FINANCE & TECH

Personal finance advice is a lot like other fads and memes on the internet – some ideas get exceptionally popular, there’s a backlash (sometimes deservedly, sometimes not), and then there’s a reversion to the mean.
Many of the ideas are often, at their core, good. Like all ideas, they evolve and mature. Sometimes that means those ideas become a bit more niche and specific. Sometimes they become broader and more inclusive. (If you want a good example outside of money, look at religion – there are very broad inclusive religious beliefs and there are very niche specific and exclusive ones.)
What’s great about financial advice is that there is no right answer. It’s valuable to consider it all and take the ideas that will help you improve your financial life.
For the last few years, the FIRE “movement” has been extremely popular. The idea of retiring early and escaping the rat race is intoxicating. Most recently, there’s been a bit of a backlash (rightfully, I think) criticizing the movement. (FIRE stands for financial independence, retire early)
I’ve always seen the FIRE movement as a net positive. I’m not “in” it so I don’t see all of its parts (and thus can’t speak to the sexism and judgment and whatnot) but if you take the good and leave the bad, you’re better off for it.
And that’s what you should be doing with all financial advice on the internet – take the good, discard the bad – here’s why:
Take the Best, Discard the Rest
Nothing is one size fits all. It never is and we all know it.
The beauty of the internet is that it can expose you to the stories of many experiences and many backgrounds. There’s, of course, a bit of self-selection involved. You will only get the experiences of people with access to technology, desire to share, and the means to spend time writing, recording, and publishing those experiences. But you get way more than you would if you stuck to TV, books, or magazines.
This means you can read a lot of different stories and cherry-pick the best ideas that work for you.
There is no single best anything.
In its simplest form, FIRE is about saving as much as you can and investing it so you can retire early. It got popular in the most recent stock market run because it enabled many people to retire at really young ages. As it got popular, it developed sub-groups and certain characteristics became more extreme (not in a bad way, just more concentrated). You had those who celebrated extreme frugality, living off the grid, tiny homes, nomadic lifestyles, etc.
Frugality is always a good idea – until it isn’t. You want to save money but at what cost? Short term savings can mean longer-term costs. This is where your personal situation matters and you need to cherry-pick. It would be cheaper to sleep on a futon but your sleep may suffer – which has an impact on your life and productivity. That can impact your income. Perhaps you want to spend a little more on a bed that you’ll use for many years.
And many of the complaints about FIRE are valid too. It doesn’t take a genius to know that you can save more money if you earn more money. And you better get a little lucky with medical expenses.
In life, there’s no single right answer to every problem or single right way to do anything. You’re on a journey and you need to pick the tools and equipment that will get you there.
You Must Personalize It
I’ve gotten emails from readers who want specific advice for their situation. I never give it because I can’t possibly know the full situation and, honestly, I’m not qualified. That’s why you should work with a fee-only financial advisor. Free advice on the internet is just that – (potentially) worthless. 🙂
Another problem with free advice is that it’s not tailored to you. Even the seemingly simplest situation is extremely complicated.
But not everyone can afford a fee-only financial advisor and so when you read advice on the internet, you have to do the work of personalizing it. That’s the cost.
For example, common advice is to max out your Roth IRA and 401(k). This advice is “good” because it lowers your tax burden. But what if you can’t afford to max them out? What if your employer doesn’t offer a match on your 401(k) contributions or your plan is expensive with terrible options? What if you make too much to contribute to a Roth IRA? The list of What-Ifs is endless.
If you want to get it right, you need to invest more time reading and learning the reasoning behind that advice. You can’t blindly follow it because it was never written for your specific situation.
There’s No Fiduciary Duty
With financial advisors, there’s a fiduciary duty. They have to put your financial needs above theirs.
On the internet, there is no fiduciary duty. I’m not certified, I’m not licensed, and I’m also not giving you advice. We’re having a (one-sided) conversation over a coffee or a beer as you would with your friend. The site is supported by advertising, which means I get paid when you visit or when you sign up for various products, and some of those products aren’t going to work for you.
This site isn’t unique in that regard – that’s how the internet works. Much like on Facebook or Twitter, you get free stuff and, in return, the site makes money off your activity.
When you read reviews of products or services, the company publishing that review may make money when you sign up. We try to remain unbiased in our reviews (many are written by freelancers who are compensated for their time writing, not tied to the financial performance of the piece) but bias is everywhere. Writers may not want to be too negative because they don’t want the blowback.
There’s also the bias of exclusion – we tend not to write reviews of products that are obviously bad. We never reviewed Suze Orman’s prepaid debit cards (they had a $3 monthly fee!), which quietly disappeared after they were launched in the early 2000s.
You May be Listening to an Incompetent Bozo
I know I’m not a bozo… but you don’t.
I have zero formal education when it comes to personal finance. I have formal education in other things that are themselves hard but nothing really in the same domain (economics is close-ish but not really). I would not hire myself to create a financial plan and I am reticent to offer any kind of advice to friends and family.
I don’t know what I don’t know (this is my biggest worry) and sometimes I make mistakes. When I write on the Internet, I feel a different kind of responsibility to the reader. I want to get it correct, I want to get it complete, but I feel responsible only to get it right. It’s easy when you talk about something specific, like reviewing a product or discussing my mental models around money.
It’s harder if you want to discuss something much broader. If there is an omission, I trust the reader to do their own research and find it.
For example, investing is a very tricky subject because it, in a small way, depends a lot on the future. This is why many experts say invest in index funds – it’s a no-lose proposition. Index funds are cheap, you get the whole market, and they’re a safe choice. But what should your allocation be? How much in index funds versus bonds or other asset classes? You get rules of thumb. 120 minus your age. As you dig deeper, it gets more complicated – but most of the advice stops at “buy index funds” because that’s where the safe area is.
You have to do the work to fill in the blanks and not trust that the bozo you’re reading knows the whole picture. 🙂
Share it With a Friend
If there’s an idea that interests you but you’re not sure if you “get it” – tell a friend. Talk it over with someone you consider smarter than you on the subject. Just talking about it, and being forced to explain it, can help you better understand it.
This doesn’t have to be a friend you know in-person – it can be an internet friend. Someone whose background and ethics you know and trust. If your friend knows the particulars of your situation they could even guide you on how to fit this new idea into your financial plan. 
The idea could be wrong (I’ve written stuff that was incorrect loads of times) or your interpretation could be wrong. A lot of financial topics are complicated (perhaps on purpose!) but getting a second opinion can give you the confidence that it’s correct and that you understood it correctly. 
If you don’t have someone in your life that you can talk to you should still aim to get second opinions by reading books by actual, verifiable, experts. You should also follow several bloggers who have a wide range of opinions so that you can see the whole world of personal finance, not just one person’s view of things. This way you can pick and choose which ideas you most agree with. 
Don’t blindly follow any advice, much less advice on the Internet, and hopefully, this framework can help!
Summary
The internet makes financial information accessible to a lot more people, which is great. But it also comes from generally unknown sources which means you have to do your homework. As they say, you can’t believe everything you see on the internet. 
Your finances are extremely important and you should take care not to make important life-changing decisions based on an article you read – no matter where you read it. 
Use the internet for exposure to new ideas and general education, but back up your actual decisions with advice from someone whom you trust and who has your best interests at heart. 
Oh, and before you go, I want you to do all this with this post too.
Take the good, skip the bad, personalize it, and (most of all) share it with a friend! 🙂 […]

The Cut’s financial advice columnist Charlotte Cowles answers readers’ personal questions about personal finance. Email your money conundrums to mytwocents@nymag.com

Photo: Getty Images

Dear Charlotte,

I feel guilty saying this, but I actually saved a lot of money this past year. My job allowed me to work from home, so my income was the same. But because I was making all my own food, was not commuting, and didn’t do most of the normal stuff I spend money on, my savings added up a lot. (It also helped that I stopped paying my student loan bills when the government froze them.) I currently have about $20K saved up, and I’m trying to figure out what to do with it. I’ve never been good about saving money, and I didn’t really have an emergency fund until now. Should I keep it in cash, just in case? Or should I put it toward my student loans (about $25K)? I don’t even know where to start with investing it, if that’s a good idea. I’d like to do something responsible that will help me in the long-term, and I’m not sure what that is.

