In 2021, the bottom 50% had similar wage growth to the top 1%—11.7% and 12.7%, respectively. For context, the “bottom 50%” is earning, on average, $30,000 or less. The top 1%, for comparison’s sake, represents those earning greater than $250,000 per year.

This is why the “percentage increases” are a little misleading: For the bottom 50%, that growth translated to about $2,000 for the year. For the top 1%? $180,000.

The top 0.01% saw the greatest gains: A real wage growth of 14.5% worth a staggering $4.1 million. (The top 0.01% represent those who earn $3.2 million or more per year.)

As Bridget Casey noted astutely on Twitter, the experience of money for the 0.01% is so completely removed from that of even the top 10% that it functions like a different asset entirely. So much so that trying to “project” our interpretation of wealth onto them is not possible, because they have “different money” than we do (paraphrasing Bridget). 

Weird examples of ways wealth begets more wealth

There are plenty of examples of rich people using their wealth to create more wealth, but I think we fail to recognize just how different the rules of the game are for them. 

For example, a piece of IRS tax code that was originally instituted to help farmers buy trucks for their land (Section 179) is now used as a way for business owners to write off their luxury car purchases. This Range Rover dealership even advertises the tax deduction and helps the buyer find a large enough Range Rover to qualify. In the event a business owner bought a Range Rover weighing more than 6,000 pounds, the entire purchase is now tax-deductible, wiping anywhere from $48,700 to $93,800 fully off the top of their taxable income, saving them anywhere from $15,000 to $34,000 in taxes (32% lowest high income bracket applied to the cheaper car vs. 37% highest income tax bracket applied to the more expensive car), for example.

This is just the tip of the iceberg. 

There are other perks that can help impact your interest rates as well, beyond just having a decent credit score. For example, once you’ve accumulated assets worth $10 million or more, you’re eligible to join special subsegments of major banks, like Chase Private Banking. You’ll receive lower interest rates on loans and receive higher yields on deposits, among other things. (Because yes, those with $10 million or more are definitely the same people who need a discount on their mortgage interest.)

These two examples were randomly selected based on information I’ve come across; the majority of wealth hacks the ultra-wealthy employ are likely so far beyond my comprehension that they’d never make it to this blog.

But I’ve heard of everything from borrowing against your own wealth and never incurring capital gains taxes to moving temporarily out of state to protect a giant windfall so your “trust” can be established somewhere with more favorable tax treatments.

The biggest difference between a regular high earner and Jeff Bezos is not necessarily the amount of money, but what that amount of money can buy in the form of teams of people to manage their wealth. The best accountants and wealth managers in the world are focused on finding all the loopholes they can, a luxury that regular people (and especially poor people) cannot afford. 

The irony, of course, is that Jeff Bezos is practically the last person on the entire planet who needs the help from the loopholes. 

Wealth begets wealth. Poverty reinforces poverty. 

These conversations tend to make people uncomfortable. Maybe it’s because we don’t like acknowledging that 11% of Americans are struggling through a situation that’s unimaginable to most of us, or maybe it’s because recognizing the role of momentum in our lives can feel like it discounts or cheapens our own accomplishments. Regardless, momentum plays a larger role than we often give it credit for.

Momentum matters

Much like compounding returns in the stock market, once you find yourself in a particular situation, the easiest thing to do is stay in it. The inertia of being very poor or very wealthy tends to maintain itself, to some degree, because the cycles are self-perpetuating. 

After a certain point, it’s less about you and more about the cycle you’re in. Just like someone who’s poor may not be poor because of their own decisions, someone who’s rich may not be rich because of their decisions, either. Despite our 21st century efforts in the US to grant equal opportunities to everyone, outcomes will likely never be equal. 

We don’t give much credit to friction in our everyday lives, but I’m going to be a basic and predictable Twitter ThinkBoi and quote James Clear here: “The greater the friction, the less likely the habit.” In this context, I’d replace “habit” with “outcome.” The more friction standing between you and your goals, the less likely it is you’re going to achieve them. 

The flywheel can start spinning in either direction, burying you deeper in poverty or propelling you to wealth beyond your wildest dreams. 

The scary thing? In some ways, it’s not entirely up to you which flywheel you get sucked into—but once you’re there, it’s hard to start spinning in the opposite direction. 

Understanding the economic reality of roughly half our nation (and how people end up in the situations they do; i.e., hard work and glorious wealth are not correlated as strongly as many of us want to believe) can help us extend empathy and understanding to one another—wherever we’re at in our financial journeys.

That means the $100 that used to be able to buy 20 chicken sandwiches can now (after 25 years) only buy 7.8 sandwiches (we’ll round up and say we threw in waffle fries).

Using this ridiculous example, why would you hand over an extra $100 now (when your money is worth 20 sandwiches!) than delaying that $100 payment into the future when it’s still $100, but only has 8-sandwiches-worth of purchasing power?

Obviously, you need to make minimum payments on your debt – and high interest debt is a different story – but for low-interest debt, the power of inflation is melting away the value of your money as the amount that you owe each month stays the same.

