emphasis on index funds, as **[individual stock picking is usually a loser’s game](https://mymoneywizard.com/should-you-trade-individual-stocks/)**. As far as specifics, it’s no secret I think **[Vanguard is the best](https://mymoneywizard.com/5-reasons-vanguard-funds-best/)**.

### 10\. Pay off your mortgage

If you recently purchased a house, you likely benefitted from a low interest rate environment, and you’ve probably got a couple decades until your loan matures. With a 15-30 year timeframe, your chances of the stock market outperforming your 3-4% mortgage is very high. So it makes sense to invest your extra cash into index funds, rather than the mortgage. Swapping #9 and #10 becomes more appealing the closer you get towards the end of your mortgage, or the higher your loan’s interest rate.

Final Thoughts
--------------

The above is the most optimized, textbook answer for the vast majority of this site’s readers. Your individual situation may vary, and any one of these 10 steps will be a far better use of your money than concert tickets, new car purchases, or other frivolous spending. So don’t stress too much about “doing the wrong thing.” For example, if you’re extremely debt averse, and those last bit of student loans are driving you crazy, there’s nothing wrong with prioritizing #8 above maxing out the retirement accounts. At the end of the day, as long as you’re investing your money into _something, _your net worth will sky rocket, and you can rest easy knowing you’re taking smart steps to drastically improve your finances.

Some Frequently Asked Questions:
--------------------------------

### **What do you mean, max? **

Each retirement plan has a maximum amount you’re allowed to contribute per year. The IRS adjusts these rules all the time, but as of 2018 the maximum amounts are:

*   **401K, 403b, 457, TSP, etc. :** $18,500 per year.
*   **IRA:** $5,500 per year.
*   **HSA:** $3,450 for those with single medical coverage, $6,900 for those with family plans.

### **My employer doesn’t offer a 401K, and/or doesn’t match my 401K contributions. Should I prioritize my IRA instead?**

Yep, feel free to move on down the list if any of these steps don’t apply.

### **My 401K sucks. Should I prioritize everything else above it?**

Probably not. Even with high fees, the tax advantages of a 401K are huge, and shouldn’t be overlooked. I crunched the numbers, and as a rough rule of thumb – **[your 401K is worth maxing out as long as its fees are less than 2.2%.](https://mymoneywizard.com/should-i-invest-401k-high-fees/)**

### **My employer only matches a little bit of my 401K contributions, not 100%.**

It’s also pretty common for employers to match a percentage of your contributions, rather than a direct 1 for 1 matching. For example, some employers will match 50% of your contributions up to a set percentage of your salary. In this instance, you’re still getting guaranteed free money, so contributing enough to receive the full match should be your priority.

### **I’m a government employee and I have a 457, not a 401K.**

Congrats, you’ve got the most amazing retirement plan ever. 457 plans aren’t subject to the age 59.5 withdrawal rule, so you can access the money penalty free when you leave the employer (or retire early). Double check that the fees aren’t outrageous and the fund options are okay, then feel free to prioritize maxing out your 457 above your HSA and IRA. If you’re not a government employee and you have a 457, be careful, as the money in these plans technically belongs to the employer. This means if your employer ever goes bust or gets sued, your retirement savings could be at risk. Also, non-governmental 457 plans can’t be rolled over into an IRA. This is getting off-topic from the point of this article, but needless to say, if you’ve got a non-governmental 457(b) 457(f) or 457(g) plan… read the fine print very carefully before making large contributions. _Republished with the permission of [My Money Wizard](https://mymoneywizard.com/correct-order-investments/)_.

The Correct Order for Investing Your Money

Here's the latest post in the Rockstar Finance Money Match-Up series where two money bloggers argue opposite sides of an issue. Today's issue features another interesting debate -- what is the best way for high-earners to invest retirement funds? The two options discussed today: funding a 401k via the traditional path versus through a Roth IRA. We'll begin with Jason from [Winning Personal Finance](https://www.winningpersonalfinance.com/) who prefers traditional accounts...