This is all good news, but I understand why you’re conflicted. It’s a weird time to have more money than ever before. You’ve probably heard the pandemic economy described as K-shaped: Roughly half of Americans are in dire financial straits (the bottom prong of the “K”), while many others are actually doing quite well (the top prong) for the reasons you described. Obviously, it’s preferable to be in your camp. But how do you make the most of this new financial wiggle room, especially when there’s still so much uncertainty?

To figure out your best path forward, I called Shannon McLay, a financial advisor and the CEO of the Financial Gym, a membership-based financial-services firm. “A lot of our clients are in the same position — they have a lot of savings from the past year, but they aren’t sure what to do with it,” she said. “The bigger question is, What are you saving for? You want to define those goals. If you’re just trying to save money generally, it’s hard to stay committed in the long-term.”

For starters, you’re right to focus on shoring up an emergency fund. But that doesn’t need to be an amorphous, “whatever you can spare” amount — get specific about what you need. The rule of thumb is that it be enough to support you for three to six months, at least. If your industry is more volatile or your job may be in jeopardy, you will want to err on the careful side (i.e., budget for a six-month cushion or more). But if your position is secure and/or you have other safety nets, such as family members you could move in with easily if things got hairy, then you can probably aim for three months’ worth of expenses instead. McLay recommends that you put that cash someplace where you can access it if you need to but won’t be tempted to dip into it otherwise. A high-yield savings account is a good idea.

I’m sure you have other goals besides guarding against hypothetical disasters, though. And that’s the tricky part of money management — you have to multitask. It’s also the fun part because you get to think about what you want. “It’s important to set savings goals that are unique to you, and that make you excited,” said McLay. “A lot of our clients ask, ‘Shouldn’t I pay off student loans or save for retirement?’ And those are worthy goals, to be sure, but who gets out of bed for that every day?”

Instead, McLay finds that her clients are motivated to manage all of their finances better — including the longer-term, unglamorous stuff like 401(K)s — when they’re planning for tangible, shorter-term objectives at the same time. “What makes you really happy?” she asks. “Is it travel? Is it a tattoo? Is it a puppy? If money wasn’t a factor, what would you want to have in your life?” The more research you do, the better. For instance, if you want to go to Portugal, find out the flight and other travel costs so that you know exactly how much to save up. “Then create a ‘Portugal fund’ so that it feels concrete,” she says.

Ideally, you want to choose a couple of tangible goals you can realistically accomplish within the next year or two. Then, start to look farther ahead. McLay likens this process to planning a road trip: If you’re living paycheck to paycheck, you can’t go far, so it’s pointless to map anything out. But if you have savings, you can start to think bigger — and that can be overwhelming. Creating a timeline for your goals is similar to charting your route and staying on track. The end point, of course, is being able to support yourself comfortably in retirement, but you can’t expect to drive straight there without stopping — you’ll need to refuel and visit friends and check out other sights along the way.

A word on your student debt: McLay (and many other financial advisors) believe you shouldn’t worry too much about it, provided the interest rates are low (as they are on most federal student loans) and you stay up-to-date on your bills. You’ve been wise to stall those payments this past year in favor of shoring up some cash; when the government starts collecting again (which is slated for January 31, although Biden is very likely to push that date back when he takes office), you should feel fine about paying the monthly minimums. I know it might feel counterintuitive to have a bunch of cash sitting in one place while you owe money in another, but remember that your savings also protect your ability to make your loan payments should something terrible happen and your paychecks dry up in the future.

(That said, if your student loans haunt you and there’s nothing you want more than to be rid of them, by all means, put some of your new savings toward paying down a chunk. It’s really a lifestyle choice — again, you’re driving here.)

As for investing: If you don’t have a 401(K) or other retirement savings yet, now is the time to open that account and start putting money into it. If you do have a retirement account, consider upping your contributions. Most experts recommend putting between 10 to 15 percent of your paycheck into your retirement portfolio. Automate your contributions so that you don’t even think about it. In fact, automate as much as possible! It’s way easier to be responsible with your money when you can get the internet to do it for you.

Once the world does open back up, it’s inevitable that you’ll return to some of your old spending habits, and you might not save at the same rate that you are now. (We may think we’ve gotten used to skipping bottomless brunch, but I bet it’s just as fun as we remember.) This is to be expected; make adjustments and don’t beat yourself up. But just because your cash flow will shift doesn’t mean your goals should fly out the window. You have a rare chance right now to think big and make strong decisions for your finances that will serve you for the rest of your life. It has been a horrible year, but you might as well make it worth something. […]

What we’ve gone through this week with the siege of the U.S. Capitol is traumatic and unsettling. At times, I’ve felt my mind blurry, unable to write or think or talk. I only see images from the news planted in my head, which come to me again in nightmares. I wish I had something amazing or profound to say to help us get through. But I don’t. 
What I do have are some tools and resources that may help you take care of yourself during these difficult times (and any time). It’s more important than ever that we take care of ourselves first. This life is fleeting. We are dealing with crisis after crisis and our nervous systems were NOT meant for this. Check out these resources on managing your mental health and money. 
Mental Health and Wealth Challenge
I’m hosting the Mental Health and Wealth challenge TOMORROW! It’s FREE. Do you know how they always say you should “pay yourself first”? What about putting yourself first? Literally. See how your morning and day can transform if you commit to 13 minutes (the 7-minute workout, 5 min meditation, 1 min look at finances) of self-care for one week.
I used to be the type of person who’d look at my phone and start scrolling before both my eyes were fully open. I’d rush into work and never take care of myself. I was miserable, irritable, and feeling fatigued, and burnt out. When I started doing this challenge for myself over the summer, it was a complete gamechanger. You can read about my experience doing it here.

The Mental Health and Wealth Hangout 
My new(ish) site MentalHealthandWealth.com is very much Dear Debt’s sister site. I started Dear Debt 8 (!) years ago when I was deeply depressed about my debt. In 2015 I paid off my debt but the blog has become a place to talk about mental health and money, so starting the sister site seemed like a natural fit. 
As part of the site, I also host Mental Health and Wealth Hangouts every other Thursday at 5pm PT. Hangouts are free (suggested donation $3). Register here. 
Resources
Here are some additional resources to help manage your mental health and money in these trying times.
National Suicide Prevention Lifeline — Call 1-800-273-8255
Crisis Text Line — Text HOME to 741741
Open Path Collective — affordable therapy. You can also check your local college to see if their graduate program in counseling offers discounted sessions
Aunt Bertha — Find free or low-cost social services for food, housing and more
National Foundation for Credit Counseling — nonprofit financial counseling organization
Listen to my podcast episode of The Mental Health and Wealth Show (did you know I have a podcast?!) about financial wellness. 
…or parenting during a pandemic, financial anxiety, and what you should know about therapy. 
I’m also hosting a workshop on How to Pay Off Debt. If you want to learn more about my story and what I did, join me for the workshop on January 21 at 5pm PT. It’s $21 and you can register here. 
The Body Keeps the Score: Brain, Mind, and Body in the Healing of Trauma by Bessel van der Kolk M.D. – this book is all about trauma and can shed insight into how it is stored in your body. It was one of the most profound books I’ve ever read. This is my affiliate link, so if you purchase through my link, I’ll get a small commission to keep this blog afloat. 
Hope these resources help. I’d love to know what you’re doing to take care of your mental health and money right now?

