Do The Math For Debt

I’ve never gotten more push-back on a post than I have for my 30 Financial Milestones You Need to Reach by Age 30. It’s still Money After Graduation’s most popular post of all time, and since making the checklist the download that you receive when you sign up for my email newsletter, more protests are coming in.

In the time I’ve been doling out personal finance advice online, I’ve been called everything from privileged and out of touch, to colorful names I will not repeat. I know I don’t have the soft touch many other personal finance gurus have. But I have to be harsh with you because you need to know the truth:

If you do not get your financial shit together, you will not be okay.

If you do not aggressively save for retirement, you will not have enough money saved to leave the workforce on your own terms and live comfortably. If you do not pay off all your debt as fast as possible, you will not have the flexibility and security of keeping every dollar you earn. If you do not set aside money for emergencies, you will not be ready to deal with what life throws at you (and it will throw many things at you, and a handful of them will be horrendous).

But the painful truth is I cannot make any of the above easy for you. I can tell you how to do it and I can give you motivation and inspiration, but I cannot lighten the load. I cannot reduce your debts, earn you more money, or increase your investments. You have to do that part.

I also cannot (or at least, will not) lie about it. Which is why my advice sometimes comes across as “harsh” or “mean”.

It’s not easy.

Getting your finances under control is not easy at all. That’s actually why most people don’t do it. It is far, far easier to buy a house you cannot really afford, finance a car with a 7-year loan, make the minimum payments on your student loans, and use credit cards to fill in the gaps.

That’s what most people do. Don’t be most people.

You can save $25,000 for retirement in less than 5 years.

When you look at that number, you might think $25,000 over 5 years means you have to save $5,000 per year or about $417 per month.

Wrong.

If you invest that money in the stock market and earn an average rate of return of 5%, you only need to save $368 per month. This saves you just shy of $50 per month, or nearly $3,000 over the 5 years. Yes, you read that right. $3,000 of your $25,000 retirement savings is going to save itself. So you don’t have to save $25,000 — you have to save $22,000.

Don’t think you can earn a consistent 5% return? Fine. Find 3% and you only have to save $387 per month. It’s still $30 less per month than you thought.

You can save up a 3-month emergency fund in less than 1 year.

Some people think you need to save 3-6 months of your gross income as an emergency fund. This is a wonderful idea, but largely impractical in your 20’s and 30’s. You should, however, have at least 3 months of essential expenses on hand. Make a list of all the things you spend money on over the course of a month. Now, cross out anything that isn’t a necessity.

If you were without income, you would still need to pay for housing, utilities, food, and your cellphone, as well as make the minimum payments on your debts. But that’s it. You do not need to put money into savings when you don’t have a job. You can apply for forbearance on your student loan payments. You will not go out with friends.  You literally will live on the bare minimum.

Is it your entire income? Probably not.

These are your essential expenses. I would guess they’re somewhere around $2,000 or $3,000 per month. Multiply it by 3, then divide by 12. That’s the amount you have to set aside each month to accumulate a 3-month emergency fund in less than a year. If you cannot save up a 3-month emergency fund in one year then your home is too expensive and/or you cannot afford your car and/or you can’t differentiate between “needs” and “wants”. Explore each category ruthlessly, then cut out whatever is holding you back.