Student Loan Forgiveness: How Does it Work?

For decades, educators have encouraged young people to get increasingly expensive post-secondary degrees that provide arguably decreasing real returns in the labor market, and to take out large subsidized loans, regardless of their career choices.

In 2016, the average college graduate borrowed between $26,450 and $31,200. Fortunately, some borrowers may find relief. There are many programs in place, some old and some new, through which debt forgiveness is possible, and we should expect more programs to surface in the near future, as untenable student debt burdens become a larger political topic.

Using Debt Forgiveness

Debt forgiveness programs are exactly what they sound like. In a student loan forgiveness program, qualifying borrowers may have some or all of their public student debt forgiven, either immediately or over a period of time. Unfortunately, none of these programs forgive private loans. The only known methods of discharging or removing private loan amounts is through bankruptcy or a one-off restructuring with the borrower’s private lender.

Currently, there are four major programs and several other minor programs that might cancel or significantly reduce your federal student loan balance. The major ones are Public Service Loan Forgiveness, Perkins loan cancellation, income-based repayment and Teacher Loan Forgiveness. The catch is these may not apply if the debtor is in default status, meaning the loan has gone unpaid for more than nine months.

Each plan has very strict requirements which must be met before student loans may be forgiven. Many require annual submission of official paperwork to student loan servicers, and any missteps might disqualify an otherwise eligible borrower. If you are considering or currently in the process of trying to have your loans forgiven, it is crucial that you understand the necessary steps and follow them diligently.

Most Common Loan Forgiveness Options

Depending on the state in which you reside, there may be occupation-based forgiveness programs available. These are typically designed for doctors, attorneys or other professionals who pay above-average amounts for advanced degrees. Borrowers who used Perkins loans may actually have their entire debt forgiven after just five years. This mostly depends on your occupation, especially for those who serve full-time in a public or non-profit school. This program is used to entice teachers to work in low-income schools and in states where there are shortages of qualified teachers in a given field. Potential specialties range from speech pathologists and preschool teachers to high school math and science teachers.

Nationwide, however, the most common are the Public Service and Teacher Loan Forgiveness plans. Full-time public servants can have their entire federal loan balances forgiven within 10 years. Teachers at qualifying low-income schools may receive partial forgiveness ranging between $5,000 and $17,500, excluding those who only have PLUS loans.

Obama Student Loan Forgiveness

There is a fifth option, popularly referred to as the Obama Student Loan Forgiveness Plan, which came into existence after the Health Care and Education Reconciliation Act of 2010. It might be identified more correctly as a debt restructuring program with possible forgiveness in the future.

Borrowers who qualify may consolidate all of their federal student loans into one single loan, at which point the borrower may choose from five different repayment options. These options — standard, graduated, income-contingent, income-based and Pay As You Earn (PAYE) — offer a wide range of attractive reconstructions.

The graduated repayment plan, for example, allows the borrower to make lower-than-standard payments at first, and every two years, the monthly payment amount increases. This is designed to spread more of the loan amount into the future, when the borrower would ostensibly earn a higher income. The PAYE plan typically offers the lowest monthly payment, including payments as low as $0, though many borrowers have a difficult time qualifying for these plans.

Those enrolled in the income-contingent, income-based or PAYE plans must pay their loans during a term lasting between 20 to 25 years. If, at the end of the term, the borrower still has an outstanding balance, such a balance could be forgiven. Anyone who makes payments in one of these three plans and who also works in the public sector can count his or her Obama Loan Forgiveness payments as qualifying payments for their Public Service or Teacher forgiveness programs.

Total & Permanent Disability Discharge

The Department of Education (DoE) also offers relief to those who have significant physical or mental impairments and are unable to engage in “substantial gainful activity,” which is the official government term for a real job. Those individuals interested in applying for permanent disability status must work through the DoE process to prove their disability. To prove that you have a disability, you need a letter from a qualified physician and other required supporting documentation. Applications typically take between three and six months before a decision is rendered. If your application is accepted, you’re unable to apply for any other student loans until you receive another letter that deems you able to engage in gainful activity.

Top 10 Fastest Growing Industries in the United States

Construction in the United States is on the upswing. Seven of the top 10 fastest-growing industries in the country are related to construction. This data comes to us by way of the financial data provider Sageworks, which has compiled a list of the fastest-growing industries based on annual sales increases. This year, computer systems design and related services tops the list, followed by a variety of construction and utility-related industries.

1. Computer Systems Design and Related Services

This industry is far and away the fastest growing in the U.S. As quoted in Forbes, Sageworks analyst James Noe said, “There’s just an obvious need in the economy for these types of services. Everyone uses computers and businesses rely heavily on technology now, so in my mind, it’s a no-brainer that these types of services are growing fairly quickly.” According to a 2012 report from the U.S. Department of Labor’s Bureau of Labor Statistics, a 15 percent rise in employment in this field is expected from 2012 through 2022. Looks like that’s on track, with 18% growth last year.