Melanie Lockert is the founder of the blog and author of the book, Dear Debt. Through her blog, she chronicled her journey out of $81,000 in student loan debt. She is also the co-founder of the Lola Retreat, which helps bold women face their fears, own their dreams and figure out a plan to be in control of their finances. She is passionate about empowering women, helping others get out of debt, and focuses on the intersection of debt and mental health. Every September she organizes a Suicide Prevention Awareness Blog Tour, to help share resources for those struggling with debt and suicide. In addition to her love of personal finance, art and music, she is also a karaoke master and a cat mom to Miles and Thelonious. […]

(Warning: We never said these jokes were any good…)How did Santa do on his performance review?
— > He absolutely sleighed it!
And did the elves finish all their work projects on time?
— > Yep, they wrapped them all up quite nicely!
What about the reindeer, they must be exhausted…
— > Yeah, they’ve been hoofing it all year.
Did all the reindeer wear face masks?
— > Yes, because they didn’t want to infect anyone as they flu through the skies.
Is it true that some of the presents got delivered by drones this year?
— > Yep! Some of the elves wanted to practice their remote working skills.
Why did Santa use just 3 of his reindeer this year?
— > Because he experiences a lag in bandwidth if they all try to Zoom at the same time.
What about the little elf … why couldn’t she ride along with Santa on the sleigh this year?
— > Because Rudolph insisted that all middle seats should remain empty during December flights.
Why did the reindeer all get tired during the flight?
— > I guess Santa forgot to give them all a proper stimulus check before takeoff.
Why did the elf spend just 50 cents on gifts this year?
— > He was dreaming of a tight Christmas.
Does Santa’s workshop offer a 401(k) matching program?
— > Unfortunately not, but all the workers are making good use of their Elf Directed IRA!
*******
Sorry for the lame jokes. I made all these up, so some don’t make much sense.
I wasn’t planning to post anything today … Really just wanted to wish you beautiful peeps a very Merry Christmas and say thank you for reading my stuff. 
We talk about money a lot on the blog. How to make it, save it, invest it, and use it to get the most out of life. But money isn’t really the most important thing in life. Love is what makes the world go around. And I truly hope you are prioritizing it accordingly. 🙂
Wishing you and your loved ones very happy holidays. 
Love, Joel (and everyone behind the scenes on the Budgets team!)

Me and my bestest friend aka wife!

Joel is a 35 y/o Aussie living in Los Angeles and the guy behind 5amjoel.com. He loves waking up early, finding ways to be more efficient with time and money, and sharing what he learns with others. Rise Early | Retire Early! […]

Have you ever heard of the “fresh start theory”?It’s basically a theory that people are more likely to tackle and achieve their goals if they begin them on a landmark date … Like the 1st of the month, their birthday, January 1st, or any date of significance.
Landmark dates are motivating. They mark the exact date when you stop being the old you, and start being the new you! They encourage forward-thinking activities, instead of past habits and happenings.
2020 is almost over. Byeeeee 👋 . 2021 is nearly here. Woohoo! 🎉 It’s time to set some goals using Jan 1st as our landmark date!
(I know, New Years goal setting is kinda cliche. But, goals are necessary. And, if you don’t set goals now, when are you gonna set them?)
My 2020 Mid-Year Goals Recap
Six months ago, I shared some goals for this past year. Here are some cool things we accomplished this year…
Roth IRAs funded! Wife and I funded our favorite flexible tax-free accounts in January 2020. We contributed the max amount ($6k into each Roth), and we’ll be prioritizing this again in 2021.
I got a job! And not just any job – a fun one that lets me work when and where I please :). I’m extremely thankful to find work and remain gainfully employed through one of the toughest job years in history.
We gifted $2,500 to a new baby nephew. My wife and I set up a Unified Gift to Minors brokerage account for our newest family member. This money is invested in a total stock market index fund and will hopefully grow to be 5 figures when the kid turns 18!
We sold our spare car! It was sitting and collecting dust for too long! The $7,700 cash we sold it for went straight into the stock market. Not only has this investment increased about 10% since then, we’ve also saved $160 per month in car expenses since August.
Made more than $3k in sign-up bonuses! We ended up making $2,200 from churning bank accounts and $1,200 from opening 3 new credit cards. Pretty dang good!
I got some health insurance: This was on, off, then back on my list throughout the year. After a bit of luck, I was able to score some benefits through my employer starting in October.
And some goals we didn’t accomplish 😔…
Buying people stocks instead of birthday/Christmas gifts: My plan was instead of giving people physical presents for birthday/Christmas, to buy them stock in various companies instead. I did this for my Dad in the past who loved it! But, as it turns out, other members of my family think stocks are boring… (And apparently gift giving is supposed to be about the receiver, not the giver – who woulda thought?). Anyway, my family all got physical presents this year.
Sell a rental, refinance the duplex & invest in another real estate partnership: Almost all my real estate goals were squashed in 2020. And, I’m fine with it! I don’t think waiting is a bad thing… Patience is important in volatile years and opportunities in real estate will come and go like buses throughout my life. I’m in no rush. 
Foster/adopt a kid: We did make some small progress toward becoming an approved resource family. It’s a long process, and we’ll continue this through 2021.
A million other little good and bad things happened this year, most of which we didn’t really plan for. So it feels weird listing them as “accomplishments” because some were out of our control… Things like passing $500k in net worth for the assets we’re tracking, receiving a government stimulus handout, spending only $332 this year on restaurants (our budgeted amount was $2,400), losing 5 figures on some of my rentals from missing rent and vacancies 😳, etc.  
This year was really hard to predict. I think you will all agree! How did you go on your 2020 goals this year?
My 2021 Goals & Stuff to Figure Out
Here’s what my wife and I are planning for next year…
Financial stuff:
Roth, Roth, Roth!: My wife and I were late to the Roth game and have been trying to play catch up ever since we opened our accounts in 2016. They are one of the most flexible accounts for early retirees, and we plan to invest as much as we can each year, as early as we can each year. Even if it means selling other assets to fund them, Roth IRAs are our No. 1 priority.  $6k is the limit for 2021 to invest in each Roth account.
100% contributions to 401(k) (until it goes away): My workplace notified me that my benefits plan (healthcare and 401(k)) will be terminated at the end of March 2021. It is yet to be determined whether alternatives will be offered, but my guess is no.😪  So I want to stuff as much money in my 401(k) as possible early in the year. I don’t earn a huge amount from this job, so 100% contributions in Jan/Feb/March might only be ~$7k or so added to this account.
Sell a rental property: I still owe y’all a post on why I’m slowly transitioning away from rental properties. Anyway, our plan is to sell 1 property this coming year and transition the money to our brokerage account. This might be $25-50k depending on the property we sell and price we get after fees.
Build a donation machine!: I’ve been thinking about setting up a donor advised fund with Fidelity. It’ll allow us to invest our donations, and direct them to charities when we see fit later in life. Starting probably very small, like $2k, we can add to this each year and possibly grow it into a self-sufficient foundation!
Family, fun & community stuff:
Continue the foster/adopt process:  It’s still weird talking about this publicly, because my wife and I are a little unclear about where this road will actually take us. What if we get all the way to the end and realize we’ve bitten off more than we can chew? What if we try it and decide fostering isn’t for us after all? I’m guessing all new parents have feelings like this no matter how kids come into their life. Anyway, I’m happy to share more info about this if you guys agree to not hold it against us if we decide not to end up adopting anyone. Deal?
Travel while working remotely: Due to covid, my wife and I cancelled a 10-day trip to Hawaii, and a 9-day all-inclusive trip to Mexico in 2020. We’re planning to re-book these trips this coming summer… And now that I work 100% remotely, we want to try working while traveling. This is kind of a test — working while traveling is easier said than done 🙂
Buy/sell more stuff online — earn $1k cash:  I’m really having fun hawking random items when I find them out and about. The reason I haven’t set a $ goal around this activity thus far is because it’s kind of unpredictable, and I treat it more like a hobby vs. a side hustle. That being said, who knows, maybe I can try and shoot for making an extra $1,000 this year? I’ll start keeping track!
Podcast guest spots:  This year I was a guest on 3 podcasts, and have a few offers to be on shows in 2021. I’m not a huge fan of having my voice recorded, but doing uncomfortable things keeps me on my toes. I’m shooting for another 3 speaking spots this year.
Create a short writing course for beginners:  Last year I created and hosted a short writing course, teaching people some basics I’ve learned over the past few years. I’m planning to launch a V2 course and offer it to more people who want to start writing or blogging!
Your 2021 Goals?
People say goals should be specific, measurable, have deadlines, etc. I agree, though I don’t think annual goal-setting is a single activity that can be done in one sitting. For me it’s an evolution; a constant process throughout the year…
Generate ideas → list them in order of priority → clarify goals → determine steps → action → tracking → adjustments → more action → success.
You probably noticed some of my goals aren’t very specific. That’s cool with me and I’ll be fleshing them out over time.
If you haven’t put much thought into your financial goals yet, here are a few common ones to get your juices flowing:
Pay down x amount in debt
Save and invest xxx  (don’t know how much to save? Try this calculator I found on Best Interest Blog that generates a $ figure goal to save in 2021)
Achieve savings rate of xx%
Introduce a friend to the FIRE movement!
Rebalance your portfolio, or try investing in a new asset class
Start side hustle of xyz
Buy a rental property
Refinance your house, or auto loan, or student loans!
Donate $xxx to giving and charity
Declutter and sell stuff you no longer use
Try to improve your credit score!
Build up your emergency fund
Take a course, progress study, learn xyz skills
Negotiate full time work-at-home or better work/life benefits
Achieve FI, quit your job, and buy a one-way ticket to remote island?
What’s on your 2021 list?
Have a great week, and HAPPY NEW YEAR!!! 🎉 🎈🎉 🎈
(ps. We’re taking this Friday Jan 1st off. Posts will resume starting Monday the 4th!)