Traditional Accounts Are Best for High Earners
----------------------------------------------

Your “dream life” probably looks very different than mine. One thing most of us have in common though is that [we all want to win](https://www.winningpersonalfinance.com/about/). Getting the most value we can out of our hard earned money is one way to do so. The US government has given us an opportunity. They’ve created retirement accounts with tax advantages to incentivize saving for our retirement. With a traditional account, you get a tax break in the year you contribute and pay taxes when you withdraw from the account. A Roth account provides no up-front tax breaks and allows all earnings on that money to be tax free. Knowing it’s a good idea to contribute to a tax advantaged retirement plan is the easy part. The harder question is, which is better, Roth or traditional? On the surface, the answer is simple. The better account is the one that will lead you to pay less in taxes. Today’s matchup asks which account is better for a high income family. I’ll happily argue that in most cases, a traditional account is best for those with high incomes.

Predicting The Future
---------------------

It’s fairly straightforward to predict your marginal tax rate today. This number is important because it represents the amount you’d save on taxes for contributions into a traditional plan. The harder part, is predicting your marginal tax rate on that same money in the year you withdraw it. If you will withdraw your money at a lower marginal tax rate than you pay today, a traditional plan is for you. If you will withdraw your money at a higher marginal tax rate than you pay today, a Roth is for you. Yes, I know I’m only supposed to take one side of this argument but this is not a one size fits all approach. Unfortunately, none of us can perfectly predict the future.

High Earners Pay High Taxes Today
---------------------------------

Since we don’t know what the future holds, let’s use some logic. Chances are, high earners are paying high marginal tax rates today. During retirement, (the old definition of retirement when a person actually stops earning income) high earners are likely to withdraw their funds at a lower marginal tax rate than their high marginal tax rate today. [Paying a lower tax rate in the future than you’d have to pay today favors a traditional account](https://www.winningpersonalfinance.com/roth-vs-traditional-401k/).

Lower Income In Retirement (Usually) Means Lower Taxes
------------------------------------------------------

The tax rates in the US tax code are tiered. The first chunk of income is tax free. The next tier has low tax rates and it goes up from there. If you have no other income in retirement, you can fill up these lower tax rates with your withdrawals or a Roth conversion from a traditional plan. This structure of the tax code is why it’s often best for a high earner to defer paying their taxes.

Let’s Try an Example
--------------------

The Physician Philosopher and I agreed to use a set of variables to compare the two. They are:

*   Married couple with a single income of $200,000
*   They have two kids and take the standard ($24,000) deduction
*   The earner contributes $18,500 into a 401(k)
*   His or Her employer will contribute 4% of salary for a total of $26,500
*   Tax savings from choosing a traditional 401(k) for this contribution would be $4,290 and would be invested in a taxable account when comparing a traditional plan to a Roth option.

This couple would fall into the 24% tax bracket today (in 2018) assuming they contribute to a Roth and fall into the 22% tax bracket if they made a full contribution to a traditional 401(k). We don’t have any other information. Is this family better off with the Roth or traditional account? I believe the traditional account is the answer for this high earning family. A 22% or 24% federal marginal tax rate is pretty high. It’d be nice to pay taxes on that income at a lower rate.  At some point, this family will retire and start living on their savings. That’s why they saved for retirement. Right? At that point, they can use traditional plan withdrawals to fill up the lower tax tiers. I’m going to add a couple of additional assumptions for the retirement phase.

*   Over time the invested contributions increased by 300%.
*   All of the contributions are withdrawn in the same year with no other income.
*   The family’s children are grown and no longer can be claimed for a child tax credit.
*   The tax rules remain the same as they are in 2018.

 can determine which option is MOST LIKELY to be the better approach for you. If you get it right, you can save thousands in taxes.

What if You Guess Wrong
-----------------------

By choosing a traditional pre-tax account, our hypothetical family is betting that the taxes being saved today will outweigh the tax rate paid when the savings are withdrawn. Here’s my favorite part of this approach. Even if they guessed wrong, they win. If the traditional account was the wrong call, it will probably be because high income during retirement years caused them to continually pay high taxes. In that case, it will mean the family is very wealthy. How else would they end up paying high taxes during retirement? Think about it. Based on today’s (2018) tax rates, the first $101,399 (for a couple married filing jointly) has a marginal tax rate lower than 22%? In fact, with no other income, they’d have to withdraw more than $400K a year from retirement accounts for the effective tax rate in that year to be over 22%. If they’ve found a way to make significant income throughout life, that’s a win in my book. Even if the traditional vs. Roth decision made years earlier did not work out. By picking a traditional plan as a high earner, you’ve already won. Either by:

1.  Having more after tax dollars than the Roth option or
2.  Having fewer after tax dollars but still being very well off

That’s what I like to call a win/win!