When you consider the fact that you can invest extra payments to grow faster than inflation and couple it with the fact that inflation is rising and making your money worth less faster, it makes it feel silly to pay down low-interest debt early.

Put ridiculously, why would you pay off your debt with 20 chicken sandwiches now when you can pay 8 chicken sandwiches later, just to be “done” faster?

How income is impacted by inflation

Most workplaces worth their weight in Microsoft Outlook will increase your salary every year by 2-3% by default to account for inflation (whether or not this is a tenable long-term economic strategy is questionable, but the point stands).

That means your income goes up with inflation – because next year, you have to make more than $100 to be able to buy what $100 buys today.

It doesn’t matter to the lender that in year 10 you’re getting $150 to be able to purchase the equivalent of what $100 buys today. You still owe them $100.

Let’s clear the air immediately on this one – I realize there’s an inherently judgmental tone when discussing spending “mistakes.” After all, it’s your money, not mine, so at the end of the day, who am I to call something that you’re doing a mistake?

Here’s why I’m dubbing these decisions “mistakes” – because I think you’ll agree. There’s a difference between spending decisions that are unorthodox or may seem objectively irrational when compared to the average, but still aren’t mistakes for you.

But then there are things that you’d probably stop doing if you knew better; things that don’t serve you in any way beyond stretching you thinner than you’d have to be stretched.

The genesis of this article was the realization that, for the past year, I’ve seen three extremely common trends in clients – almost without fail, every person makes at least one of these expensive mistakes (and sometimes all three of them). So now you get to benefit from hundreds of hours of consultations #FoFree (should I plug a “Subscribe” push here? Why not!).

I’ve isolated things that aren’t one-off mistakes – they’re consistent, ongoing choices or habits that will cost you thousands of dollars over just a few years’ time.

#1. Overpaying for car insurance

I feel like a Geico commercial right now, but it’s true. When I worked with people 1:1 a few years ago, almost everyone I met was paying through the nose. The majority don’t have any accidents on their record or driving events that would justify $170, $180, sometimes $200/month for car insurance, but I’m telling you, it’s not necessary. What I’m trying to say is: Your car insurance should not rival your car payment.

Most of the time when I ask, “Have you shopped around?” like the broken record I am, the answer is no.

Why? Because it’s one of those adulting phrases that we all throw around like it’s a recipe with a cauliflower substitute but don’t really know what it means.

Let me tell you, though, “shopping around” for car insurance will save you money, big time. The first time I got car insurance in Dallas, I bought a 12-month policy with Progressive for – please sit down – $2,100. I forked over $2,100 in one sitting for car insurance, which is the equivalent of $175/month.

When it came time to renew, I simply wasn’t about it. My ticket-less, accident-less driving history didn’t feel like it should cost $1,800 to insure for a single year.

So I did an experiment: I went into “Incognito” mode in my browser and went through the quote process all over again (it’s easy – just Google [car insurance company name] quote). They were quoting me $1,800 to renew, and when I went through the process in incognito, they quoted me closer to $1,700. It felt so arbitrary.

I chatted a specialist and explained I had been given a better quote and I would very much like that one instead, please.

After another year of this, I got wise and started shopping around in earnest. I finally settled on Geico, where I could buy a six-month premium for $660 ($111 per month).

The point is, you’re probably overpaying, and by going through a few online quotes (you don’t even need to call anyone!), you can almost definitely lower your rate. By doing so, I’m saving $40/mo., or $480/year, but receiving the same level of coverage.

#2. Having multiple gym memberships that are going mostly unused

I’ve been surprised by how many ad hoc gym memberships or other subscription-style programs people cobble together on an ongoing monthly basis.

$100 here, $75 there… it adds up. And this is usually how the conversation goes:

“Ok, so you’ve got a $150 membership to Insert Boutique Fitness Studio Here, but I also see a $75 charge for Insert Drop-In Fitness App Here.”

(long pause)

“Oh yeah, well, I use both because I like to do multiple formats.”

To which I say – FAIR. I am the last person who would ever tell you to commit to OrangeTheory for the rest of your life and kiss a stationary bike or a pilates reformer goodbye.

This is where it’s crucial to do the cost analysis of what you’re paying for. When I used to work at Corepower, I never understood why people would pay $100 for a 5-class pack when the unlimited monthly membership was $129. Of course, I was going every single morning, so if I were paying on a per-class basis, it would be intensely expensive.

That said, you probably don’t need to pay a $150 membership fee for a studio you’re visiting once a week (or even twice a week). Even if you’re going twice per week, you’re paying about $18/class. That’s obviously better than a drop-in rate, in most cases, but just barely – I would recommend dropping gym memberships that don’t truly serve the community aspect for you. If you’re popping in once a week, it’s time to cut the permanent ties and use your aforementioned “Drop-In App” of choice to stop in when you feel like it.

The funny thing about gym memberships is that I’ve found people have a hard time parting with them (even when they’re not using them!) because they represent the type of person you were, at some point, trying to become: the type of person who frequents a boutique fitness studio.