Joel is a 35 y/o Aussie living in Los Angeles and the guy behind 5amjoel.com. He loves waking up early, finding ways to be more efficient with time and money, and sharing what he learns with others. Rise Early | Retire Early! […]

I used to hate filing my taxes. Every year I would complain, procrastinate, make excuses, then finally on deadline day I would take a messy stack of forms to my tax guy and cry for last-minute help. It wasn’t fun at all.Then something changed. I grew up. I put a system in place. And lucky I did!
Today, even though my tax situation is more complicated than most families’, filing is an absolute breeze! (This year I’ll receive probably 18 x 1099’s and W2s for income/interest, I manage 5 physical rental properties — each of which has 5 or 6 tax forms and large numbers to crunch — some LLC company filings to do and various K1 statements from other partnerships.) 
My tax organizer system really just boils down to a few simple steps — and being organized is 100% FREE. In this post I’m going to share these tips, and hopefully some of them can help you kick your 2020 tax return in the buttocks.
First of All: Check Yo’ Attitude!
If you think filing your taxes will be a sucky process, then it will be! I’m not saying you have to love every second of it, but try not to roll your eyes and think of all the negatives. That only makes it harder for yourself.
The more positive you think, the less painful it will be. The earlier you get your file submitted, the more free time you have to enjoy the year! The better you follow your tax organizer system, the easier it gets every single year going forward.
Let’s get started…
1. Create One Single Place for All Your Tax Docs
Your filing and folder system is the most important step. Personally, I use Google Drive to keep all my stuff, and there are several reasons why I like keeping it in the cloud. But, you can certainly have these files secure on your personal desktop, or do it old school with hard copies. Just make sure it’s all in one place.
Here’s what my drive looks like. All my years are in simple folders:

All tax documents are grouped by category.  Personal income, investment forms, each rental property, partnerships and LLC business, and misc deductions each get a folder of their own:

Inside the folders are the actual tax forms, receipts and scanned files.

Pro Tip: Why I Store My Tax Files in the Cloud
The benefits of having my tax information stored in the cloud are:
I keep zero paper in my house. Once I scan something and upload it, I recycle or shred the paper immediately. My online tax organizer is slim, out of sight and out of mind.
Using Google Drive, all my forms are searchable (provided I label them correctly).
I can work on my tax return anywhere, on any device. This is important for steps #3 and #4 below.
I can share these online folders and private links with my tax team (instead of trying to email 100Mb of attachments and scans to them). My accountant LOVES this system.
2: Create a Quick Tax Tracking Worksheet
The purpose of the tracking sheet is to help you compartmentalize all of the docs and forms that make up your return, as well as keep track of what you have received vs. what you are still waiting on.
Here’s a look at my tracking sheet for 2020 (example). Feel free to download this basic sheet here: tax doc tracking template and make your own modifications.

Each year, I find my previous year’s tracking sheet and cut/paste all the data to start a new sheet. It’s a template I use over and over again and most of my forms and tax documents stay the same each year.
Eventually, when I send all the information over to my tax team, I also send this sheet to help them find everything within the folders. I try to label every form specifically, and I put special notes if there’s something different from last year.
3. Scan, Save, and Track All Tax Forms as Soon as You Get Them!
Through the beginning months of the year, you’ll start to receive forms. W2’s and 1099s from employers, bank forms, investment stuff, etc etc. Some of these forms will come via postal mail, some will be sent to your email, and some you’ll have to log into portals to find.
Try and get in the habit of opening, scanning, filing, and noting in your tracking sheet as soon as you receive a document.
It takes me about 3 minutes when I get sent a tax form or statement. I open my mail, grab my iPhone, use a free app called Scannable to take a photo of the form, and immediately upload it to the relative folder in my Google drive. Then I quickly open the tracking sheet in Google Sheets, and note what I received. Done.
Same thing when I get an email saying, “Your 2020 tax forms are ready to download”… I stop whatever I’m doing, log into the bank or whatever portal, download my forms, upload it to my drive and track it. Literally done under 5 mins.
Instead of spending months drowning in documents and trying to remember where I put all the forms, my annual filing process is broken down into simple 5-minute activities. Easy stuff!
4. Track Receipts Throughout the Year
Just like the step above, having a quick and easy way to store receipts throughout the year makes it 100 times easier when filing time comes.
For those of you who use Mint.com to track your expenses, there’s actually a label you can assign to different transactions throughout the year. I check this every month when doing our budgeting exercise (although not many of my expenses are deductible).
For Personal Capital users, the same can be done in their system under the transaction tab.
Doesn’t matter if you think you’ll be doing an itemized deduction or taking the standard deduction (apparently 90% of households just take standard deduction), it’s still a great practice to label each expense related to tax!
Reviewing them at the end of each tax year ensures you’re not skipping over any tax deductions and claiming every single cent that you are entitled to.
5. Create a Yearly Summary of Changes
One cool habit I’ve started is creating a simple list of relevant events that happened throughout the year. My CPA dude needs to know what happened in the past year so he can make sure I’ve received all the right forms and file a complete and correct return.
Here’s an example of major events or life changes that can affect your taxes:
Changed employers
Gifted to charity
Contributed to 401k
Added after-tax funds to HSA
Got a stimulus check (I’m 99% sure these are not taxable income, but you’ll prob have to note what you received regardless)
Shut down a business or LLC
Bought property, sold property, refinanced, etc.
New dependents to claim
Got married → individual changing to file jointly?
Other necessary personal information
Etc…
My guess is some of you guys already add this stuff in your net worth tracking or annual finance reviews. It’s always handy to keep general information like this recorded with your income tax organizer.
6. Hand Over Your Docs as Neatly as Possible
There are 2 ways you can hand off tax documents to your tax preparer…
The first way is to dump a messy pile of mislabelled and unorganized documents on their desk. Then, somehow expect them to know everything you did throughout the year, prioritize you over their 5,000 other clients, and magically get you the biggest refund possible.
OR …
The other way is to organize all your docs into a neatly wrapped present — with a bow on top. You can provide a tidy, well-explained cover letter with your annual events summary and instructions on where to find everything they need within your filing system. If you do this early in the year, you will be prioritized and they will LOVE YOU.
Remember, your tax preparer is busy this time of year. They probably work 80-100 hours during tax season, and anything you can do to make their job easier will make you stand out over other clients.
I aim to be my tax team’s favorite client each year. It’s not because I pay them more money than their other clients — it’s because I’m the easiest to work with.
**********
This was supposed to be the end of the article! But I emailed a draft copy to my brother, and he pointed out some additional cool stuff. With his permission, I’m sharing his notes…
I was thinking, there are other benefits outside of tax when all this comes in handy, example:
1) This year I applied for a mortgage and I had to upload a buttload of documents. I just counted. I uploaded 67 separate PDF’s to the bank, and that doesn’t include about 5 that I emailed them directly or had them call my insurance people. The process has taken about 2 MONTHS because of all the stuff we have — the wealthier you get, the more complicated it gets. Having a system in place to find past financial documents without much effort really pays off!
2) Similar process when Baby M was born, although I wasn’t 100% on the ball, I was pretty good. I collected all the medical bills that arrived over MONTHS, which are designed to confuse you and deliberately obfuscate the mess that is our medical system. I put each in a spreadsheet and then I could easily spot the duplicate bills, the ones that had no Explanation of Benefits, etc. You can then call them all on their bullshit and plan which bills to protest and which to ask for discounts on. Most importantly it got me a clear picture. 
3) You never know when you’ll need this stuff mid-year for one-off things. For example, 
– Applying for mortgage or other credit without a lot of warning. Asking for previous income amounts or tax info.
– You might apply for a job and be asked to prove your financial stability (eg, when negotiating a salary based on your last salary, or if you hold an office where you need to prove you are financially not a risk for bribery, etc).
– Every now and then I need to look up my kids’ SSN numbers and I know where they are with all the other info.
Anyway, just some thoughts about why this is a handy process outside of taxes!
**********
Ready to join the secret society of ninja tax organizers? Tell us your other efficiency methods in the comments below so we can all learn each other’s tricks. 🙂

