Back to Basics: The Basic Steps to Financial Awesomeness

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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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!)
  7. 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.
  8. 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.
  9. 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.

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  1. No matter what stage you are in or path you are on, these are great reminders!

  2. Thanks for including “Giving” as one of the steps for being financially awesome! I too value the importance or charity and giving, even if you can only afford time. Plus I read somewhere that people who including giving in their budgets are typically more financially responsible.

    • MaggieBanks

      And it sets up a mentality that moves you beyond selfishness. It’s unfair that everyone can’t reach early retirement even if they tried. Everyone can help with something.

  3. My advice for beginner finance folks, and what worked out for us is listed below.

    I’m a big believer in the theory behind tracking everything you spend, but I am horrible at applying it to real life. 🙂 Since I rarely use/carry cash though, it’s easy to review the credit card statement at the end of the month and divvy it up into categories, which is how we track things. Then it isn’t a chore so to speak, with writing stuff down daily. But whatever works for you best, do that!

    Secondly, our biggest contributor to freeing up cash to invest for our Lifestyle Change was by being mindful of spending. What worked great for us was asking, “do I want this, or do I need this?” before making any purchases. It took a few months before it got easy, so don’t get discouraged, but eventually we found we had been spending wantonly on the card because “we could.” That let us have all that money back once we cut back on spending that we didn’t need to do.

    • MaggieBanks

      Excellent advice! I always ask “is this worth a delay in getting to financial freedom?”

  4. seattlegirluw

    Insurance is definitely more important than most people realize. (We just had a friend whose apartment got flooded. I doubt he had renter’s insurance.)

    But my favorite part of this post is “You’re the only one that determine what expenses are necessary to your happiness, and which ones you wouldn’t miss.” It really says everything you need to know about frugality.

    • MaggieBanks

      It’s true! No one can tell you what’s important to you. If your daily coffee run is what sets the tone for your whole day and cutting it out would be really hard, don’t give that up. It’s up to each of us to figure that out.

  5. I don’t track my spending as much as some. I plan to look through my 2015 expenses once it comes to a close. I’ll either be impressed with myself or disappointed, but it will give me insight to where i can improve in 2016!

    • MaggieBanks

      Oh there are always disappointments… but they help us figure out where our money went and where we would RATHER have it go for next year!

  6. I was dismissed for class today but chose to read anyway. Yes, many of these points are “well known”, but they’re good reminders. Thanks!

    • MaggieBanks

      thanks for dropping in. And it’s helpful to have a post on the basics to refer people back to! 🙂

  7. Yes! Fantastic solid points about the fundamentals. I love #3 “Be Mindful of Spending.” If you value something that someone stated you need to cut out, you will drive yourself crazy (it’s like getting to the bare bones of a budget & recognizing it’s not the person who you are whatsoever). Find what’s true to you & brings you joy – then stick with it and eliminate elsewhere. 🙂 Wonderful words, Maggie!

  8. Always good to remember the basics (though I’m not the best spending tracker). We can all use a reminder! Cheers.

    • MaggieBanks

      Thanks Adam. I’m a retroactive spending tracker… I use receipts and cc statements to plug in the items in my budget. 🙂

  9. Whoa, this is really good – well written, informative, and easy to understand. Great job! I wish I would have read something like this when I was in college.

    • MaggieBanks

      Thanks, Ernie! Always good to get the basics down first – it’s a good reminder for me to try to verbalize what I would classify those to be.

  10. I always feel these types of posts are good reminders. Even if you think you know everything, there might be things you forgot or just simply haven’t done in a while… as they say, squeaky wheel and all.

    • MaggieBanks

      Thanks, Jim. I think it’s helpful too. Sometimes we get all caught up in all the awesome ideas we could be doing, but lose sight of the basics that make the most difference.

  11. Aurelia

    Great post! I’ve been working on improving my financial life for quite some time now, but going back to the basics and making sure I am not in denial about certain points always helps! Glad to read you agree with paying cash for a house!!! I just bought a house in cash and everyone from family to agent and lawyer tried to get me to get a mortgage. As I am gonna be unemployed as soon as I move into this property and mooch my soon to be husband until I figure out my side business, getting a mortgage sounds crazy to me. Thanks for that one line that basically made my day, I was starting to second guess myself!

    • MaggieBanks

      CONGRATS ON BUYING A HOUSE WITH CASH! Sorry, I yelled at you. That’s a BIG deal! Awesome work! Being debt-free can only help your financial situation, in my opinion!

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