2. Services to Buildings and Dwellings

This industry is comprised of all the establishments that provide services necessary for the maintenance of a property – cleaning (inside and out), extermination and pest control, as well as landscaping and outdoor construction, like decks, stone retaining walls, and fences. These services saw a 14% sales increase from January to December of last year.

3. Building Finishing Contractors

The industry’s name is rather self-explanatory, these contractors do the work required to finish a building, whether that’s additions, alterations, maintenance or repairs. This industry, too, saw a 14% increase last year.

4. Residential Building Construction

This includes construction, remodeling and renovation to both single family and multifamily residential buildings. 14% growth last year.

All of the next five industry categories saw 13% growth last year.

5. Foundation, Structure, and Building Exterior Contractors

The contractors who install the wood products above among other duties made up the fifth-fastest growing industry in 2016. This category consists of the specialty trades working on the foundation, frame, and shell of buildings.

6. Other Professional, Scientific, and Technical Services

These are jobs that require a high level of education, training and expertise. The services provided come in the form of legal advice, technological expertise, accounting, research, consulting, advertising, photography, translation and interpretation, as well as a number of others. Since computer systems design and related services are listed further up, we would have to imagine this category does not include growth in that particular technical service.

7. Building Equipment Contractors

With all of this construction, these buildings need to have internal work done, as well. This includes electricians, wiring installation contractors, plumbers, and heating and air-condition contractors.

8. Other Specialty Trade Contractors –

Specialty trade contractors consist of carpenters, brick and stone masons, tile and marble setters, roofers, drywall installers, sheet metal workers, ceiling tile installers, and many more.

9. Nonresidential Building Construction

Buildings and developments in this category include hotels, amusement parks, stores, office and public safety buildings, industrial facilities, schools, healthcare facilities, and churches.

10. Other Heavy and Civil Engineering

This industry is comprised primarily of two sectors, “establishments whose primary activity is the construction of entire engineering projects (e.g. highways and dams), and specialty trade contractors, whose primary activity is the production of a specific component for such projects,” according to the Bureau of Labor Statistics.

The Bottom Line

More than half of the top 10 fasting growing industries are directly related to new-home construction. Non-residential building construction is also part of the list. The construction industry, in general, may be one to keep an eye on, given these signs of an economic recovery.

Why Some Kids Never Leave The Nest

It’s an international phenomenon: the kids that won’t go away. The Italians call them “mammon”, or “mama’s boys”. The Japanese call them “parasaito shinguru”, or “parasite singles”. In the United States they are known as “boomerangs”, and in the U.K. they are called “KIPPERS”, which is short for “kids in parents’ pockets eroding retirement savings”. According to 2016 data from the Pew Research Center, close to 32% of Americans aged 18-34 were living with their parents. And if we expand this category to include those living with relatives outside of their immediate family, the statistic rises to almost 40 percent, according to CBS. Generally speaking, this is a more common practice for sons than daughters. Surveys in the United Kingdom and Japan suggest a similar situation in those countries. In this article, we discuss some of the reasons why kids may be living with their parents for longer periods of time and outline some steps that parents can take to reduce the potential for negative effects – both for their kids and for themselves.

The Benefits Of Staying Home
Growing up is not only tough, it is increasingly expensive. In the quest for a rewarding career, many young adults opt for college after high school. Four years later, they have school loans for amounts ranging from just over $15,000 for an education from a public college or university to more than $31,000 for an education from a private school, and that number is steadily increasing. Add on the cost of a car, food, clothing, shelter and a social life, and suddenly one may find him/herself digging out of personal debt. It is easy to see that moving back in with mom and dad becomes a financially attractive option.

Aah! The benefits of home! Somebody else pays the bills, worries about the mortgage, cuts the grass and – if a kid is really lucky – cooks, cleans and does the laundry. It’s like having a butler, a maid and a really rich uncle all rolled into one. No stress, no bills to pay, no worries about the threat of unemployment, eviction, and so on. What’s not to like?

Often, if boomerang kids need money, they find that mom and dad are more than willing to open up the checkbook. The kids only need to stick out a hand and somebody will put a few bucks into it. To top it all off, everything that they earn on their own can be used as discretionary income, and once they are established, it’s unlikely that their parents will kick them out. Living at home rent free often means that a new car, designer clothes and a week in Mexico are suddenly easy to afford, even on an entry-level salary.


What’s A Parent To Do?
Clearly, moving back home has enormous and immediate advantages for the kids, but it’s not such a great deal for the parents and, in the long term, it may not be good for the kids either. That KIPPERS moniker is an accurate depiction of an ugly scenario. Some parents are too kind to kick out their still-dependent kids, so instead of using their prime earning years to save and invest for retirement, the parents are pouring their money into adult children who can’t or won’t strike out on their own. Furthermore, in addition to jeopardizing mom and dad’s retirement, junior isn’t learning a thing about the responsibilities that come with being an adult.

