If there’s one thing that separates financially independent people from week to week financial slaves, it’s having a good relationship with your finances! Let’s go through some practical tips to help you get on top of your money.
Have a plan
Failing to plan is planning to fail. It’s 100% true. You should take some time to look at your financial life and put together a basic plan. I often see people blindly making financial decisions without taking a holistic look at their financial life priorities.
A good financial plan makes room for your needs and your wants, so there’s no reason not to have one.
How much to save
There are two types of savings here. A proper emergency fund (which should only be touched during an actual emergency, not when you need something to wear to a friend’s wedding) and retirement savings.
These are two critical components of a strong financial foundation. Here’s the rundown. Your ultimate emergency fund should contain at least three months of take-home pay set aside, in cash, for an emergency.
You can start smaller, of course by trying to put away one month worth. Then build on that to two month.
Then make sure you are also contributing enough to your retirement plans. Saving for retirement can be a massive goal (we’re talking millions), so every little bit counts. No matter what you’re contributing now, set calendar reminders to increase those contributions every year.
When to start saving
You should start saving last week, seriously. It is absolutely critical to save as much as you can now. This is because it will likely only get more difficult to, in the future. Saving allows you to control your money and let it go toward your own financial goals, rather than it control you.
Finally, compounding interest isn’t magic, it’s math. Money you put away today will do a lot more for your future than what you can save if you start in another five years.
How to start a budget
To budget properly, you should start with your monthly income, deduct your financial obligations (like rent) and your goals (like student loans). Whatever is left after these deductions is your “flexible spending number,” a weekly amount you can spend however you see fit, be it on vinyl records or that holiday to Mexico.
The great thing about having only one number to budget with is that you can actually stick to it. You can put your dollars where they matter most to you.
The biggest waste of money is…
The one thing that always seems to blow up a person’s budget is rent. Your rent should never be more than 30% of what you take home each month. It’s so easy to rationalize this overspending because it’s your home. But between work and life, how much time do you actually spend there?
Rent is susceptible to what we call “lifestyle inflation.” As you make more money, you spend more across all areas of your life. If you can keep your rent in line with your starter salary, it will give you that much more room to splurge elsewhere.
Consider sharing a house, or getting a home loan for somewhere more affordable.
Where to cut costs
If you’re one of those people who just hopes that each month there’s extra “leftover” to save, then anything is going to be a battle. Flip the savings equation on its head. Be proactive and automate contributions to your savings accounts.
As far as things to cut back on, take a look at your eating out expenses. Then at things like subscriptions (cable, gym memberships, phone bills). Instead of cable, use streaming services. Instead of paying for the gym, try daily running routines in your neighborhood which is free. These are easy ones you can likely find ways to trim.
One of my favorite tricks is to keep a shopping list on my phone. I write down everything I might want or need, and when I’m in a store I will stick to this list. I also take at least one thing out of my cart at every check-out line. It’s the little things.