Joel is a 35 y/o Aussie living in Los Angeles and the guy behind 5amjoel.com. He loves waking up early, finding ways to be more efficient with time and money, and sharing what he learns with others. Rise Early | Retire Early! […]

Before we get to the net worth update… I came across this funny old post from a couple years back called “Money Trails”…
Basically, it tells you how far your money will let you travel if you line up all your dollar bills, lengthwise, in a single long straight line…
Here’s how it works:
Convert the length of your dollars (6 inches per $1 bill) to feet… $542,510 = 271,255 ft.
Convert feet to miles… 271,255 ft = 51 miles
Google map a radius of 51 miles from your home and pick a location
Imagine laying all those dollars end to end to that location
From my home in Los Angeles, it looks like my money will take me down to my fav surf spot in San Clemente! Or, if my dollar bills could float (and I could walk on water), I could visit Catalina Island or that other tiny little remote island in the middle of nowhere on the left…

Unfortunately, I’d need a net worth of $26,252,150 to make it all the way to Hawaii. Or more than $35 million to visit my brother on the East Coast!
What a fun (and utterly useless) perspective on measuring your net worth!  I’m curious… How far can YOU get with your current dollars? Here’s the original post if you want to check out instructions.
Jan 1 2021 Net Worth Update: $542,510 (+$10,027)
Sweet! Another $10k bump since last month’s report!
Here’s the account summary, as well as growth shown in dollars and percentages for each asset we’re tracking:

December Abnormal Expenses…
We stayed in Los Angeles for Christmas this year to comply with our lockdown orders. Although not traveling saved us a few bucks, we still had some hefty December spending — and a negative savings rate. 🙁 Here are the major things that hurt our wallet:
Tax bill paid for rental property: Technically this $5k bill wasn’t “due” until the end of January, but I hate having outstanding bills just sitting around so we paid it early. This was paid with our property reserve account, and tax isn’t due again until next January.
Christmas presents, a tree, food, and booze: We dropped another $600 or so this past month on presents (+ a tree!), in addition to our November gift spending. Our grocery bill was pretty killer this month ($627) which is quite high for a family of 2. But, some of these were fancy meats and stuff we don’t typically buy, plus contributing to family meals for Christmas. My birthday was on Dec 30th and my wife made a special beef wellington with expensive filet mignon – delicious and worth every dollar!
Lower income for school holidays: My wife isn’t paid as a salaried employee, so we miss paychecks over school holidays. Thanksgiving and Christmas breaks total over 3 weeks of missing pay! This is one of the reasons we sit on a large emergency cash fund, to see us through dips in income like this. Summer break hurts the most, which we’ll tackle somehow in a few months when the semester is coming to an end.
December good stuff and wins!
Stimulus payments, $1200: We got our stimulus payments on Dec 31st – a nice little way to end 2020. We qualify for these checks because we have less than $150k in combined income.
Teacher appreciation funds: Because my wife is such a kickass teacher, the families and students gifted her a total of $365 in vouchers and cash this Christmas! Thank you to all you parents out there who gift money to schools and teachers. I can’t tell you how well this is received by teachers and how much it makes them feel appreciated. THANK YOU.
Trash turned to treasure: Out on a morning run, I came across a compost tumbler that someone was throwing away. I snapped a pic, created a free ad on an app called OfferUp, and someone picked it up a few hours later for $40!

My conscience got the best of me the very next day…  I noticed more free items and furniture out front of that same house and learned the people there were moving houses. I can’t imagine how much it sucks moving homes during a pandemic, so I ended up giving the $40 to the family as a moving present.
This is why I’d be a horrible business owner – I have a problem giving my profits away. At least I have a fun story to tell, and maybe some good karma down the road somewhere. 😉
Detailed Asset Breakdown:
CASH Accounts: $37,265 (-$1,954): We skipped a paycheck from my wife’s job this month, and also transferred some cash into our HSA account. This cash balance is trending downward, which is OK as it’s still higher than what we really need for our emergency fund.
Rental Property and Reserve Account: $233,228 (-$4388): We paid our property tax bill which accounts for $5,185 of this expense. Our positive cashflow was $797, which is the difference between $1,975 in rental income minus $1178 in total expenses. 🙂
IRA – Rollover: $137,226 (+$5,903): The increase in this account was solely from market growth and reinvested dividends. Someone asked me about why I don’t do a backdoor conversion of this account over to our ROTH… and the answer is that we plan to in future years. More to come on this topic!
IRA – Roths: $70,429 (+2,663): I’m excited to contribute to these Roths again in January for 2021. The plan is to transfer funds from our joint brokerage over these accounts to begin tax-free growth as early as possible within the year.
Joint Brokerage Account: $177,454 (+$4,015): I made some large buy/sell trades within this account in late December. Due to our low income in 2020, we were in a good situation to do large capital gains harvesting. Although we’ll pay a small amount of state income tax, we’ll pay 0% in capital gains tax and reset our cost basis for a bunch of stocks. At some point I’ll do a deeper dive into this account and explain what all that crap I just wrote actually means.
HSA: $2,850 (+$994): The increase here came from an after-tax contribution of $887.50 (prorated contribution for 2020) and the rest was market growth.
New 401(k) at work: $6,457 (+$2,196): This 401k has been only open for 3 months, so I’m proud that there’s already $6k in there. I get zero company matches, so this is mostly personal savings and a tiny bit of market growth.
Breakdown of Liabilities
Rental Property Mortgage: -$122,278 (+$240): If my calculations are correct, this mortgage balance will be less than $120k at the end of 2021 if I just leave everything alone. I could speed things up by making extra payments myself… but why do this when the tenants are paying it down naturally each month?
Credit Card Balances: -$121 (+$358): Other than this small credit card balance, my wife and I have no other consumer debt. 🙂
Overall, 2020 was a very good *financial* year for my wife and I. Since we only started sharing these monthly net worth reports in October last year, I can’t really give a complete and full 12-month comparison and overview. Something I promise I’ll do when I’ve got enough data!
How were your updates the past month? Share your milestones and juicy details in the blog comments — boasting is heavily encouraged! 🏆🏆🏆
Have a great weekend, peeps!
– Joel

**********PS: If you’re just getting started in your journey, here are a few good resources to help track your money. Doesn’t matter which route you go, just that it ends up sticking!
If you’re not a spreadsheet guy like me and prefer something more automated (which is fine, whatever gets you to take action!), you can try your hand with a free Personal Capital account instead.
Personal Capital is a cool tool that connects with your bank & investment accounts to give you an automated way to track your net worth. You’ll get a crystal clear picture of how your spending and investments affect your financial goals (early retirement?), and it’s super easy to use.