Rebuttal Against The Roth Argument
----------------------------------

_**Tax Rate Changes**_ Some argue that tax rates can change and therefore we should favor the Roth. It’s true that they can change. Still, I don’t find this argument favors a Roth (or a traditional) account. Your decision should be based on your best guess on what your tax rate will be in the future. As we’ve seen in the most recent tax legislation, the rules can change and can do so quickly. Considering most of us have no clue if they are going to go up, down, left or right, I use the status quo for my estimates. _**Behavioral Finance**_ Not all $18,500 contributions are created equal. Maxing out a Roth account allows you to save more “after tax dollars” than contributing the same amount to a traditional account. In order to make up the difference, one would have to invest the tax savings in a taxable account. Since you’re reading this on Rockstar Finance, I know you’re already a superstar at this stuff and have the discipline to invest the tax savings. Many high income professionals who have the resources to max out their 401(k) are already saving more in other places making the behavioral finance argument largely moot. _**Stretch Roth**_ There’s an argument for the Roth as a tool for generational wealth. It’s a nice to think about your Roth accounts still growing tax free after being passed down to your great grandkids. Here’s the catch, inheritance is inheritance. If you want your heirs to have the most spending power with their dollars, the key to doing so is for you or them to pay the lowest possible taxes on the resources. Assuming no estate tax considerations, if you spend your life in the highest tax brackets and your heirs do not, they are better off inheriting pre-tax dollars and paying a lower tax rate than you would have. Changing the generation of the person withdrawing this money, does not change the math on which account is better.

Final Point
-----------

Winning the traditional vs. Roth Game is about paying the lowest possible taxes. If you can predict the future (income, tax rates, future spending, other after tax assets) it would be easy to make the right call every time. We can’t predict the future. Today’s debate is for a high income family in a high tax rate. In this case, I’d bet on a traditional account and expect them to pay a lower tax rate when withdrawing that money at retirement age. Worst case scenario is that they chose wrong because their income is too high in retirement years. That’s still a pretty good outcome in my eyes. ------------------------------------------------------------------ Now let's hear from [The Physician Philosopher](https://thephysicianphilosopher.com/) who prefers to use a Roth IRA...

Why Roth contributions are better than Pre-tax contributions for high income earners
------------------------------------------------------------------------------------

Discussing whether you should put your money into your 401K/403B via a Roth or Pre-tax method is an important topic to consider. After all, you have to click one of the boxes if your employer offers both! The question is: which one should you choose? I am going to outline four arguments below that highlight why it might be beneficial for the high-income earner to put their money in via a Roth mechanism. Here are the assumptions for the argument:

*   Married couple with a single income of $200,000
*   They have two kids
*   They are taking the standard ($24,000) deduction
*   Their employer will match 4% of their contribution for a total of $26,500
*   One other implicit assumption is that in order to place $18,500 in via a Roth mechanism this requires about $24,342 pre-tax dollars.

Roth Argument 1. The "I ain't Nostradamus" argument (Mixture of contribution types)
-----------------------------------------------------------------------------------

Employer contributions are made as pre-tax contributions. Therefore, if your employer provides a match and/or contributions above the match, this will be placed as pre-tax dollars. Given the pre-tax contributions placed by your employer, placing your employee contribution via a Roth mechanism allows for diversification of your dollars such that a portion of your 401K is Roth and a portion is pre-tax. No one knows what will happen with future tax laws (see the image below for proof). Well, maybe Nostradamus did, but "I ain't Nostradamus." A big part of the pre-tax argument is that you are likely going to be taxed at a higher marginal tax rate right now in your peak earning years than when you retire. But anyone who is being honest doesn't know that is going to happen. That's their best guess. \[caption id="attachment\_40817" align="aligncenter" width="625"\] is more than double the pre-tax. I still think that is probably worthwhile.