But the sooner you let go of this vision of you that’s simply not working out (maybe you just don’t LIKE CrossFit and “functional fitness” – that’s not a personal failing!), the sooner you’ll free up those #funds to discover that maybe your true fitness muse is actually more of a “heels dance class” fanatic. You gotta let go to grow, my friends.

Of course, we can apply this principle to a lot of things, but the boutique fitness trend has almost uniformly influenced people into signing up for multiple memberships, and most people don’t need more than one.

#3. Sleep-walking through impulse purchases

This is the point of the article where we’re going to transition into dangerous, line-straddling “judgment” territory, but stick with me – the point of this “mistake” is the sleep-walking part.

There is an energetic difference between the way you purchase things you’re obsessed with and that bring you intense and sustained joy, and things you throw in the shopping cart at 11 p.m. on Glossier’s website late Friday night because you’re bored and lonely and that product called “Bubblewrap” sounds so enticing and cozy (not a personal example at all!).

I call these sleep-walk purchases because you’re going through the motions. Something strikes your fancy in a moment of weakness, and before you know it, it’s on your front step three days later, to be toyed with for all of 15 minutes before being relegated to the back of the bathroom drawer, used a handful of times, then never seen again.

The reason these types of purchases are insidious is because they prevent you from being able to spend on things you actually love.

If you feel yourself often saying, I have no idea where all my money went this month, it’s probably stashed in your closet, dresser drawers, kitchen cabinets and bathroom counters, in the millennial pink bottles, oversized cutoff hoodies and S’well water bottles (remember those?) that creepily stalk you around the internet in flashing ad placements.

There’s nothing wrong with buying your fifth oversized cropped sweatshirt or yet another face wash made of the same ingredients as all the other ones sitting in your shower, but if you’re going to do it, do it with eyes wide open – maybe sit for a second and think, Let’s say I didn’t spend $38 on this right now – what could I experience tomorrow for $38 instead? Drinks and apps with someone I haven’t seen in awhile? Two books I’ve been dying to read that’ll give me hours upon hours of entertainment and knowledge?

I’m not even necessarily telling you to not spend the money and to save it, but just to spend on something you’re actually going to derive happiness from.

On a larger scale, we could dive into the difference between spending $1,000 on a handbag or $1,000 on a trip to Southeast Asia, but we’ll save that esoteric discussion for another day.

In closing

While I (unfortunately) can’t write on a 1:1 basis to address all the unique quirks and spending oddities of each specific individual, I feel confident that these three will cover the majority.

I challenge you to see just how much fat you can trim from your monthly expenditures without measuredly changing your life (i.e., are you going to feel super deprived because you have a new car insurance policy or because you remove one iffy class per week from your schedule? Probably not). Think about it like buying back your own time and money from places and things that were sneaky budget drains.

Let me know how much you’re able to trim monthly (then multiply it by 12 to get excited about all the potential you just freed up!).

It feels appropriate to break this post into two since your starting point matters so much when it comes to the conversation of “building credit.”

For today, we’ll focus on those of you who have normal-to-decent credit already (in other words, you’ve never had any super negative events hit your credit report, like missed payments or defaults). We can revisit credit repair, which is essentially crawling your way back to “good” after something causes your score to drop, and use today to discuss credit principles and best practices.

Why your credit score can impact your financial health long-term

The book “I Will Teach You to be Rich” taught me a lot about this topic, and it opened my eyes to an aspect of the credit score’s impact that I hadn’t considered before.

Your credit score determines what kind of interest rate you can get on big ticket loans, like your car and home. People with poor credit scores end up paying thousands (if not hundreds of thousands) more over the lifetimes of their loans, which means your credit score can directly impact your ability to build wealth.

For example, let’s say you have a stellar credit score, a score that would make Dave Ramsey feel hot and bothered. You take out a $250,000 mortgage on a $310,000 house (read: you’re borrowing $250,000 and putting $60,000 down).

You get an interest rate of 2%. Great! Over your 30-year fixed rate mortgage, you’ll pay $82,000 in interest, meaning your $250,000 loan will cost you $330,000. Woof.

But now let’s pretend you have a slightly less stellar credit score, and instead of a 2% interest rate, you get a 3% rate. Yep, just 1 percentage point higher.

Now, over the course of that same loan, you’ll pay $129,000 in interest.

What if you got a 4% rate? Now you pay $180,000 in interest.

By simply jumping from a 2% interest rate to a 4% interest rate, you pay $100,000 more over the lifetime of your loan.

This is why Ramit Sethi, the author of the book, really hammers home the long-term financial importance of having a kick-ass credit score—it’s not just a number to halfway understand, it’s your ticket to good loans.

How your credit score is determined

Hopefully you’ve spent enough time on this site by now to know why your credit score matters (read: it’s your ticket to free travel via premium credit cards, if nothing else), but let’s dive into the ways your credit score is measured.

If you’re like, Which entity is out there grading me on my financial behavior? Who has THE NERVE to do such a thing?, the answer is a variety of credit reporting agencies like Equifax, Experian and Transunion. Usually, you’ll hear people talk about the “FICO” credit score, which is determined by a mix of financial data points about you. Kinda big brother-y, huh?

