6 Essentials of Money Management
Anyone who knows me well knows I’m passionate about money. It’s not the money per se that interests me, it’s the idea of freedom and choice that having it represents. I haven’t always been this way – though saving money has always been easy for me.
I first started managing my own money when I moved into my first apartment at the end of university. Yeah, before that I had some savings but I never had a regular income.
After getting the apartment it was like someone had lit a fire under me to improve my finances real quick.
1. Get a Job
Step one is always to have some income. For 99% of folks that’s going to start with a job. Doesn’t have to be anything fancy but hopefully, it will be regular.
With regular income, you can start seeing into the future a bit. You can start to prioritize your next purchases. And your time outside of work will suddenly become more precious.
2. Have a Goal
For years I did alright putting a certain percentage aside every month. But the moment I decided to have $10,000 at the end of the year – my savings rate jumped.
There’s an instant morale boost every time you get closer to your goal. It’s almost like gamifying a portion of your life. And there’s no longer the easy option to cheat by putting a smaller percentage aside one month by telling yourself you’ll catch up the next.
Sometimes you’ll even want to get to your goal faster.
Examples: Pay off credit card/student loan debt, save up an emergency fund, travel abroad for a year, save enough for a down payment on a house, max out your IRA for the year.
3. Pay Yourself First
This is the easiest way to reach your goal assuming you have one. It’s like a budget but in reverse.
Sounds silly I know. I’d always heard how a budget can help improve your finances. For me for some reason, that doesn’t work. I can’t write up a plan and detail it to the last penny for the month and then follow that plan.
Don’t get me wrong, you should know where your money is going. But instead of factoring in all the little details go straight for the big things first. Let the less important stuff triage itself out of existence.
Let’s say your goal is to save $6,000 for your IRA over one year.
$6,000/12 months = $500/month. Each payday, put those dollars aside before you do anything else. Or at least at the same time, you pay your other necessary expenses (rent/mortgage, insurance, food.)
Then you can take care of the less important stuff.
*Attention, in the attempt to save money you should never deprive yourself of good, healthy food. Some people talk about living on ramen when things are tight – I do not advocate this. There’s assuredly something else that could go first.
4. Have a Security Fund
Every money guru talks about a security fund. They’re all right – you should have one.
I couldn’t say what the magic number should be though. Whether it be all likely expenses for three months, six months, or a year – it all depends on your circumstances.
For example, an individual college student with no car will need a much smaller security fund than a couple who’ve just bought their first house and are anticipating the arrival of their first child.
5. Invest
Now that you have a goal, some savings, and a stash for emergencies, you need to get your money working for you.
Hate to say it but banks are not your friend. Even leaving money in a savings account will be detrimental over the long run. That might be a good place for a security fund or any short-term goals, but beyond that inflation will rub away your hard-won dollars.
Historically the stock market has been the best place to park extra capital. Investing can be as complicated as you make it to be so if you’re a simple person don’t be intimidated. Just sign up for an account with Vanguard, or Fidelity, then find an index fund, put some money in it, and wait.
This means you don’t have to do any specific research, and you won’t pull your hair out when a certain company does poorly. Even Warren Buffet advises index funds.
I should note, if you’ve the intention of being an ethical investor, this might not be for you as index funds are likely to include companies that manufacture and sell arms, alcohol, unhealthy foods, petroleum, etc.
6. Track Your Progress
Finally, you should keep tabs on your progress. This can be very satisfying for your short-term goals. For the long-term ones, it is less a matter of spurring yourself on to greater efforts than it is to reflect about the different places you’ve parked your money.
You can adjust if needed. The goal here isn’t to stress yourself out but rather to stay aware of where your money might be better placed. Here is where you might compare the advantages of different kinds of income when it comes to taxes. Hopefully, this will lead to long-term tax planning.
[Disclaimer – I am not a financial advisor. The above are the bedrock rules I’ve distilled from reading finance books and playing with my own money. Though I think they should apply well to anyone, I am not qualified to give financial advice.]
For Further Reading
I’ve read more than my share of finance books. The ones that stand out the most are:
The Richest Man in Babylon by George S. Clason is an oldy but a goody. Written in the 1920s Clason simplifies the concepts of money and investments through a bunch of parables. I love this book.
The Millionaire Next Door by Thomas J. Stanley and William D. Danko is a classic of financial sociology. The authors research the real millionaires in America and discover that you wouldn’t recognize most of them as such. They generally make humble choices and work regular jobs. They don’t sport expensive cars or clothing. If your goal is making good financial choices and becoming wealthy, this book is worth a read.
The Index Card by Helaine Olen and Harold Pollack is a book that destroys the intimidation factor of investing. The premise is that most financial advice you’ll ever need could be contained on an index card. The big difference between the wealthy and the not is their allocation in the stock market.
What do you think about all this? Do you have your own essential rules? Please leave a comment.