Roth Argument 2. The Behavioral Finance Argument
------------------------------------------------

So, I taught you that you aren't Nostradamus. You probably knew that, though, didn't ya? You want to know something else that you already know? Humans like to spend money. Placing your money in via a pre-tax method in the scenario set up above will result in $4,290 additional dollars coming home to your pay-check. Proponents of the pre-tax method will say, hey that's $4,290 you can put into a taxable account! While I agree with this in theory, the reality is that most people just spend this money. That's why there are entire books written about paying yourself first. If you see the money in your bank account, you are more likely to spend it than to put it into another investment. That's why paying yourself first is such a big deal, and why putting money in pre-tax may not help you invest more. For this reason, I think that a Roth contribution has an advantage, a behavioral finance advantage. It forces you to put more dollars into your investments before you ever see it in your paycheck.

Roth Argument 3. The Stretch Roth IRA Argument
----------------------------------------------

This is the strongest argument for Roth contributions. A [Stretch Roth IRA](https://thephysicianphilosopher.com/2018/04/06/1479/) is awesome. Plain and simple. Our assumptions at the beginning of this post show that this couple has two kids. These two kids can get paid a substantial amount of post-tax dollars every year without raising their taxable income, and let the rest continue to grow (you guessed it) tax-free. Or maybe they give it to their kid's kids. The way to do this is to convert your 401K into an IRA when you leave your employer. You can convert any some remaining pre-tax dollars into Roth dollars via [a Roth Ladder Conversion in early retirement](https://thephysicianphilosopher.com/2018/04/13/the-early-retirement-gap/) when your income is low. Want to see the power of a Stretch Roth IRA? Here's an example: _**Grandma on FIRE**_ Assume you're a grandma (or grandpa). And you achieve FIRE (Financial Independence and Retire Early) at the age of 55. Your 28 year old daughter just had a baby girl who is age 0. Five years later, you and your spouse face an unexpected early demise in a car accident. (Morbid, but a Stretch Roth IRA’s are about inheritance money). You decided to convert your 401k to an IRA when you left your employer and designated your granddaughter (now 5 years old) as the beneficiary, because she is the youngest grandchild in the family (results in lowest RMD). You had $2 million dollars in this account, all of it Roth because of making Roth contributions to your 401K and performing a Roth Ladder Conversion in early retirement. Under this assumption, the money will grow at 6%. This is how it works out for the granddaughter. She would be required to start taking an RMD based on age 6, which would be a little more than $27,000 that year. Remember, that’s tax-free because grandma already paid the tax. If she doesn’t take out any more than the RMD each year, it will grow to a max of $16,500,000 (16.5 million dollars, you read that right) by age 66. At that peak, her RMD will be approximately $1,000,000…still tax-free. Hopefully, she will be investing the majority of that money when she starts running her own business (because you set a good example) and it’ll continue on for the next grand-kid in the family. Oh, and since she will have so much. She can give that Stretch Roth IRA to her kids, or your great grand kids. It's the gift that keeps on giving.

Roth Argument 4. The "Mo' money, Mo' Problems" Argument
-------------------------------------------------------

The last argument out lay out there is that the more money you have tucked away into your 401K/403B in a pre-tax contribution, the more money you will have on the pre-tax side in your IRA when you leave your employer. This all sounds well and good until you turn 70.5 and have to start taking out your Required Minimum Distributions (RMD's). With a Roth IRA, you do not have to take RMD's. And neither will your spouse if you die. Only your heirs are required to take out RMD's on a Roth. With pre-tax money, the RMD starts with the owner at age 70.5... this can be brutal, and I'll show you why:

The "Mo' Money, Mo' Problems" Experiment
----------------------------------------

Let's add one assumption to the argument above to make the point. Let's say that this high-income couple saves 20% of their income, like they should. That's $40,000 plus the $8,000 they get from their employer each year. So, they are saving and investing a total of $48,000 each year. They will likely get some raises and bonuses, but we will keep those out to make the math simple. If someone invests $48,000 over 30 years (say from age 30 to 60 when they early retire) and it grows at 8% interest, they will have a little more than $4.2 million. For the next 11 years until 70.5 years old, they take out 3% of their total sum because they don't have a mortgage, car payments, or college tuition for the kids anymore. This leaves them around $120,000 just to live on...not too shabby! The nest egg grows to about $4.9 million (assuming 5% growth in retirement) with those assumptions. At the age of 70.5 if this is all pre-tax money, the RMD on that money will be around $150,000. By age 80, it will have ballooned to almost $300,000. So much for the idea of saving taxes by going pre-tax instead of Roth. All of those pre-tax RMD's will be taxed just like your income is now. So, this couple is actually going to be taxed MORE in retirement, and not less. You can convert some of your 401K from a traditional IRA to a Roth IRA through a Roth Ladder Conversion to avoid some of this, but you certainly won't be able to convert all of it (or even most)! So, again, the more Roth money the better. This simple argument shows that for a person with a large anticipated nest egg for retirement (which a high-income earner should have), Roth money is superior. You can choose to take out how much you want and leave the rest in without getting hit with the RMD. Same for your spouse.

