Fact: Your money beliefs (not your paycheck) determine whether or not you will accumulate wealth. That’s because, for some, there is no amount of money in the world that would be enough to encourage them to save or invest.
What you think about money ultimately determines how you use it, or, if we’re going to be honest, how it uses you. Money management skills are learned. You either learn from your environment or you learn it through a conscious money management plan.
Nod your head if this sounds familiar: You know you earn well but you can’t seem to scrape a few dollars together to open an investment account or grow your emergency savings. If this isn’t you, but you take time off work to do financial admin, you might as well nod your head too.
In both instances, your money doesn’t work for you.
Here is some advice to help you get control of your life and better manage your money.
Tip 1: Define money management
If the thought of money management conjures up an image of a banker in a suit carrying an expensive leather briefcase and discussing financial jargon that leaves you wondering whether it’s even English, you’re right. Money management includes wealth-building principles such as savings and investments.
You’re also right if you think that money management involves budgets and knowing where every dollar goes.
Both of these can be boring as dirt, but it doesn’t have to be.
For starters, on the wealth-building side, there are a number of fintech giants making investments and savings easier and cheaper. Some of them allow you to invest from as little as a dollar.
Your personal budget doesn’t have to be a mission either. Gone are the days where you worship at the altar of the spreadsheet. Say hello to automated finances instead. And for that, you need systems.
Tip 2: Reach your goals with a system
Dealing with a sandstorm of receipts and bills on a Saturday morning is not only a dreadful way to spend the day, but it’s also unnecessary.
Almost every type of payment can be automated and almost any bank can help facilitate the move to automation.
- Moving money to your savings
- Pay bills such as utilities, rent, loans, education, etc
- Squaring off your credit card debt every month (because you’re averse to high interest)
- Investing (yes, this can be automated!)
- Maxing out retirement
- Allocating money for your guilt-free spending
- The earlier you start, the better. It’s the long term investment effect
Setting up auto payments the first time shouldn’t take more than an hour or two. Ramit spends less than an hour a month on his personal finances.
Tip 3: Say goodbye to the budget and hello to conscious spending
Ramit has a friend that spends $21K just to go out. In one year. That seems bonkers when you consider the hourly salary in Iowa is $31K annually. However, this friend has discovered the cure to the budget. Shall we call it the anti-budget?
That anti-budget has a name and it’s called conscious spending. It’s where you finally understand that random spending doesn’t serve you just because it’s cheap/popular/conventional.
Conscious spending means you decide exactly where you’re going to spend your money–for going out, for saving, for investing, for rent–and you free yourself from feeling guilty about your spending. Along with making you feel comfortable with your spending, a plan lets you continue growing towards your goals instead of just treading water.
The simple fact is that as young people, most of us are not spending consciously. We’re spending on whatever, then reactively feeling good or bad about it.
You’re going to start spending on the things you love instead. If you like going to the spa but can’t be bothered about streaming services, why would you have them? Just so you can say you do? Or maybe FOMO?
Here’s the trick though. Before you can spend without guilt, it’s important that your bills are paid, retirement is funded, emergency savings is in place, and that you’re building wealth.
Tip 4: Plan for retirement
You can’t talk about money management and not throw in a decent amount of effort into retirement. And no, this is not just a clever way to cave to societal pressure and wait until you retire to start living. Who came up with that nonsense anyway?
Planning for your retirement is an important component of creating your best life because the goal is to work less the older we get, isn’t it?
So how much do you need to retire? While retirement planning is different for everyone, a quick calculation can use the 4% rule. This means if you need $50,000 per year, you should have $1.25 million stashed away in a retirement account somewhere. While you are still able to generate an income, you need to fund your retirement account. In fact, your ability to earn an income is your best asset.
Check out our retirement guide that walks you through the ins and outs of the various retirement products. Some takeaways include:
- There are tax benefits to retirement savings
- Matching on your 401(k) is money for free (In other words, just do it!)
- Pay attention to restrictions so you don’t pay the overfunding penalty
- Know whether you qualify for a Roth IRA or not
While you’re free to build up your retirement fund in any other investment account too, it’s better to max out your retirement products first, because… tax. Compare quotes from financial advisors to find the product that will help you reach your goals.
Tip 5: Start Investing, but keep it simple
You can’t talk about money management and not talk about investing. Okay, we said that about retirement savings too but it’s vital to your financial future.
If you’ve been a fan of Ramit for a while, you might recall his Ladder of Personal Finance guide which lists every money move you need to make to optimize how your money works for you.
Rung 1: 401(k) – max out matching, save at least 5%
Rung 2: Debt – pay it off. Interest rates paid on debt don’t serve you in the long term. It’s also great not to max out your credit as it affects your credit score
Rung 3: Roth IRA – if you qualify for this product use it. You simply can’t miss out on the tax benefits
Rung 4: Max out 401(k) – If you haven’t already, max this out. Once again, tax benefits
Rung 5: Non-retirement account – Finally earned your stripes to dip your toes into other types of investments.
There are a few things to consider with investing. For starters, just like your retirement savings, you’re in this for the long haul. There are no shortcuts and quick wins here. Okay, there might be one or two, but don’t bank on it. Your financial future rests on your ability to keep your hands off your investments for as long as possible.
It’s also important to know the risk of investing and whether the period you’re investing in will cover the costs.
If you’re starting out, start small and cheap. A robo advisor also happens to be a good way to automate your investments. It also helps to know that an investment is not a great vehicle for an emergency fund. You’re going to want to stick those funds into a capital-preserving account such as a savings account at a bank.
Your financial goals, along with a streamlined method for managing your personal finances, will determine your financial situation in the long run. It’s important to know that every dollar that passes through your account is a potential seed, and you have the opportunity to plant it well. Clever money management allows you to live your rich life now and in the future.