There are five primary categories that you’re being judged in, and unfortunately, the standards are more on the Simon Cowell side of the spectrum than the Paula Abdul side.

Your “payment history” accounts for 35% of the score.

This means 35% of the outcome of your credit score is determined by if you’ve made correct, on-time payments in the past. Since your credit score is used by lenders to decide whether or not you’re likely to pay them back, your payment history is a huge factor.

Missing payments (even just out of forgetfulness, not lack of financial ability) is probably the worst thing you can do to your credit score, which is why I’m a big fan of setting up auto-pay everywhere that you can.

The next most-important thing? How much you owe accounts for 30%.

Also known as “credit utilization,” the amount you owe to different lenders plays a big role in determining your score. In other words, lenders interpret owing a bunch of money as a sign that you might be overextended, if it’s a high percentage of the credit available to you.

Think about it like this: If you have one card with a $3,000 limit and you’re consistently using $2,500 of it, you’re sending the message that you need nearly all the credit that’s available to you—you’re living close to the edge, at least in the bank’s eyes. If you were to open two more cards, both with $3,000 limits, and you still only continued to use $2,000, lenders would see that you’re now only leveraging $2,000 of your available $9,000, and look more favorably on that.

It feels backwards when you treat it reasonably: “I only need $2,000 a month on my credit card, so why should I keep getting more credit?” I get it—but this is how the system works, and we’re all pawns in its game—and you can’t win if you don’t play!

This is why opening more credit cards is considered a good thing—it makes your total line of credit larger. And if you remember anything from middle school, you’ll know that when you increase the denominator, your percentage gets smaller.

The length (or “age”) of your credit history accounts for 15% of your score.

Think about it like this: If you were going to lend someone $1,000, and you had the option between someone who had a really positive history of paying people back for 15 years or someone whose history of paying people back only extended about 6 months, which one would you feel more confident spotting for $1G?

Yup, the average age of your credit history plays a role. This is why it’s a good idea to get a credit card (or some other form of credit) early in life so you can establish that credit footprint early (so go back in time and take care of that! I know, so helpful).

My first card dated back to 2014. It was a Shell gas card that my dad gave me after I came home from college freshman year complaining about how much I had spent driving home from Alabama… I miss being a dependent on their tax forms more than just about anything. I stopped using it after I graduated and my mom punted me out of the family checking account.

After two years, the credit line was closed due to inactivity, and my credit score took a hit because my oldest account and form of credit (from 2014) was no más. My next-oldest account was my Discover card opened in 2016.

The average age of my credit dropped precipitously, especially thanks to all the new premium cards I’ve acquired (#NoRagretz, though), but over the last few months it’s risen again.

Relevant Pro Tip: If you don’t have credit yet (or you have a low credit score), use this “Shell gas card” approach (assuming you have a willing parental participant). By opening a joint account with someone who has a good credit score, their score will help you get approved, and that’s your “in” to show off your best financial behavior and improve your own score. Of course, if YOU miss payments, it’ll hurt their score, so this arrangement requires a great deal of trust and discipline. That’s why I suggest going in on it with a parent or spouse.

Ready to mix it up? Having different types of credit counts for 10%.

There are two major types of credit accounts: revolving credit and installment accounts.

When you think revolving, think flexibility: your credit cards, a Target Red card, a Shell card… they’re usually associated with stores, gas stations, or your run-of-the-mill credit card.

When you think installment, think loans that require a set minimum payment every month with no flexibility—in other words, you’ve been given a payment schedule to pay a lender back. Auto loans, mortgages, and student loans fall into this category.

It helps to have diverse types of credit because it makes you look ~ well-seasoned ~, but notice that it only accounts for 10% of your total score. You probably don’t want to rush out and buy a car to increase your credit mix.

When my Acura RDX lease fell off my credit report (in other words, it ended), my credit score went down because the installment loan disappeared. Luckily, the addition of my Audi A3 auto loan helped, but it took a couple months for that to be reflected in the score. Patience is a virtue.

Lastly, new credit makes up 10% of your total score.

In other words, having a bunch of “new” credit on your score (especially that which is acquired rapidly) is a bad sign to lenders, because it makes you look like you’re financially squeezed (of course, you may just be a new reader of Money with Katie whose eyes have been opened to the wonders of the Ultimate Rewards portal, but they don’t know that).

When you apply for a new credit card, a “hard inquiry” is placed on your credit report—simply put, the lender “inquires” as to the details of your report when making the decision whether or not to lend you the line of credit, and that “inquiry” stays on your report for two years. The FICO score is supposed to only account for inquires from the last 12 months.

A hard inquiry usually causes your score to go down by a few points. If you’re like, “Why?!” I say, “Same.”

A lot of hard inquiries on your report makes it look like you’ve got a lot of action happening in your financial world, and that’s perceived as a bad thing. This is one of the reasons I tell people to wait 90 days between card applications, so as not to rock the metaphoric boat too much.

Keep in mind, though, that new credit only makes up 10% of your score, so it’s not a factor I’d worry too much about.