You’ve heard the old saying: “Give a man a fish, you feed him for a day. Teach a man to fish, you feed him for a lifetime.” A similar concept applies to your adult children. If you give them free room and board, you may be feeding them for a lifetime, but they’ll never learn to feed themselves. It’s just one of the sad facts of life that most folks will keep taking if you keep giving.


Set Rules!
If your adult kids want to come back home, or they won’t leave, you need to lay down the law. Teach them that there’s no free lunch in life. Maintaining a household is an expensive proposition, so everyone living under your roof needs to carry his or her own weight by paying his or her fair share of the expenses. This includes paying rent, paying utility bills and paying for food.

While the kids are chipping in to pay for telephone and cable service, the parents need to make sure to keep their wallets closed. Your children need to pay their own bills. This includes car payments, insurance, gasoline, credit cards and cell phones. Kids need to learn that if they incur expenses, they are responsible for paying them. This will surely teach a child the beauty of budgeting.


More Than Money
In addition to learning to pay their own way, your children need to understand that households don’t keep themselves up without some assistance. Everyone living in the house needs to be responsible for keeping it clean and keeping it maintained. Mowing the lawn, weeding the flower beds, painting the shutters and cleaning the bathroom are par for the course when you own a home. If the kids are living at home, they need to do their share of the work.

The Bottom Line
While there’s no easy way to take a child to task, especially when that child is an adult, tough love prepares kids for reality. Mom and dad won’t be around forever to tidy up the house and pay all of the bills. If the kids learn to manage their money and maintain a household before they leave home, they (and you) will be better off in the long run.


This Is the Secret to Organizing Your Finances

This Is the Secret to Organizing Your Finances

The first step when organizing your finances is to determine what it is you would like to accomplish. After your goals are set, the most important thing you need to take a good look at is your cash flow, so that you can figure out the necessary steps to fund your goals. I suggest doing this in three steps:

  1. Add up how much you are spending.
  2. Figure out how much you earn and pay in taxes.
  3. Subtract your expenses and taxes from your income to calculate your discretionary income.
This is a cash management analysis. It does two things: it brings awareness to your spending habits, your taxes, and your income, and it allows you to plan accordingly. By plan accordingly, I mean that when you are faced with a decision to buy a new or used car, to buy a bigger home, or even just to add a monthly cable bill to your expenses, you’ll know exactly how that is going to impact your cash flow. So let’s explore how to figure out your cash flow in a little more detail. (For related reading, see 3 Steps for Creating an Emergency Fund.)


The best way to know where you are spending your money is to import all your credit card and banking transactions from the last four months into a free online budgeting software program. I prefer, but there are several out there, including,,, and others. Once you’ve opened an account and have imported your transactions, you can look at your spending trends. As you get more data, you’ll know how much goes towards food, auto and housing expenses. This also tells you where you can lower your expenses if needed.
If you’re interested, you can compare your spending habits with that of the rest of the country by looking at the latest Consumer Expenditure Survey. Mint does a nice job of suggesting ways to save money on credit card interest and fees, insurance rates and other expenditures. (For related reading, see Got a Raise? Here’s How to Avoid Lifestyle Creep.)

Income and Taxes

The best way to compare your earnings and tax bill is to look at Total Income on line 22 of last year’s tax return. Subtract line 60, Total Tax and any state or local taxes from their respective returns to determine your after-tax income.

Discretionary Income

Now subtract your expenses from your after-tax income to determine how much you have available to fund your goals. This will let you know if you are living above or below your means, and how much you have left to allocate towards your savings goals.
This analysis lets pre-retirees know how much they can save, and what they may need to have a steady income in retirement. And it can prevent retirees from running out of money because they will be able to determine if they are spending more than their portfolios can handle. Whether you are a pre or post-retiree, once you are aware of where your money is going, you can more easily make conscious decisions with your money. Finally, my parting thought: the best way to lower your expenses is to cut out unnecessary items and reduce big ticket items, such as cars and homes.

Should You Pay in Cash?

Articles and books on personal finance generally pack in as many tips as possible in an effort to make at least a couple essential ones stick. This shotgun approach is worth it if it helps readers learn to pay themselves first, spend less than they make, and so on, but saying too much sometimes means explaining too little.

In this article we’ll focus on just one technique to improve your finances, by taking a close at how making purchases with cash can contribute to your ability to budget, save and invest.


A Plastic Paradise

With the proliferation of plastic alternatives to hard currency, some people consider carrying cash a throwback.

To be fair, plastic is much sexier than a piece of colored paper with a dead president staring vaguely into the distance. Some banks even allow you to customize the graphics that appear on the credit card/debit card or choose from a range of designs and colors the company is marketing.