It only takes a couple minutes to set up and you can grab your free account here. They also do a lot of other cool stuff as well which my early retired friend Justin covers in our full review of Personal Capital – check it out here: Why I Use Personal Capital Almost Every Single Day.
(There’s also Mint.com too btw which is also free and automated, but its more focused on day-to-day budgeting rather than long-term net worth building)

Joel is a 35 y/o Aussie living in Los Angeles and the guy behind 5amjoel.com. He loves waking up early, finding ways to be more efficient with time and money, and sharing what he learns with others. Rise Early | Retire Early! […]

After a turbulent 2020, I’m positive about 2021’s outlook for stocks and real estate. We should see significant GDP growth (3-5%), a strong rebound in corporate earnings (20%+), and a massive unleashing of spending (saving rate back down to ~6%). As a result, there’s a high probability we will see new record highs in many major asset classes.
What’s concerning me is that the majority of us probably think 2021 is going to be better than 2020. Therefore, it may be hard to find the incremental buyer.
However, the great thing about asset bubbles is that they tend to inflate far past reasonable fundamentals. Therefore, even if you know things are ludicrously expensive, it’s worth hanging on for as long as possible.
2021 may be one of the greatest times to get rich. Let me share my 2021 outlook for stocks, real estate, and the economy. My beliefs will shape how I invest my money and spend my time.

Financial Samurai 2021 Outlook
I’m going to focus on stocks, bonds, and real estate because that’s where most of my assets are (~70%). I’m assuming these asset classes make up the majority of your investments as well. You are free to speculate all you want in Bitcoin and other asset classes. However, my focus is on building wealth with the majority of my assets.
10-year Bond Yield
Everything starts with the risk-free rate of return. Once you’ve made a proper forecast of the 10-year bond yield, you can then proceed to make your appropriate investments.
If you’ve been reading Financial Samurai since 2009, you know that I’ve consistently believed the 10-year bond yield would stay low or keep going lower. America has contained inflation. We’ve learned from many previous economic cycles. We have globalization. Technology makes information flow instantly. Federal Reserves are coordinated.
I believe the 10-year bond yield will increase in 2021 back up to 1.25% by 2H2021. In other words, the yield curve will steepen and banks will be one of the better investments.
To put things in perspective, 1.25% on the 10-year is still 70% lower than where it was in 2018.
I don’t believe the 10-year bond yield will surpass 1.5%. Once we take a step-function down in rates, it’s hard to move back up due to expectations. I also believe the aggregate bond market will have a flat year.
With interest rates inching up, the aggregate bond market index will likely have a flat year. I envision a scenario where bond yields make up for the decline in principal values. Everybody who is considering refinancing should refinance now while rates are still near all-time lows. Check out Credible for some real, no-obligation quotes. Multiple qualified lenders will compete for your business.
Now that I’ve established a view on the risk-free rate of return, let’s move onto my S&P 500 and real estate outlook.
S&P 500 Outlook 2021
The first part of making an S&P 500 forecast is making a decision on whether the index will go up or down. The second part is estimating the magnitude of growth or decline through GDP and earnings forecasts.
My S&P 500 bottom call in 2020 was spot on. However, my estimate on the amount of the recovery was not. I didn’t expect us to rebound as much. As a result, I did not buy enough on the way up.
For 2021, I expect the S&P 500 to increase by 8% in 2021 for a year-end target price of 4,088. If the S&P 500 can generate an EPS of $165, that puts valuation at 25X. If the S&P 500 can generate a $170 EPS, then its P/E drops to a more reasonable 24X for 2021.
A $165 – $170 EPS is equivalent to a 25% – 30% increase over 2020 estimated earnings (still waiting for 4Q2020). Therefore, from a price-to-earnings-growth metric, a 25X multiple is reasonable.
Consensus S&P 500 EPS estimates are for $190 in 2022. But the S&P 500 will only start trading on 2022 earnings beginning in 3Q2021.
2021 Valuations Are Expensive
To put a 25X earnings multiple in perspective, check out the chart below. 25X puts the S&P 500 at a 20-year high. And achieving a 25X multiple is predicated on experiencing a 25% earnings rebound in 2021. If earnings don’t come through, the S&P 500 will most likely be flat or decline.

However, it’s worth noting that 90% of the S&P 500’s market capitalization is now based on intangible assets such as R&D, IP, and software. Therefore, one could argue there should be a natural rise in valuations for companies that have higher operating profit margins and more defensible income streams.
Partly based on expensive valuations, investors should expect corrections of 5-10%, multiple times in 2021. Therefore, you may want to wait for these corrections to put new cash to work.
Wall Street S&P 500 Forecasts 2021
Wall Street is very bullish on the S&P 500. A couple of the biggest bulls are Goldman Sachs and JP Morgan, who have year-end 2021 S&P 500 target prices of 4,300 and 4,400, respectively. JP Morgan has a 2021 EPS estimate of $178 for a 36% rebound in earnings.
I sincerely wish Goldman and JP Morgan are correct. Their analysts and strategists surely make enough money.
However, I believe their forecasts are too high. Like children eagerly anticipating receiving every present on their wish list before Christmas, I fear they will be disappointed with only one or two presents.
We have three risk factors to corporate earnings:
Virus mutations that lower current efficacy rates of existing vaccines.
Much slower-than-expected vaccine rollout, delaying 2021’s expected economic recovery into 2022.
The Senate going blue, which breaks a lot of gridlock. More regulation and higher taxes should slow growth at the margin. Then again, we could see even stimulus package going forward.
Forecasting a 30% – 40% rebound in earnings growth to justify an S&P 500 level above 4,200 is too aggressive.

[GS way too bullish IMO]
Money should flow into Consumer Discretionary, Financials, and Energy. These are the sectors that lagged the most because they also got hit the most.
I don’t think tech investors should expect a similar type of outperformance as the economy rebounds. In fact, I think big tech has a 65% chance of underperforming. The NASDAQ is trading at 40X P/E, the highest since 2014. The index has essentially doubled in two years.
If there are any 1-2% dips, I will be buying the S&P 500. However, I’m not aggressively putting new money to work if the S&P 500 keeps marching higher. There are much better deals to be had in real estate.
Real Estate Outlook 2021
The median home price in America went up about 8% in 2020. That’s a 40% gross return on a 20% down payment. This level of growth is unsustainable, especially since mortgage rates are unlikely to go down further.