Building your credit over time

While there’s no voodoo magic you can work on your score to make it jump 100 points overnight, there are a few little hacks (hackettes, if you will) that might speed up the process for you.

If you only have one credit card, get another one.

The idea here is that you’re expanding your line of credit. Spread your spending across them both. If your score is already good enough for a premium card (usually 720 or above), may I suggest you peruse my favorite part of this site to learn about which card may be best for you?

Request a higher credit limit on your existing cards.

If you’ve had your credit card(s) for awhile, you can request a higher line of credit. Again, the idea here is that you’re growing your available credit to make your total credit utilization go down.

The problem with advice like this, I’ve found, is that people read it, think, “Sounds good!” then immediately realize they don’t know how. While it’s different for every bank, I would recommend calling the number on the back of your card and saying something to the effect of, “I’ve been paying my card off in full every month for X years now, and my income has gone up since I got this card. I would like to request an increase in my credit line.” (Assuming all those things are true!) If the person says no, politely hang up and call back the next day. Someone else will answer, and maybe they’ll be in a more generous mood.

Set up autopay.

This is a no-brainer and I almost feel bad including it as a “hack,” but this is a preventative measure – since a missed payment will really hurt you, this is an easy way to ensure it doesn’t happen.

Whenever I tell people to do this, I often hear some variation of, “But I like to make sure I have enough money in my checking account first,” to which I say, setting up autopay may actually help you keep your spending in line. You’re unlikely to go buckwild on a card and throw caution to the wind if you know it’s getting paid off in full, checking account ready or not.

Pay off your card(s) more frequently.

Remember how we talked about lenders loving that glassy, serene lake? You can think about your repayment history a little like that. If you rack up thousands on a card then pay it off in one fell swoop once a month, it can look tumultuous. If you periodically pop in and pay off your card while it has smaller amounts, it makes things look a little less volatile.

Using Credit Karma

I’m personally a big fan of Credit Karma for keeping tabs on things. Here’s the screengrab from my account’s dashboard that gives me a great overview of why my score is what it is:

It’s supposed to be all behind-the-scenes science, but I’ve found that your credit score sometimes reacts erratically to things. Credit Karma has been helpful for me to understand exactly what’s happening, so I suggest using it if you’re interested in learning more (it’s free).

Pssst: After you read this, don’t miss this episode of Rich Girl Roundup, in which we do a debt deep dive, including discussing the balance transfer card option.

Before I began helping people with their finances in 2020, I didn’t have much experience dealing with debt. While it felt like a given at the time, as natural as being fed dinner at 6 p.m. every night and being driven to school every morning, I was wildly fortunate to have two parents who covered the housing, food, and sorority costs my tuition scholarship did not.

Graduating with no student loans and a strong aversion to credit card debt (again, thanks to my parents who reinforced at every swipe that the credit card was to be paid in full every month), I had never worked to pay down debt personally – so when client after client brought debt with varying degrees of intensity, learning quickly was a necessity.

In the last 10 years, the cost of college has risen by more than 25%. The fact that it’s mathematically impossible for a student to put themselves through school by working hourly jobs almost guarantees that students whose parents won’t or can’t foot the bill (understandably so, as the average tuition for a four-year public university is $9,410 for in-state students and a staggering $23,890 for out-of-state students) will end up with some amount of student loan debt.

This post is a guide to paying down high-interest debt. Fortunately, student loan debt (with the exception of graduate school loans) rarely falls into that category, so the bulk of what we’ll talk through today is probably more relevant for credit card debt.

How people find themselves in credit card debt: Crises compound

I’m always tempted to make jokes about swipe-happy Sapphire spenders when we start talking about credit card debt, and undoubtedly, that plays a role: a lot of credit card debt is the result of poor planning and impulse control, and there’s no way around that.

However, the student loan debt crisis outlined above doesn’t exist in a vacuum: Sometimes one debt fuels another.

Going to school, taking out loans, and graduating with a low-paying full-time job in a high cost-of-living area is a recipe for disaster. By the time rent and the student loans are paid every month, it leaves very little for actual living. (Another note, for context: According to the Center on Budget and Policy Priorities, the national median household income has risen by 0.5% since 2001. Median rent has risen by 13%.)

This is, of course, not a new issue for young professionals, but it’s certainly exacerbated by the conditions above. And while you’re almost definitely not entirely at fault for a debt situation you find yourself in now, there are strategies to claw your way back. Work smarter, not harder (a lazy intellectual’s dream).

Credit card debt is a slippery slope, and most of the women I work with didn’t voluntarily dive, Dry Bar blowout-first, into the black hole of Neiman’s-induced 27.99% APR (though some did). Most of them overextended themselves little by little, month by month, and looked up one day to find themselves $10,000 in the hole (thanks to that aforementioned 27.99% APR).

The good news is, it’s not always a financial death sentence.

It’s a little like having a broken arm: If you recognize the problem, go to the doctor, undergo the pain of resetting, and agree to wear a cast for a little while, eventually, your arm will function normally again – but if you ignore your broken arm and continue to use it as if nothing’s wrong, you’ll wind up with irreversible damage.