There is also the security advantage with debit and credit cards. Debit cards are protected by your personal identification number (PIN) and credit cards by your signature (and for some cards, a PIN number too). Cash is only protected by your ability to defend it should someone else want to take it from you.

Moreover, cards are as widely accepted as cash – with the exception of a few mom and pop shops. And yet, from a personal finance view, cash is almost always the better choice for making a purchase. Here’s why:

1. Overpaying

One of the drawbacks of credit and debit cards is that they encourage you to spend more than you intend to by giving you easy access to more capital. With cash, spending more than you intended requires going to a bank or ATM to get more and then going back to the store to complete the purchase. While some businesses have in-store ATMs, all charge fees, in addition to whatever fees your bank charges. For most people, these factors will cause them to reconsider whether their budgets can handle any extra strain.

Generally speaking, only carrying the cash you are prepared to pay for a given product will prevent you from buying the next level up and paying for features you don’t need. This works for small-scale purchases, but buying a computer or a car can involve large amounts of cash that probably shouldn’t be carried around. If a check can’t be used, a debit card is better than a credit card because you are spending money you have rather than money you don’t.

2. Over-Shopping

Just as cards encourage overpaying for one item, they also allow you to buy more items than you mean to. Stores are set up to make products appealing in order to persuade shoppers to buy more. Sometimes a shopping list isn’t enough to protect you from impulse buys.

According to the article “Cards Encourage You to Overspend” on, people will spend more with a credit card compared to cash. In fact, a Dunn & Bradstreet study found that people spend 12% to 18% more when using credit cards than when using cash. And McDonald’s found that the average transaction rose from $4.50 to $7 when customers used plastic instead of cash.

So what can you do to avoid this? Only carrying enough cash to buy the things on your list can limit the damage. This is the best way to keep shopping within your budget. If you are motivated, you will find discounts or cheaper alternatives to your regular brands to make that cash go further and maybe earn yourself a luxury item.

3. Cash Vs. Credit Cards

Cash, for the purposes of this article, is strictly limited to money you have already earned and is sitting there for you to use. Using your Visa to take a cash advance and then carrying the cash with you will not solve the essential problem of using high-interest debt to cover your expenses.

Cash has one very clear advantage over using a credit card: If you buy something on your credit card and end up carrying a balance, or only make the minimum payment each month, you will incur interest at a rate of 15% or more of your purchase (which can have you paying $15 or more for every $100 you spend). If you save up enough cash for the same purchase, you are giving yourself the equivalent of a 15% discount by not using your card. Before you even sign up for a card, make sure you know what you’re getting into.

4. Cash Vs. Debit Cards

If this article were only dealing with cash as a better alternative to credit cards, no one would dispute it. In contrast, debit cards seem to enjoy a protected status despite the overkill on ATM fees and foreign ATM fees. Forgetting the fees, a debit card’s main failure is that is trivializes purchases. Being a square of plastic, it is hard to tell how much of your money is flowing through your debit card.

For most people it becomes a matter of $2 here, $6 there, another $4 over here and so on until they give up keeping track of how much has been spent in a day – let alone a month. Then it’s a shock to their systems when the monthly statement comes and it’s far too late to do any good. With cash, you can see the damage as it is done and hopefully curtail your spending before it gets out of control.

The Bottom Line

Using a credit or debit card offers more security than cash in most cases. For large purchases, carrying cash is often not an option and writing a check or getting a bank draft may be more trouble than it is worth for some. Furthermore, if a debit card is used responsibly, it is an ideal replacement for cash. A credit card can also be a convenient tool, but it’s only a fair substitute for cash when the balance is paid in full at the end of each month. Otherwise, your ultimate reward for paying with your credit card will be paying off an even bigger debt.

If you struggle to avoid overspending, shopping with cash is one way to stick to your budget and limit impulsive spending.

The Importance of Building Savings Habits Early

The Importance of Building Savings Habits Early

We’re taught to save money from the time we get our first tooth fairy payment, but when we’re young, saving doesn’t always seem necessary. A common belief is that saving is for people who are getting ready to buy their own house, put their kids through college, or retire.

In reality, it’s better to start saving long before any of these things happen, for several reasons. (For related reading, see: How to Create an Effective Budget.)

Why Saving Money Early Is Key

First, it makes savings a habit. Take the tooth fairy profit, for example. The quarter a six-year-old saves from the dollar she found under her pillow isn’t going to fund her college tuition (a child only has so many teeth, you know). But having her tuck that little bit away in a savings account or piggy bank will get her into the habit of saving a little from everything she is given or earns in the future. The same goes for high schoolers and college students. Saving some of their summer job pay or internship income will prepare them for saving when they enter the work world full-time. Opening a Roth IRA sooner rather than later can be one of the best financial decisions that a young person can make.