Take Home
---------

I think the Roth argument really starts to shine in three particular situations: the higher the income, the higher the employer match/contribution (via pre-tax method), and if you are a super-saver. I also think that the inherent advantages of the Stretch Roth IRA in addition to the RMD implications, behavioral finance impact, and lack of clairvoyance we can have about the future tax code...all make the Roth contribution a good option for the high-income earner. Regardless, chances are that since you are reading this on Rockstar Finance you are going to be fine! Just do the math and make an intentional decision that is the best fit for you and your family. Of course, the better you do the better the Roth decision will be! ------------------------------------------------------------------ So, those are the two sides of the issue. What do you think?

Money Match-Up: What is the Best Way for High-Earners to Invest Retirement Funds?

How to save $100,000. Yes, the covenant six-figures. It’s one of the hardest things to do in your personal finances but is also a revolutionary financial milestone. It’s a lot of damn money. It also can take years to get to this point, but it is well worth it when you have that number saved and invested.

For one, when you have $100,000 saved and invested, compound interest can really go to work for you. It’s the point where your net worth can really start to exponentially grow. Additionally, it adds a really nice cushion to your finances where you’ll hopefully feel less stressed about bills, debt, and the unexpected expense.

Below is my transparent journey to this financial milestone.  You’ll see where I’m at currently, how I got where I am so far, and how I plan on crossing the $100k threshold. It feels weird sharing this nor do I want anything to come off like I’m bragging. This stuff below was HARD and took a lot of TIME. But let’s dive in, shall we?

**How to Save $100,000: My Journey So Far**
-------------------------------------------

I was…

*   Sick of paycheck to paycheck lifestyle
*   Tired of my career going nowhere and making less than $40k/year
*   Wanted to learn how to invest and save
*   I had a small 401k at my company, didn’t know anything about, what was invested, how it worked and didn’t contribute enough for a company match. D’oh!

Late 2014 is when I first started taking an interest, then in December, I was laid off from my job. Needless to say, that all kicked my butt into high gear. And since 2014, I’ve worked hard to learn about personal finances and investing, fixed my career worth to generate a better income, and have stuck to my processes since. I opened my Vanguard account in September 2014, transferred $500 to a brokerage account (half of my savings at the time). In December, once I was let go from my job, I rolled my sad 401k over to Vanguard as well.

As I’m writing this today, I now have $69,500+ saved in Vanguard, in just under five years.

I also have about another $3,000 in my bank account for bills and quick emergencies. So total right now is $72,500+. Maybe you are thinking it seems I should have more. Or you may also think that’s a lot. I honestly never saw this much money in my life ever. So it’s without a doubt, a substantial amount to me.

### **Some other things worth mentioning and being transparent about.**

**Especially now, when everyone makes excuses or wants to say, “It’s so easy for you because….” without knowing some facts.**

*   I graduated from college in 2010 with $28,000 in student loan debt. Yes, not as bad as many of my peers, but debt is still debt. It was a $40,000/year school but between scholarships and my parents working hard to help, I wasn’t left with a huge burden.
*   In 2011 I bought a new car (financial mistake). So add $23,000+ to my remaining student loan debt (around $25,000) so, $48k in 2011. I also had just over $1,000 on my credit card too.
*   Until 2015, I never made more than $36,000 pre-tax.
*   Until 2017, I never made more than $46,000 pre-tax.
*   I moved out 3 months after graduating college in 2010, 5 years later I moved back in with my parents for a year after being financially defeated. Yes, that does help your finances a bit. I still paid them some rent (significantly less than on my own of course).
*   I knew the basic of personal finance like having a credit card, keeping a good credit score, and saving. That’s it until I learned more on my own.
*   From mid 2017 – Present, I now make between $70,000-$95,000/year. I like to stay private on the exact number, but I do have a healthy salary. I’m fortunate, but it took me 7+ years of work and learning to get to this level.
*   Yes, I have this blog and treat it like a business. I’m not even a year in, I made $500 bucks so far off it. And it goes all back to the business. So, not making six-figures a month from a blog (one day I hope!).
*   I’m not married (yet) and do not have kids. Not currently having kids at 31, certainly puts me at an advantage without the extra expense. I do plan on having kids in the next few years. I live with my girlfriend and we currently rent an apartment where we split bills pretty evenly. So no, we don’t own a house yet.