Despite the strong gains, I believe residential real estate will continue to do well in 2021. I forecast a 5% YoY national median growth rate in 2021, closer to the levels we have seen between 2015 – 2017.
Meanwhile, commercial real estate will start catching up as the economy opens. There should be deals to be had in the hospitality and office space. You want to buy those properties from owners who are over-leveraged and can’t hold on until the economy fully reopens.
Mortgage rates won’t increase by more than 25 basis points on average e.g. 2.75% on a 30-year fixed to 3%. Investors will smartly shift some of their stock gains to real estate. There will be an increase in appetite for cash flowing rental properties given the value of income has gone way up.
Once you’ve had huge principal gains, you want to convert some of these gains into a steady income stream. If you follow this strategy of consistently converting some of your capital gains into income-producing assets, you will become a very wealthy person over time.
Where To Buy Real Estate
For 2021, strategically, I like buying real estate where there is the biggest difference in company share price performance and local real estate price performance.
For example, the NASDAQ closed up 42% in 2020. Therefore, you want to buy real estate in places like the San Francisco Bay Area, where many NASDAQ companies are located. The amount of wealth tens of thousands of employees have made in the Bay Area is absurd.

I feel much richer after a 40% 2020 equity performance, and I don’t even work in tech. Many of these tech employees have seen far greater returns and will want to rationally diversify their investments.
I believe big-city real estate will make a nice comeback in 2H2021 and 2022. Therefore, you want to strategically buy before the comeback is really evident.
The herd always waits for a green light. In SF, I’ve witnessed the herd come back by 2003 after the 2000 dotcom crash and by 2012 after the 2008-2009 financial crisis. But this time, everything is recovering more quickly. If you are a renter, you should try and lock in a long-term lease now.
At the same time, I continue to believe in investing in the heartland of America. Not only is there a fanning out within cities to save on living costs. There is a fanning out across the country thanks to technology and the permanent acceptance of working from home. This trend is decades in the making as new great cities emerge across the country.
The easiest ways to invest in the heartland of America is with Fundrise or CrowdStreet. Fundrise has created diversified eREITs and eFunds for exposure. CrowdStreet focuses on individual real estate deals in 18-hour cities for accredited investors. Both are the leading real estate crowdfunding platforms today. Both are free to sign up and explore.
Your Goal For Real Estate Investing
In the latter half of 2021, there will likely be more discussion about inflation. Inflation chatter must pick up if the Fed stays accommodative and stocks and real estate continue to do well.

Therefore, you want to at least be neutral inflation by owning your primary residence. This way, you can at least ride the inflation wave while having a nice place to stay. Enjoying your appreciating asset is such a wonderful combo.
But in an inflationary environment, what you should really do is go long real estate by owning more than one property. This way, you can benefit from capital appreciation and rental appreciation. If you own only one property you can’t monetize any appreciation unless you can splice the property out or rent out rooms.
Let me give you an anecdote about the potential future of rental properties. During my latest rental lease negotiation, I accepted less rent for hopefully better tenants. However, as part of giving my tenants a discount from my original asking price for the first year, they’ve agreed to a 4% increase in rent for the second year starting at the end of 2021.
2021 Should Be Profitable
Although most of us are bullish on stocks and real estate in 2021, I still think these two major asset classes will perform well. The Federal Reserve and the Federal Government are accommodative.
If something bad happens in 2021, we can count on Janet Yellen and Joe Biden to bail us out. There’s no way they can’t since they just got into power. Once you have power, you want to hold onto it at all costs.
Further, there is a massive amount of savings that is ready to be unleashed. Take a look at your own balance sheet. Ask your friends and colleagues whether they’ve got large cash buffers. Chances are high they do because the national savings rate has been elevated since March 2020. This money will go back into the economy.
You may not be able to benefit from the latest round of government stimulus due to income restrictions. However, you can benefit by investing in companies and cities that will be beneficiaries of the stimulus.
I believe there’s a 75% chance 2021 will be a great year for stock and real estate investors. Just make sure you don’t over-leverage yourself. After all, even if there’s a 75% chance of making money, there’s still a 25% chance of losing money.
Best Way To Track Your Investments
The easiest way to track your investments is with Personal Capital, the best free financial tool online today. I’ve used Personal Capital to track my net worth, analyze my investments, check for excessive fund fees, and plan for retirement since 2012.
All you’ve got to do is sign up, link up your investment accounts, and then you can see everything in one place. There’s no rewind button in life. Stay on top of your finances today.

[Personal Capital Free Investment Checkup Tool]
Readers, what are your predictions for 2021? What are some big goals you have in mind? Do you believe 2021 will be a great year?
Disclaimer: As always, invest at your own risk. Don’t invest in money you cannot afford to lose. Always discuss your investment thesis with others. Run the numbers over and over again. There are no guarantees in investing.
Finally, if you are paying someone to invest your money, don’t forget to ask them how they did in 2020 and what their forecasts are for 2021. Have them review your 2020 performance and their 2021 game plan for you. You have the right to an explanation. […]

If you’re focused on paying off your mortgage, good for you. It’s generally always good to pay down debt. However, I’d also like to share with you the biggest downside to paying off your mortgage that may surprise you.
It’s been six years since I paid off my rental property mortgage. It was a mortgage for $464,400 I took on in 2003.
For the first year after paying off my mortgage, I felt great. But after that, the satisfying feeling of getting rid of debt wore off.
Perhaps the reason why the feeling was so ephemeral was because there was no congratulations card or fancy French Laundry dinner celebration. The only thing that changed was an extra $1,308 in cash flow, which went straight to savings or investing.
Before taking on this mortgage, I experienced an eerily similar feeling of ambivalence in my early 20s. After working for 60 – 70 hours a week from 1999 – 2001, while saving 100% of every bonus and 50% of each paycheck, I started thinking: what’s the point of it all? 
Maybe I was experiencing a quarter life crisis back then. What I did know was that my enthusiasm for working in finance faded after the September 11, 2001 terrorist attack.
In 2003, with my lack of enthusiasm, I was *this* close to leaving San Francisco for Honolulu until I found a 2/2 condo overlooking a park in Pacific Heights for $580,000. Once I took out the $464,400 mortgage, my motivation to work hard shot through the roof!
Suddenly, my paycheck felt meaningful because if I stopped paying, I’d lose my $116,000 down payment and trash my credit score. Without dependents, finally, I had something tangible to work hard for.

The Biggest Downside To Paying Off Your Mortgage

The biggest downside to paying off your mortgage is the complete loss of motivation to take risks and work as hard as you can.
Once you have no mortgage, you no longer have as much fire to improve your finances. You may start slacking off in your career or entrepreneurial endeavors as well.
A mortgage keeps you hungry.
Think about it. Without a mortgage, life is relatively easy. Your living costs drop down to hardly nothing. Food is abundant and cheap in this country. Meanwhile, there are a lot of cheap or free things to do for fun.
When life is easy, we tend to get soft. Not only do we get out of shape, we neglect our relationships, and ignore our finances.
When you’ve got everything covered, only the craziest of people bother to take risks. It’s irrational to work hard if you have no financial burden. When nobody is depending on you, there’s no pressure to provide.
Forget about trying to start your own business on the side or get promoted when you can just enjoy life now. The biggest downside to paying off your mortgage early may be indifference.
How A Mortgage Affects Behavior
Back in 2015, I made a new year’s resolution to pay off the rest of my ~$91,000 mortgage. I unleashed an inner money-making beast.
Instead of continuing to leisurely consult part-time for 15-20 hours a week at Personal Capital, I got motivated to look for more consulting work.
Due to my desire to pay off my mortgage debt that year, I ended up taking on two more consulting jobs for a total of 60 hours a week for three months. One company was a Series Seed startup out of Y Combinator. Another company was a Series B startup in the finance space as well.
All three companies were fascinating to consult for. For three months, I was making around $30,000 a month. I used all of the money to pay down mortgage principal and invested the remaining 20% in the S&P 500.
Having a mortgage made me want to boost my income. Three months of working 60 hours a week with three firms was as much as I could handle.
Took Things Down A Notch
As soon as I wrote the final mortgage check in 2015, my whole attitude changed. First, I stopped looking for more consulting work even though two out of the three contracts ended. Second, I decided to go on a 3.5 week trip to Asia to live life like a digital nomad.
I then spent several days up in Yosemite to see if bears poop in the woods. Then I went to New York City for two weeks to watch the US Open and see some friends! Once I paid off my mortgage, I began to completely slack off!
There was little motivation to try and maximize income. Why bother when the mortgage was already paid off? Back then, I was still $50,000 away from my $200,000 a year passive income target too. It didn’t matter. I wanted to relax.
Sure, not having to consult anymore meant less stress and a healthier lifestyle. But it’s not like I was stressed or unhappy working those hours in the first place. Instead, I was thrilled to be able to do what I wanted to do while making a very healthy income. Something new was happening every day at one of those three companies.
The biggest downside to paying off your mortgage is really the loss of motivation to try new things. Only when your back is against the wall will you do everything possible to change. Having a mortgage is like an implicit back stop to not slack off.
Below is a snapshot of my last mortgage payment on 5/12/2015 for the condo I bought in 2003.