Second, you may actually have more money now rather than later. A recent college grad just starting their full-time career or a young newly married couple may find this hard to believe, but they may have more expendable income now than they will in 10 or 20 years. Just as their income will most likely increase over the years, so will their expenses. Moving out of an apartment into a house increases maintenance and utility costs. Having kids not only adds expenses like additional food, clothing, and medical bills, but parents also often find themselves needing larger cars and more living space to accommodate their growing family. If both parents decide to keep working, they are likely to incur childcare costs; and if one of them leaves the workforce to parent full-time, that income is lost. (For related reading, see: 8 Essential Four-Letter Words for Financial Health.)

Lastly, it allows the power of compounding to work to its fullest. Starting to save as a child or young adult obviously gives you more time to save than if you wait until middle age. Investing this savings early allows compounding to work its magic. As an example, assuming a constant 6% annual rate of return, if a 25-year-old invests $10,000 a year for 10 years and then stops while a second person waits until age 35 to invest $10,000 a year for 10 years, the first person will have accumulated almost twice as much in total savings by the time they are both 45.*

So even if you aren’t planning on staying forever at your first full-time job right after graduation, participate in the company 401(k) plan as soon as you’re eligible. If there is a company match, invest enough to take full advantage of it. If and when you leave you can take it with you by rolling it over into an IRA which will allow your money to keep growing wherever you go. If your employer doesn’t offer a 401(k), you can still almost always save by payroll deduction to a separate retirement account. And the best part about saving through payroll deduction is that you won’t miss the money because it doesn’t appear in your bank account.

It’s important to pay yourself first – even before Uncle Sam, the landlord, the utility company, or the grocery store. There will always be money left for them, but there may not be for you if you don’t make this basic discipline a priority. Saving early will get you in the habit and give you a huge head start!

*This is a hypothetical example of mathematical compounding. It’s used for illustrative purposes only and is not intended to represent the past or future performance of any investment. Taxes and investment costs were not considered in this example. The results are not a guarantee of performance nor represent specific investment advice. Actual returns will fluctuate. Investments that offer the potential for high returns also carry a high degree of risk. 

When You Get Money, Get Rid of It

When You Get Money, Get Rid of It

When You Get Money, Get Rid of It

When You Get Money, Get Rid of It| brokeGIRLrich

Ok guys, this is my biggest savings fund tip of them all.

When you get money, get rid of it. Especially when it’s more difficult to get the money.

I don’t mean go buy some fishing gear or six pairs of Tieks that look adorable but will destroy your feet. I mean hide it away somewhere other than your checking account.

I’ll level with you. I am a bad budgeter. When I really need to get things sorted, I might go back to budgeting for a little while, but as long as I’m not wildly underwater, I’m more likely to have an idea of what’s in my checking account and spend accordingly.

So part of my trick is that when my paycheck hits my bank account, it almost immediately gets parceled out to other spots.

Some money goes into a savings account I use to pay my rent each month.

I pay off my credit card balance.

And then, I try to get rid of as much as possible. I transfer some out to my IRA. Gone.

I transfer some to my car insurance savings account. Gone.

I transfer some to my down payment savings account. Gone.

I add a little to my emergency savings account. Gone.

I check the new checking account balance, brace myself a little, and think, can I possibly squeeze out a little more to my IRA or one of my savings goals? And the answer is usually yes.

Now my checking account looks a little sad. But a sad amount, that’s still kind of padded, that I can live with for the week. When I buy my groceries, I think, oh, there’s plenty in there, let’s splurge on some Halo Top or I hit up takeout too many times and I should probably only buy the necessities.

And in the long run, my net worth is still growing like woah, because I live like I don’t have a ton of money (because I don’t in my checking account), but my savings and investment accounts are still slowly growing over time.

The best part is that this scales just fine. Did I kill it with brokeGIRLrich income and working extra shifts at my part time job? Awesome – all of my savings goals are probably a little ahead now and I totally picked up Halo Top whenever the heck I wanted it this week. But I still keep that being careful mindset by immediately moving the bulk of what I make out of my checking account.

You’d also be surprised how little bits add up. Sometimes I have goal amounts I try to meet – like putting away $100 a month towards a certain savings goal. With those little extra payments, every fourth or fifth month, I suddenly find I’m ahead an extra $100 dollars and that’s an awesome feeling.

It’s a way more awesome feeling than a new t-shirt or an extra fancy cocktail would’ve been if I’d just left those little bits in my checking account.

There is no doing it later with savings. For me, that means it’ll get spent. If I think, “I’ll transfer over X amount at the end of the week,” I probably won’t. But if I transfer out the money immediately, it’s just gone. I’m gonna think of it as gone. I’m probably not going to ever go through the bother of siphoning back out $20-30 from a savings account to splurge a little through the week. My mind just writes off the money when it’s out of the checking account.

So as soon as my paycheck clears my checking account, I do everything I can to get rid of as much as I can and for me, it’s been working out to some decent net worth growth over the last few years and the ability to weather a few unpleasant financial storms.