Yes, I’d say I’m fortunate and I know there are people who wish to have experienced what I have. Like parents letting me move back in, being able to go to college, etc. And there are people in far better situations than me too. The point is, even if I have it better than you so far, don’t make excuses to not try to improve your financial health.

**How to Save $100k**
---------------------

Initially when I started my personal finance journey, saving $100k was never a goal. If you revert back to above, it was more about having a cushion, investing for my future, boosting my salary, and retiring early. Yet, goals change over time. As I got more financially savvy and vested in my career, I no longer cared about retiring early. Especially when I found my work passion for marketing

And second, I realized how saving and investing $100k can really make a HUGE difference in my financial health. Below, are the steps I took (and currently taking) to save $100,000 by the end of this year. I may not hit my goal, but I’m certainly working hard to ensure I do. Hopefully, these actionable tips can help you save for any specific number or your even your first $100k.

### **Improve Your Salary or Career Worth**

I’ll be the first to tell you, this is not always easy and can take time to get where you need to be. Also, I think the personal finance community lacks talking about how making more money is so crucial.  Cutting back your expenses, budgeting, and spending wisely should be incredibly obvious.  But at the end of the day, you can only cutback so much.

What you save adds up, but the “not spending $5 on coffee will make your savings huge” argument is just lame. Don’t “@” me yo! During these last five years, I found that I was passionate about digital marketing.  I did everything I could to learn online in my spare time, take on freelance gigs, and applied to a marketing agency to get more experience and learn as much as possible.

I saw the demand for this job, I liked the work, and the payscale can be huge as you get more experience.  Not every job is the same, but you need to find ways to improve your career worth, understand the direction of your job and skills, and not be afraid to ask for what you are worth.

When I started to take control of my finances, I had limits to as much as I could save. But when I grew my salary, that helped me save A LOT more.  Yet, a high salary is no guarantee that you’ll save big money.  It’s about [your mentality and discipline](https://investedwallet.com/mentality-trumps-high-income/) to not immediately inflate your lifestyle. Had I been making what I do now, back in 2010- 2013, I would probably have spent majority of it.

In 2017, I nearly double my salary by making the move to a new gig, which was also a remote position. Now I cut travel expenses and increased my salary. And all that extra salary went to paying down some debt faster and doubling my savings rate.

### **Free Up Some Debt**

While I started to aim for $100k, I was still paying down debt. I paid off my car in 2017 after six years, and now only have $4,000+ in student loan debt. Some will disagree with my approach, but instead of paying all my debt as fast as possible, I chose to save and invest too. I felt that while I was paying interest on the loans (4.5%-6%), I didn’t want to have zilch saved by 30, miss good bull market rallies, and miss years of compound interest. I’ve averaged great returns each year until more recently. It certainly won’t last, but that’s fine.

Was this the right approach? Not sure. But to me it was. By doing this, I free’d up my car right when I got that nice salary bump, because that sent me back $320 a month! It was also higher than my two student loans. That $320 was now going into Vanguard (Brokerage and Roth IRA). And freeing up some debt added over $3800/year more back to my savings. In hindsight, I probably could have caught up to my current savings had I paid all my debt off. But I also would have missed out on some awesome travel experiences that I definitely would not have been able to afford.

### **Don’t Just Save, Invest**

Want to know how to save to $100k? You have to invest your money in the stock market besides just saving.  This does not mean throw all your cash at a stock. Be smart. Do your homework and of course have cash reserves. 