My last mortgage payment on 5/12/2015. Balance was $464,000 in June 2003
A Recent Example Of How A Mortgage Affects Motivation
In early 2019, I bought a single family home fixer for cash. I went through a pretty arduous negotiation process that required writing a real estate love letter, a real estate breakup letter, and more.
In the end, I thought I got a great deal – maybe $100,000 – $150,000 below market price. I spent time remodeling the house to make it even better before moving in.

Then, as fate would have it, I found a really nice house a year and a half later right at the start of the pandemic. My wife thought I was nuts to buy another house so soon. However, it was in the neighborhood. It was also the perfect house for our larger family. The combination of potentially getting a good deal and providing a nicer living arrangement was too hard to pass up.
We bought it. With a new 7/1 ARM mortgage at 2.125% I was motivated to move into the new house immediately. So we did soon after closing. Every day we delayed moving into our new home felt like a waste of money due to the mortgage.
Took My Time Renting Out My Old House
With our old paid off house, I took a couple weeks touching up the house in preparation to rent it out. In the past, I would touch up the house in a couple days so it could be rented out ASAP.
Then, I passed on tenants who were willing to pay $150 a month more. They just didn’t feel right and I wanted to feel great about the tenants. I had no mortgage, so I could afford to wait.
By passing on these willing tenants, I had to wait another 7 days before finding my ideal tenants. When all was said and done, I gave up about $2,500 in rent over the course of a year.
If I had a mortgage on my rental house, I would have tried harder to find new tenants and signed with the first set of tenants. I just didn’t care as much for optimizing returns any longer.
More Reasons Not To Pay Off Your Mortgage
Here are some other reasons to not pay off your mortgage.
1) You lose your mortgage interest deduction. 
The mortgage interest is treated like a business expense for rental property and a tax deduction if it’s your primary residence. The higher your tax bracket, the more valuable the interest expense.
For those in the 32% Federal tax bracket or higher, you get better value keeping your mortgage. The ideal mortgage amount is now $750,000, if you can afford it.
2) You lose a low borrowing cost.
Interest rates are at all-time lows thanks to the global pandemic. Therefore, it makes more sense to hold onto a low fixed mortgage rate for as long as possible.
Because I believe mortgage rates will tick slightly higher in 2021, all the more reason to refinance now or hold onto your lower mortgage rate today.
My current mortgage rate is at 2.125%. I won’t be focused on paying down my primary mortgage for a while.
Another thing to keep in mind is whether you have a primary home mortgage rate or a rental property mortgage rate when you’ve rented out your home. Rental property mortgage rates are usually ~50 basis points higher than a primary home mortgage rate. Therefore, if you are renting out your home with a primary home mortgage rate, you’re more incentivized to keep it.
The cash you save by not paying down your mortgage can conceivably be used to invest in other assets that provide a greater return.
3) You tie up capital in an illiquid asset.
Unless you have a very diversified net worth, having a lot of capital tied up in a property can be bad.
Your property could blow over in the next storm, or burn down in a fire. If you are underinsured, you will pay dearly as insurance companies make it difficult for you to receive full benefits from a claim.
Most Americans have a majority of their net worth (~80%) tied up in the home. When the housing market collapsed in 2007 – 2010, so did the net worths of millions.
Hence, I wouldn’t have more than 50% of your net worth in property and 25% of your net worth in your primary residence.
4) You decrease your financial returns.
If you put 20% down, a 4% appreciation on the property means a 20% cash-on-cash return thanks to leverage. For example: $100,000 down payment on a $500,000 house that appreciates by $20,000 means your equity increased by 20% to $120,000.
If you decide to pay off the other $400,000 in mortgage early, the return falls all the way down to 4%. You also don’t have $400,000 to invest elsewhere. Of course, there’s always a chance you could have invested the $400,000 in something that loses value.
5) You might start being less efficient with your time.
Instead of consulting for lots more money, I decided to spend my time discovering what it was like being an Uber driver back in 2015. After all expenses, I was only making $22-$25 an hour driving. But if I had found another consulting contract, I could have easily made 10X that amount.
If I had focused on growing Financial Samurai, perhaps I could have made much more. When it comes to making money, less debt can make you less financially disciplined.
But I decided to try out Uber driving because I was curious and fascinated with people’s stories. Some of these stories ended up on here. Further, making a lower income or close to minimum wage helped me appreciate the opportunities I have today.
If you find yourself spoiled, clueless, or taking life for granted, please work a minimum wage service job as an adult. Your dejection will clear right up!
6) A chance your credit score might take a hit.
Some of the variables that go into determining your credit score include the amount of debt you take out and paying your debt on time. Therefore, paying off your mortgage may reduce the strength in these variables.
If your credit score takes a hit, you may not be able to get the best interest rate for your next mortgage, car loan, HELOC, or personal loan. If your credit score is borderline excellent (~760) and you plan on taking out more debt in the future, perhaps paying off your mortgage is not the best move.
Conversely, if your credit score is well over 800, then paying off your mortgage won’t make a difference to your credit score.
A Mortgage Can Motivate Both Ways
In a curious way, a mortgage not only motivates you to build more wealth, a mortgage also motivates you to pay it down. If your property ends up appreciating in the process, then all the better!
Despite losing motivation to hustle after paying off your mortgage, paying off your mortgage early is still a worthwhile goal.
It feels great to have less debt or no debt. Every extra mortgage principal payment is progress towards more financial independence.
With a new mortgage, I’m more motivated to continue building wealth. But the reality is, I don’t need any more motivation. I have two young children that provide the greatest motivation of all.
Each child is like a mortgage itself, reminding me to not mess things up. In fact, my son the other day said the sweetest thing, “Daddy, thank you for working so hard to buy this house!” Once I heard those words, my motivation rocketed to the moon!
Mortgage And Retirement
Ideally, it’s good to have zero mortgage debt by the time you retire or no longer have a desire to make more money. The challenge is to time the outcome perfectly.
After playing around with the retirement planning calculator, I feel paying off all mortgage debt by 2031 is the ideal scenario. 10 years is a long enough time to leverage cheap debt to boost wealth. My motivation to hustle will likely fade in 10 years.
Figure out when you plan to retire and divide your debt by the number of years left you plan to work. The amount will be how much debt you have to pay down each year to reach your goal.
Let paying off your mortgage be a great motivator to boost wealth and stay focused. By the time you truly retire, I’m sure you’ll be thrilled at no longer having a mortgage.
Refinance Your Mortgage
Instead of paying off your mortgage, you should strongly considering refinancing your mortgage with mortgage rates at all-time lows.
Refinance your mortgage with Credible, one of the largest mortgage lending marketplaces where lenders compete for your business. You’ll get real quotes from pre-vetted, qualified lenders in under three minutes. Credible is the easiest way to compare rates and lenders all in one place.
In my opinion, mortgage rates have a high chance of going up in 2021. The Fed has promised to stay accommodative. Stocks and real estate are likely going to continue doing well. And the job market is making a comeback.
All these things point to higher inflation, which leads to higher interest rates. Refinance your mortgage now before rates go up. They have never been lower, but are finally starting to tick back up. […]