5 Reasons Real Estate Investing Beats the Stock Market

5 Reasons Real Estate Investing Beats the Stock Market


When done the right way, real estate investing can provide great returns through rental income, tax advantages and the capital appreciation gained from buying below the market value.

However, investing in real estate is not for everyone. It takes time to learn to competently and confidently invest. It takes perseverance and effort to find awesome deals. And it takes financial discipline to save up enough money to get started. Let’s face it: Investing in the stock market is much easier!

Still, I have found that real estate is a much better way to invest my money than the stock market. I am making a much higher return on my real estate holdings than on my traditional stock portfolio. And real estate offers some unique qualities that make it attractive.

Here are five key reasons real estate investing beats the stock market:

1. Real estate investments provide cash flow and can be a hedge against inflation.

You’ve heard it said, “Cash is king.” Whether stock or real estate, your investments should be paying you cash that you can reinvest or save for your retirement. Rental properties give a steady source of cash. Buying the right properties is key, of course.

What’s nice about rental income is that your cash flow keeps pace with inflation. The market price for rental properties automatically rises as the cost of living increases.

You can also line up a big cash payday by buying a “distressed” or foreclosed property below the market value. Then you can fix it up and sell it a few months later for more than what you’ve paid — the purchase price and rehab and transaction costs.

You can choose to “fix and flip” to collect a windfall or hold and rent for monthly cash flow. Either way, investment properties can provide cash and a hedge against inflation.

2. Real estate is a market where you can buy low and sell high.

We all know money is made in the stock market by buying low and selling high. But it is nearly impossible for most investors to do so consistently. You can’t possibly know enough about an individual company, its sector, management, competitors, etc. And institutional buyers will always have more leverage and know more than you as an individual investor.

Contrast that with residential real estate where you are dealing with individual properties and each one is different in location, size, features and other criteria. There is no set market for the exact property you are considering.

In the stock market, anomalies are quickly adjusted for by other investors. In the real estate market, there are thousands of little markets. You can always find deals and “buy low.”

There are strategies where you can buy low and sell for a high price once you have rehabbed a house. And there are geographical pockets in just about any real estate market where you can “sell high” if you know the type of housing that is in high demand.

3. Actively managed real estate provides better returns and lower risk than stock market investing.

Stock market values go up and down. Independent research firm Dalbar has been measuring the effects of investor activities over both short- and long-term time frames since 1994. They show that average investors are not very good at capturing the market return of a simple balanced portfolio. Never mind outperforming it.

Individual investors tend to buy and sell at precisely the wrong times. That wipes out possible gains in an already efficient market where bargains are sparse.

On the other hand, real estate is nearly immune to emotional buying and selling. As a less liquid investment, panic selling is impossible. You have more facts to make a better investment choice initially when you buy properties.

And the long-term nature of real estate assets ensures that you hold on through ups and downs. All the while, rents and property prices rise due to inflation.

In general, your risk of loss goes down the longer you hold real estate investments. Your equity builds and home prices rise over time. That is unlike the stock market, where the risk typically stays the same.

4. Real estate investing provides unique tax advantages.

While there are others, depreciation is the tax advantage that most investors have heard about. For dwellings, the IRS allows you to deduct the cost of the property over 27.5 years.

What real estate investors love is that you are depreciating an asset that does not often lose value. In fact, property values tend to go up over time. That means you get a tax credit on the cost of an asset that may be going up in value, not down.

What is more, depreciation is a tax credit that is on top of property upkeep and other costs that you can take away from the rental income you get. When you take it, it provides a tax deduction that lowers your tax liability. That means more money that you can use to buy more properties. Or pay off the loan if you took one. Or pay for upkeep or anything else you want to spend it on.

5. Real estate investors can use leverage to build wealth.

Leverage is a tool that many real estate investors use to build their portfolio of income-producing properties. Getting a mortgage to buy a rental property gives you leverage that you can use to invest in more properties (and different types of properties to spread your risk) with less money down.

Say you put 30% down on a $100,000 property. You are controlling an income-producing asset worth more than three times your cash investment. You are earning rent from a $100,000 property when all you invested was $30,000.

Well-selected rental properties will be cash flow positive. That means that your annual rental income will pay all the costs (mortgage, taxes, insurance, maintenance, management fees, etc.). It will also give additional cash for your bank account.

Of course you need to critically evaluate your strategy, the specific deal, and the terms of your loan. You can get easily in over your head with leverage. Being overleveraged greatly increases your risk. Leverage is a tool that needs to be managed and monitored. Any specific property or an entire portfolio can be made risky with high leverage.


I have found that real estate provides many advantages over the stock market. You can make returns of more than 10% on the cash you invest from rental income. Your investment provides monthly cash flow, and residential properties typically go up in value, providing capital appreciation.

With real estate, you have much more control over the underlying asset. That means there are many opportunities to buy low and sell high. When you buy below market value, you can build $20,000 or more of instant equity.