*   But, I invested in low-cost index funds in a Roth IRA. Since my company does not have a 401k yet, I max my Vanguard Roth IRA out every year.
*   Once I had enough for a good emergency fund (I aimed for 6 months to a year's worth), I started investing in my taxable Vanguard brokerage account too. Most is just in the money market generating more interest than my bank account. Another portion is invested in a tax-managed balanced fund.

The reason for investing is with dividends, capital gains, and compound interest, I can accelerate towards my $100,000 goal.  Yes, there are ups and downs in the stock market. And no, you shouldn’t be throwing all your money in. And no, you shouldn’t copy what I’m doing.  But you should be putting your money to work for you while you sleep.

### **Increase Your Savings Rate Steadily**

The [average American saves less than 5%](https://www.latimes.com/business/la-fi-savings-20170819-htmlstory.html) of their income. In many cases, it might be worse. This can be a combo of not making enough or just plain not paying attention to spending.  And we all have to start somewhere. I certainly was that demographic from 2010-2013 in my working career. In 2015, I managed to get it to 15% and up to 30% before my big salary bump in mid-2017.  I did this by removing unnecessary spending, budgeting a bit, slowly increasing the savings rate, and anytime I got a raise or extra money, I saved it.  It took from 2014-2017 to get to 30% and then 2017-2018 I maintained 55%-56% savings rate.  The higher your percentage, obviously the better. But start off where you can and overtime with raises and extra cash, you should also be increasing this percentage.

### **Learn To Be Like the “Millionaire Next Door”**

One of my favorite books is _The Millionaire Next Door: The Surprising Secrets of America’s Wealthy_. The book identifies common traits among the wealthy, many whom you wouldn’t realize they are because of how they manage their money.  If you want to save $100,000 and beyond, you need to learn to be like the examples in the book.

Keeping your lifestyle simple, being frugal, spend less than you earn, investing money, etc.  All principles that really spoke to me and I think have been huge in helping me get this far.  Even when I doubled my salary in 2017, nothing changed about my living, my car (still drive the 2011 Subaru today), etc. What changed was the ability to save more and pay off debt faster.

**How I Am Currently Getting To $100,000**
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Besides doing the above that I recommend everyone do if they are attempting to save $100k, below are my exact steps based on my current financial state.

### **Increasing My Savings Rate**

In 2018, I was able to maintain around a 55% savings rate. This year I moved it to 60%, with my goal to be closer to 70% by mid-year. It took me a long time to get to this rate, but improving my salary was key to adding more.  Prior to my salary bump, I was able to get to about 30%. A great number, but no doubt you have to make more money.

### **Spending Way Less Than Last Year**

Last year was a bit crazy with spending, but I don’t regret really any of it.  I traveled at some point in 7 different months out of the year, was in a wedding, and had two bachelor parties. That stuff adds up, but the experience of traveling was well worth the money. And was the first year I could afford to do a lot of cool things too.  However, it still makes me cringe a bit because that money could have put me up 12% higher in assets than I am now. Luckily this year I have no weddings and are being more conservative with travel.

### **If I Get A Raise, Then Increase My Savings Rate…Again **

In May, I’ll be with my current company for two years, which I’ll have an annual review again. I never expect a raise or a healthy one, but last year I got a 13% lift.  Any bump in salary this year is immediately being factored into my savings rate. So if I do get an increase, this will add some extra cash towards my goal.

### **Stick To My plan and Don’t Get Tempted**

If the market takes a dive a bit or if a serious emergency expense comes up it could set me back. And based on just my savings numbers, I’m potentially going to be $3,000 short conservatively.  But with dividends, capital gains, and pending if the market is up or down, I have a really good shot of achieving this milestone this year. My plan is aggressive, but I need to stick to it and that may mean saying “no” a lot more this year.  I’ve been tempted to travel somewhere or buy something now that I have the cash to afford it. But, temptations need to be ignored. It’s not always easy and even after four years of personal finance discipline, I still get tempted.

**Final Thoughts**
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If you were looking for any big secrets on how to save $100k then you came to the wrong place. There is no huge secret other than planning, saving, investing, and being patient. Time and mentality are key to your overall success in anything with your personal finances.  I could say if I made more money sooner, that I’d be at this $100k milestone sooner. But I don’t think mentally I was ready to handle that nor do I think I would have actually saved.

Republished with the permission of [InvestedWallet.com](https://investedwallet.com/how-to-save-100k/)_.