Today, we’re going to return to the basics of finances. There is nothing new in this post, so if you’re already well on your journey to financial independence, you’re dismissed for class today. However, if you’re overwhelmed with the amount of awesome financial information out there, you’ve decided you want to be financially awesome, and you just want someone to tell you where to start, this is the post for you. If you’re in college or about to get your first job, you need to read about how simple your path to financial awesomeness really is before you do anything else.
Here are the basic steps to take to be a financially awesome person:
- Track Every Penny – For one month, write down every single purchase – food, drinks, vending machines, rent, mortgage, utilities, gas, movies, clothes, etc. Write it all down. You need to know exactly where your money is going if you want to control it.
- Spend Less Than You Make – If the tracking exercise ended up being a larger amount than the money you actually see from your job (not what it says on your paystub, but what is actually on your check), then you have a problem. You are literally stealing money from your future to pay for stuff now. Stop doing that.
- Be Mindful About Spending – There is advice all over the place about how you should give up your morning coffee, cut your cable, sell all your stuff, downgrade your cell phone, and stop eating out. None of these are inherently bad ideas (in fact, they’re great!), but YOU know what brings you joy. Do not immediately cut something you love just because someone else suggested it. You need to decide what’s worthwhile to you and stop spending money on what is not. There is no way that everything you purchase brings you equal joy. Be honest with yourself about what is part of your routine because of social obligations or merely because it has become a habit. Those expenses need to be carefully examined. Think about what your best memories are from the past month. Now look back at your tracked expenses from the month. Do you even remember all of the other expenses? Cut the expenses that are forgettable, replaceable, and definitely the ones that are stressing you out (gym membership? Work clothes?). You’re the only one that can determine what expenses are necessary to your happiness, and which ones you wouldn’t miss. Cut the latter. You can’t have everything, so pick the most important things.
- Save Money and Use the Power of Compound Interest – The earlier you start saving, the richer you will be. Don’t save money for some faceless old man or woman that will eventually retire. Save money for YOU. What future do you want to have? Save at least 10% of all incoming money as soon as you start making any money. If you’re trying to start a journey to financial independence or early retirement, your goal should be to see how high you can get your savings rate, and 10% won’t cut it.
- Don’t Buy Things You Can’t Afford – In my opinion, your house should be the only thing on which you should ever pay interest and your monthly payment (on a 15-year mortgage!) should be no more than 25% of your take-home pay. If you can buy a house with cash, even better! Clothes, food, travel, furniture, electronics, *stuff* is not in the same category as a house. If you borrow money by using a credit card, the interest rates are going to be way higher than your mortgage interest and the stuff will not go up in value. Don’t live a false life. Be authentic and only buy the stuff that brings you joy that you can actually pay for with cash.
- Give – This may seem counter-intuitive as financial advice, but I’m a firm believer in adding more light to this world. Find ways to give. Maybe you want to regularly contribute to an organization you support. Maybe you want to mail $100 anonymously to someone you know that’s struggling. Maybe you pay a tithing. There are thousands of ways you can make a difference with even a little money. To not happily give anything away sets a selfish tone for your finances. When will you have “enough” to be able to share? You need to start now or you’ll end up like Scrooge McDuck – swimming through his gold coins and not sharing any of it! (Think how grumpy he is!)
- Have Insurance – Don’t think you can beat all the odds. Determining what coverage you need is up to you, but if you have kids, you should have term life insurance. If you breathe, you should have health insurance. If you have a car, you should have car insurance. And if you live in Alaska, you should have earthquake insurance. Other insurance options, such a disability insurance, should be considered depending on your situation.
- Be Prepared for Emergencies – You should have 3-6 months of actual monthly expenses ready to access quickly. This amount should be enough to cover a car catastrophe, unexpected medical bills (with insurance), or many other possible emergencies. Credit cards should not be considered an emergency plan. You should also make sure you have some water and a 72-hour kit ready to go. You should also have some extra food on your shelves in case a disaster closes the stores.
- Keep it Simple – Investing in basic, low fee index funds is the simplest way to handle investments. Basic expense tracking is the easy way to budget. Saving money is the best way to meet your goals. Finances aren’t complicated. They can be. But if you keep it simple, you won’t get overwhelmed with options and stagnate. Sometimes the simple option is the best one.
It’s always good to return to the basic steps to financial awesomeness because they don’t change. Anyone can be financially awesome. You just have to make the choice to do so.