The tax advantages of rentals can save you thousands of dollars each year, thanks to depreciation. When you get a mortgage on an investment property, the rental income pays down the loan every month, building your equity in the property.

I do want to stress that you can’t just go out and buy any property. As a real estate investor, it’s crucial that you buy below market value. That means you need to put in the time and effort to find deals and do careful and complete research.

I pass on many more deals than I invest in. Many offers I make are turned down by the seller. It is common for sellers to believe their property is worth more than the market will bear. They do not know what repairs are needed or what rehab construction costs. They often do not see the issues that make the property unsalable in its current condition.

So asking prices can be high, and offers below the asking price are often turned down. That is just a reality of real estate investing. I have purchased less than 2% of the properties I have looked at in the last 12 months. But the deals I have moved forward with have performed much better than any stock investment I have ever made.

Adding Via Subtraction (Crazy Math)

Adding Via Subtraction (Crazy Math)

Recently we purchased a king size bed. For reasons that are lost to me now, I resisted the upgrade. It probably had to do with costing too much money or “why should we replace a perfectly good queen size mattress”, etc. Obviously I was wrong. This thing is a game changer.

More importantly, it reminded me how effective it can be using dollars to subtract the negatives in your life rather than spending dollars to add positive things. In fact, I’d say that’s the single greatest use of money and a guaranteed happiness return: use money to remove something you don’t like. Instantly, things get better and your happiness increases.

Let me explain.

I don’t own a yacht. Never once in my life have I walked through a day complaining because of a lack of a yacht. The same could be true for countless other things. Would it be cool to fly a drone around and make incredible videos from a camera hovering high above the buildings? Absolutely, but again – I didn’t skip to work today thinking my life lacked purpose and meaning because I didn’t have a drone.

Yet, I make this mistake all the time. I think that some new addition to my life will bring additional happiness. In a few rare occasions this is true. I own a few things that give me great pleasure. Most of the time the happiness associated with these purchases fade over time. It’s the inevitable hedonic adaptation at play. What is new and shiny today soon becomes old and familiar. If you get on the hedonic treadmill, there are no amount of things that can bring you happiness because you always want more.

I doubt this is a huge insight to many of you. We all have experiences of buying things, being happy for a bit, and then quickly returning to our initial level of happiness. If you’re reading this blog, at the very least you’re questioning your spending anyway and wondering if there’s a better use for your money.

But I’m not sure as many people think about using money to subtract things from your life. This is particularly awesome when you remove items, tasks or chores that cause negative feelings. For example, I hate cleaning bathrooms. Of course I could do it myself and save even more money, but no amount of saving money is going to make me enjoy the process. The solution is obviously to hire someone to clean the house. For a relatively small amount of money, we completely remove a chore that brings us no pleasure and we’ve never once argued about who should clean the bathroom.

Getting back to the mattress purchase, somehow I failed to realize (for years probably) that there were some negative things about the queen mattress. I did wake up pretty often thinking I could have slept better. After all, the mattress was over 10 years old and had probably served its useful life. I’m not sure this happened every day but now that it no longer happens at all, it’s pretty clear that the cost of the mattress hardly compares to the fact that I no longer think about the mattress (except for writing this post of course).

The whole experience got me thinking about other ways to use money to remove negatives. Of course you have to be careful here, as removing a negative isn’t the same as paying extra for convenience.

The basic test is this: it’s convenient that at the push of a button I can order any type of food at any time of day and have it delivered to me. But if I didn’t do that, I wouldn’t walk around thinking that my life sucked.

Getting a new mattress isn’t convenient. It’s simply paying extra money for something of quality that replaces a previous negative experience.

I’m pretty convinced that the most efficient use of a dollar is to spend it removing something negative from your life, rather than trying to add something positive. Eventually you’ll run out of negative things to remove. At that point, you’ve reached near optimal spending as dollars spent chasing additional happiness will only get you so far before you quickly adapt and need new stuff to replace the old stuff.

A Household Spending Plan to Save for Retirement

A Household Spending Plan to Save for Retirement

“I’m Too Busy to Plan for Retirement”

Like all of us, you’re busy. Retirement is a fuzzy, distant event that has nothing to do with shuttling the kids to lacrosse practice or dance lessons while making sure family members with five different schedules manage to eat a semi-healthy dinner every night.

Maybe you’re a professional, dutifully saving 3% of your salary into a 401(k) every year and getting 3% on top of that in matching funds by your employer. This is better than most Americans: this rate of savings will fund a retirement in some form, but probably not the retirement you want. Saving at least 10% of your income (or more if you’re getting a later start) is often what’s required given the increasing likelihood that you’ll live to 85, 90 or possibly even 100. (For more, see Can I Retire Yet?.)

Why I Hate “Budgets” and Love “Spending and Saving Plans”

What comes to mind when you hear the word “budget?” Either it feels like an exercise in denial or it feels like a tedious, hours-long exercise of tracking where every single nickel is going in your household.