Now that this has taken a sufficiently macabre turn, let’s talk tactics.

A quick note on earning more money to pay off debt quickly

I worked with a gal recently who secured an astonishingly high-paying job after working for years in a more average salary band. Her new monthly take-home pay? About $10,000 per month. Wisely, she paid off $15,000 in credit card debt almost immediately – and just like that, overnight, she was debt-free.

This solution is simultaneously easier-said-than-done-obvious and, candidly, a quite tenable option.

Of course, the assumption is if it were possible to go out and get a higher paying job, we’d all do that – as if the winds of upward mobility will shuffle us swiftly forward the moment we outgrow our current situation. But I have to wonder: How many of us are actually actively seeking a higher-paying opportunity and pulling all the levers available to us?

In this particular individual’s case, she had a long-standing relationship with a client in her former role and had established a lot of trust and candor with him. Unsatisfied with her salary, she finally asked him if there were any jobs available at his firm. A position was essentially created for her, and six weeks later, her credit card debt was gone.

While Cinderella stories of this nature can be equally as demoralizing as they are inspiring (“That would never happen to me!”), I encourage you to expand your consideration of what’s possible for you. If you’re underpaid and drowning in debt, rather than finessing ways to stretch your current dollar further, devote some of that energy to acquiring more dollars.

You never know.

It’s worth noting that she isn’t the only client I’ve seen unknowingly employ this approach, though I realize suggesting you simply “go out and get a higher-paying job” is, in itself, unhelpful – but it warrants explicitly suggesting because most of us don’t even think to put much energy into turning over that stone, despite the fact that it’s the Easy Button approach to debt.

The slow and steady approach to paying off your debt strategically

So let’s say six-figure incomes aren’t falling from the sky (although, I repeat, remember to look for one).

It’s easiest to illustrate these tactics using an example scenario, so allow me to fabricate an indebted 20-something and you can project yourself onto this imaginary person’s experience.

Showtime!

The situation

Let’s say you’re in the following situation:

$38,000 in student loan debt with a 4.45% interest rate on a 10-year term and a $393 monthly payment (if these numbers feel surprisingly close to your situation, that’s because I used national averages)

$5,700 in credit card debt with an 18% interest rate with a minimum monthly payment of $142.50 (again, averages gleaned from a sloppy Google search)

The basics

Thankfully, the internet abounds with fantastic loan calculators. Here’s the Reality Steve breakdown of what your debt actually looks like:

• Your $38,000 student loan (with a 4.45% interest rate, a 10-year term, and a $393 monthly payment) will end up costing $47,149 over the 10 years. Here’s the calculator where you can plug-and-chug your own numbers.

  • That’s $9,149 in interest and 120 months of your life. Essentially, 19% of your total amount paid was interest – in other words, the privilege of borrowing the money cost you nearly $10,000.

  • For illustration purposes, let’s say you have an extra $200 sitting around every month (honestly, most of us probably do) and you’re able to pay $593 toward this student loan every month instead of $393.

    • Now, your loan will end up costing $43,500 over 7 years. That’s $5,500 in interest (a savings of a little less than $4,000) and 84 months of your life. Not bad, right? Right. But it’s not the best use of your extra $200 per month.

Let’s consider a slightly different situation now…

• Your $5,700 in credit card debt (with an 18% interest rate and minimum monthly payment of $142.50) will end up costing (are you ready?) $8,770 and take 62 months to pay off, if you only make the minimum monthly payment. Here’s the calculator for determining your own.

  • That’s $3,070 in interest and 5 years of your life. That’s 35% of the total amount paid! 35% of your total bill to the credit card company wasn’t even money you spent, just the cost of doing business. That’s unacceptable.

  • Remember your extra $200 per month? Let’s try putting that toward the credit card debt instead, so you’re paying $342.50 toward your credit card every month instead of $142.50.

    • Now, your credit card debt will end up costing $6,607 over 20 months (fewer than 2 years, compared to more than 5). That’s $907 in interest (compared to $3,070).

What to consider when paying off debt: Your interest rate is queen

The interest rate is queen. There are competing ideologies about debt payoff strategies, and some of them prioritize psychological satisfaction over basic math. I can understand why; money is deeply psychological. But I say give yourself more credit than that. You know what’s incredibly satisfying? Paying off your debt as efficiently as possible.

Start with the highest interest rate first and shuffle as much of your extra money every month toward that debt as possible.

And while we’re talking about interest rates, it’s worth noting that sometimes you can get interest rates lowered if you call your credit card companies and make a case for yourself. I’ve never actually done this (though I have negotiated annual fees, if you want a sample script for that) so I won’t advise you as though I have, but you can find scripts for negotiating interest rates with a simple Google search.

Building debt repayment momentum

Remember our example above? Let’s say our indebted friend stuck to their $342.50 monthly payment for their credit card for all 20 months and reached the magic $0 balance after a little under two years. With no other debt to speak of, they have options now.

Circling back to the interest rate, let’s think for a second about that 4.5% student loan.