While scrupulous tracking may be required if you are in genuine financial crisis, it is not required if you have some money in the bank and are already saving at least a small percentage of your income each month. However, if you’re looking to save more for retirement and get yourself up into that 10% to 15% range that is required to fund what will likely be a retirement of 30 or more years, I do recommend having a simple spending and saving plan in place to help you get there.

With my busy clients, I’ve found the plan needs to be easy to set up and maintained in an hour or two per month; otherwise, like many other good intentions, it will get thrown overboard in the daily scramble. This household spending plan will have you off and running in a few hours and can be easily maintained once a month to help you meet your retirement savings goals.

Step 1 – Set Your Retirement Savings Goal

If you’re still in your 20s, consider setting a savings goal of 10% of your income. If you’re in your 30s or beyond and don’t have a lot saved for retirement, think about how you can get to 15% or more. (For related reading, see 5 Strategies to Avoid Outliving Your Money.)

This may seem a little intimidating, given all the categories of expenses that are competing for your paycheck. If so, rather than setting a final percentage goal (10% or 15%), make a commitment to increase your savings rate by 1% a year until you get to your final target.

Step 2 – Establish Your Spending Categories

Make a numbered list of all of your household spending categories. Lump things together as appropriate. For example, your heating bill, your power bill and your water bill can be combined under the category “Utilities.”

Separate other things that you think should be tracked separately. For example, consider separating “Dining Out” from “Other Entertainment” and “Food/Household Supplies” if you suspect you may be overspending in restaurants. Create no more than about 20-25 categories. Sample budget categories are included at the end of this exercise.

Step 3 – Make Some Super-Rough Spending Guesses

Spend no more than 10 minutes going through your list and making some super rough guesses on how much you spend in each category.  Do not get out any old bills, credit card statements or a calculator at this point. Put the spending categories into three buckets – big expenses, medium expenses and small expenses. The purpose of these guesses is simply to group expenses into the categories, not to understand where every dollar is going.

Step 4 – Choose Your Spending Plan Targets

Use the Spending Grid Tool below to help you decide which spending categories you will target for reduced spending. For each numbered spending category, draw an appropriate bubble on the grid.

Big expenses should go toward the top of the graph and little ones should go toward the bottom. Similarly, expenses you’d find easier to reduce should go toward the right of the graph while those that would be harder should go toward the left.

Consider cutting any categories that fall into the upper right quadrant (that is, categories that have a large budget and which you would find easy to cut). An example of this might be the $5 cup of coffee you purchase on the way to work each day. If you switch to making coffee at home most days and taking it with you in a travel mug – thus reducing your coffee purchase to once a week – you could save about $15 a week, or approximately $750 per year, with the same end result of being able to drink coffee every morning.

At the end of the exercise, you should have one to three categories that are your Spending Plan Targets for reduction.

Step 5 – Now Get Out the Statements, Bills and Calculator

Now that you’ve identified your one to three categories that are your Spending Plan Targets, do a detailed assessment of how much you spend in each category. Go back through three months of statements and calculate an average for each. Then, figure out how much you need to reduce spending to meet your goal.

Here’s a simple example. Let’s assume that you:

  • Have a household income of $100,000.
  • Have a goal to save 1% more of your income toward retirement this year, or $1,000, which translates to $83.33 per month of required savings.
  • Identified two Spending Plan Targets – Dining Out and Clothing – as your areas of focus.
  • Are currently spending $320 per month Dining Out (including those runs to Starbucks) and $250 per month on Clothing.

You could target reducing Dining Out by $50 per month and Clothing by $35 per month to meet your $83.33 per month savings goal. This would make your new targets $270 per month for Dining Out and $215 per month for Clothing. (For related reading, see: 5 Financial Strategies to Last a Lifetime.)

Step 6 – Monitor Actual Spending in Each Category for Three Months

When your credit card statement or other bills come in each month, record how much you actually spent in each of your Spending Plan Target categories.

If you’re having no problems staying within the new limits you’ve set over a period of three months, then bump up your retirement savings to your new goal.  Congratulations!

If you find you are having problems, consider doing one of the following:

  • Run the experiment for another three months. If it’s still not working after six months, consider adding an additional category or two to your Spending Plan Target list to get the savings you need.
  • Try the “Cash Envelope” method. Using the numbers above, put $270 into your Dining Out envelope and $250 in your Clothing envelope. Always pay with cash for expenses in these categories. Once the money runs out in the envelope, spend no more in that category for the month. Money left in the envelope at the end of the month can be carried over. There is no shame in needing to use this approach – I personally know of households with incomes over $100,000 who have successfully used this method to get their spending on track and meet their retirement savings goals.

This simple system should take you no more than two hours to set up and an hour a month to maintain. It is time well spent to know that you’re meeting your savings goals and are on track for retirement!

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