The average annualized rate of return for the S&P 500 (in other words, the amount you can more or less safely assume you’ll make in the market over time) is about 8% from 1957 through 2018.

This is not a guarantee. Some years you’ll be up far more. Some years you’ll be down a lot less. This is merely the (mostly widely accepted) benchmark for long-term expectations.

If you want to be on the conservative side, you can adjust your expectations to 6 or 7%. Then, compare your interest rate on your debt.

A 4.5% interest rate on money owed < 6-7% return on money in the market.

So that extra $200 per month that you’ll get back after you pay off the credit card? Let’s do a quick exercise:

Pretend you shuffled your newly regained $200/mo. toward the student loan. Remember our scenario above?

“For illustration purposes, let’s say you have an extra $200 sitting around every month (honestly, most of us probably do) and you’re able to pay $593 toward this student loan every month instead of $393.

Now, your loan will end up costing $43,500 over 7 years. That’s $5,500 in interest (a savings of a little less than $4,000) and 84 months of your life.”

You had saved $4,000 by putting the extra $200 per month toward your loan for 7 years, paying off the debt 3 years ahead of schedule.

Including rough investment calculations is a slippery slope, so I want to disclaim that this is sheerly back-of-the-envelope math that doesn’t account for freak occurrences (like, you know, global pandemics), so one can never be entirely confident: You’re merely making the best decision you can with the information you have, and letting the math be the guide.

Pleasantries and formalities out of the way, let’s look at what would happen if you invested that $200 per month instead in a low-cost, diversified index fund that averaged a 7% return for those same 7 years.

You invest $200 upfront and $200 every month afterward for 7 years. The rate of return over those 7 years is 7%. (I swear I didn’t intentionally load this example with a bunch of the same number; this is my Fibonacci nightmare.)

Your investment (in this mathematically pure example that exists within the vacuum of an internet calculator) will be worth $21,926.

We aren’t controlling for inflation or taxes, so consider this the high estimate, off which we’d shave a few thousand.

But even if you were to cut this number clean in half, you’d still come out far ahead of the $4,000 you would’ve saved by paying off the student loan faster.

If your debt’s interest rate is higher than 7(ish)%, you need to focus on your debt. If it’s lower than 6%, you can probably safely assume your money will go further in the market than the interest it’ll save you. If it’s right at about 6 or 7%, it’s a toss-up, and your call.

That said, the very important headline here is this: This only works if you actually invest that extra money, rather than spending it.

This is not permission to only make minimum monthly payments and throw proactivity to the wind. This is a glorified 8th grade algebra problem that helps you determine the best job for your hypothetical extra $200 per month, and artisan bagel shops are not in the running.

The examples become more eye-widening as you throw even more extra at the debt, but for whatever reason, an extra $200 per month feels like a sweet spot. It’s not too much; you could probably recoup it by staying in an extra night or two and choosing a less expensive gym membership – but it’s enough to make a really incredible dent in high-interest debt, as we observed with the 5-year, $3,000 life-sucking credit card situation transformed into a 20-month, $900 inconvenience.

And mostly: Hang in there

Ultimately, I want to leave you with this: hang in there. If it gets overwhelming, remember: it’s just math. They’re just numbers. You have options. This article didn’t even get into balance transfers, another way to alleviate the squeeze of a high-interest rate, albeit temporarily and with an upfront fee.

More than anything, my hope is that you understand the situation you’re in and what it’ll take to get out: the calculators and logic laced throughout this post will hopefully serve as guideposts for getting your arms around the breadth of your debt, be it big or small. The first step is extracting our heads from the sand.

You’ll get there, and it may take less time, effort, and money than you think.

September 2020

$2,718. That’s how much my life costs every month.

In the last six months of 2020, I’ve been within a few percentage points of this number, dipping as low as only spending 82.2% of that total and as much as 102.65% of it.

Knowing how much your life costs is step #1 of taking your personal finance skills to the next level.

Step #2 is finding easy areas to trim.

The little stuff adds up, but the big stuff adds up a lot faster. Today, we’re focusing on the big stuff.

I’m less concerned about that one time you spent $400 on two pairs of leggings and more concerned about the fact that you’re paying $200/mo. for your cell phone and Wifi when you could be getting both combined for $75. See where I’m going with this?

The three major players

For people my age, there are typically two or three major items you’ll account for first. Fire up Google Sheets and let’s start here!

• Housing – what’s your rent cost each month? What about utilities? If you’re scratching your head, log into your utility providers and rent portal and start looking back at the last few months of service to find an average. If you’re like, “Great, I know what I’m paying, but I have no idea if I can afford this or not!” Here’s a great rule of thumb to stick to: take your monthly take-home pay and divide by 3. E.g., if I make $5,000 per month, my total housing cost shouldn’t exceed $1,667.

  • Most of the time the way I find deals is literally walking into leasing offices off the street and asking for their best 2BR rate. The unit I live in now was listed for $2,300 online and I happened to stop by when they needed to fill it quickly – and boom, 4 weeks free and a discounted rate down to $1,700. The price listed online is what they think they can get for it… but if you’re willing to traipse around town in the Texas heat harassing leasing agents, you can usually get a better deal. I went to several places before my current apartment building and either wasn’t happy with the price they quoted me or wasn’t thrilled about the unit, and the extra hours of searching definitely paid off.

  • I’m not advocating for sacrificing comfort or safety in order to save money. I’m encouraging the boots-on-the-ground approach with apartment complexes that you’d still be excited to live in, rather than conceding whatever exorbitant rate you see on apartments.com and forking it over without pressing.

• Car – most people have a car payment and car insurance. You probably know these since they’re fixed – so take some time to list those, too. Remember that most salespeople will tell you that you can afford a lot more than you comfortably can, because their definition of “afford” is “won’t default on the payments.” Our definition of “afford” is “won’t really miss the money every month.”

  • The general rule of thumb is spend no more than 10% of your take-home pay on your transportation-related expenses each month.

• Debt & loans – Let’s tackle this in two parts:

  • Credit card/consumer debt: Definitely priority #1. I recommend using a credit card payoff calculator to project how long it’ll take to pay off the card and how much you’ll pay in interest. Using figures that are totally in line with what I see a lot with clients, consider this:

    • You have $10,000 in credit card debt on a card with a 17.99% interest rate and a $325/mo. minimum payment. You pay the minimum monthly payment. Here’s what that looks like:

It’ll take 42 months and about $3,510 in interest to pay off the $10,000, or $13,510 total. Now consider you’re willing to throw an extra $100 per month at the minimum monthly payment:

And just like that, you’ve shaved a year of payments off your life and saved more than $1,000 in interest.

So what does this have to do with how much your life costs every month?

$325 (or $425) is a pretty high monthly expenditure – it probably rivals your car payment in size! The more quickly you can banish that payment from your life, the better, and only by contributing more to it each month can you speed up the payoff rate. You can also call the credit card company and try to negotiate your rate down. It might take 10 tries, but if it’ll drop your interest rate from 24% to 18%, it’ll be time and awkwardness well spent. (I know that suggestion makes people’s skin crawl, but I ask… are you willing to experience discomfort for 5 minutes to potentially save thousands? Probably.)

It’s in your best interest to do so as aggressively as possible, unless your debt has an interest rate of less than around 6% (give or take) or less. Student loan debt is (usually) cheap money, but a high balance. Let’s consider another common example:

• You have $45,000 in student loans with an average of a 4.5% interest rate. They’re a collection of 10-year loans and your total minimum monthly payment is about $466.

When it’s all said and done, that’s not great – $11,000 in interest over 10 years. But the kicker is the 4.5% interest rate – your money will (hopefully, probably) go further in the market averaging a 7-8% rate of return; that is to say the rate at which it’s growing (7-8%, on average) outpaces the rate at which your interest is accumulating (4.5%).

Other considerations

So those are the usual big suspects: housing, transportation, and debt. They’re usually (relatively) fixed, predictable costs.

Here are a few other things to factor in that are more variable, but I think you’ll find most of us hover around averages month over month. I’m naming stuff that I see most often, so some of it may seem random:

• Gym membership (can be up to $200 in some cases)

• Rent the Runway subscriptions (or similar)

• Cell phone/WiFi/Cable – most people overpay for these things, please feel free to cyberbully AT&T into a better rate

  • Pro tip: Mint Mobile is super cheap. My unlimited-everything plan is $30/month.

• Pet costs – I’ve seen doggy daycare creep up into the $500+ range (bless Sam’s self-sufficiency)

• Gas, Uber, parking, and other sneaky transportation costs

• Travel (if you’re spending thousands on travel, please, please, please consider getting into travel rewards)

• Dining out (can vary like crazy depending on your habits)

• Groceries (ditto)

• Entertainment (kind of a catch-all, TBH)

• Personal care (this includes haircuts, therapy, buying heaps of self-help books… you know the drill)

• Donations, gifts, etc. – this is frustrating to budget for since it changes so much but I bet $100-$200/mo. is safe

If you’re certain you’re lowballing yourself, go through your credit card statements for one month and look at what you’re buying. Better yet, do a six-month look-back and use the averages.

The bottom line

It doesn’t matter if you skip appetizers and drinks when you go out to dinner if your rent payment is $700 too high. Trimming fat from the big, repetitive areas (or at the very least, identifying one key area to work on over the next 12 months when you have the opportunity to move, heckle an insurance agent for a lower premium, or throw a bonus at a credit card balance) will make a more substantial difference over time than opting for Kroger-brand Cheerios and skipping happy hours (that stuff helps, for sure, but not at scale).

I’ve seen people reclaim $1,000 per month in their budget just by moving out of an exorbitantly priced apartment and transferring their lease to something they can actually afford.

That’s one approach – the other approach is negotiating a job, promotion or side hustle that pays an extra $1,000 per month in take-home pay. Net same effect! Bonus points for combining both approaches.

Because ultimately, I’m sure we’d all much rather have that money back to spend on something better: whether that be investing, traveling more often, an expensive hobby, tastier food… the list is endless.

And figuring out your baseline is the first step toward the lifestyle that excites you.