Do you struggle with money management? Do you want to get your finances in order in 2021? These 7 ideas are proven concepts for those who value improving their financial situation. Your mileage may vary, of course, depending on your own value system but rest assured these are based on solid concepts in personal finance.
1. Start budgeting
I’ve already written at length about the importance of creating a budget for achieving financial freedom, but it goes without saying that consistent and accurate budgeting is the cornerstone of all good personal finance.
While I recommend zero-based budgeting systems like YNAB(You Need a Budget), really any system will work so long as you budget consistently and you budget accurately. This might mean you need to open up your financial statements and track down all those random monthly subscriptions that have been adding up in your expense list.
Furthermore, good budgeting means getting an accurate sense of non-monthly but predictable “necessary” expenses like routine auto repairs and yearly Christmas gifts. Ideally, you should be saving up for Christmas gifts all year in order to not be surprised by a totally predictable expense.
The general lesson applies broadly so spend some time looking through your past several months of financial history to see what “variable” or non-monthly expenses you routinely spend money on.
2. Save an emergency fund
The flipside of setting aside money for non-monthly but predictable expenses is setting aside money for completely random expenses, like your pet suddenly needing emergency vet care or your engine going to smoke on the highway.
Ever heard of Murphy’s law? Understanding it is critical for better money management. It basically says what can go wrong will go wrong. For those of us who used to live paycheck to paycheck, how many can relate to the experience of saving up a little bit of money and getting ahead only to suddenly see the check engine light come on and feel your stomach drop. Huge, random expenses seem to occur at a pretty regular pace because that’s just life.
Hence, the need for an emergency fund. The most famous recommendation is the “$1,000” emergency fund of liquid cash set aside for emergencies. And that means no dipping into it because you blew $300 on a video game console! Only true emergencies warrant dipping into the aptly named emergency fund.
However, there is a second kind of emergency fund that is equally important to the $1,000 emergency fund variety: the 3-6 month living expenses emergency fund. This sort of fund is critical such that if you, for example, suddenly lose your job you won’t be completely screwed while you’re looking for another.
Now, I hear you. Saving up 3-6 months of all of your total monthly expenses seems like a daunting, impossible task. Especially when you’re working at Starbucks making $10 an hour and only getting 37 hours on the schedule each week.
I get it. I’ve been there. However, the fact that this is very difficult for minimum wage earners does not negate its importance in preventing serious financial harm and improving your money management. Unfortunately, in America there is not really a true “safety net” unless you are lucky enough to have parents or family that you can move in with if you truly do hit rock bottom (or some other equivalent).
For good or bad, that’s the reality. Now, when dishing out financial advice, just because the advice is difficult to live up to doesn’t make it bad advice. In philosophy, Kant talked about moral principles being “regulative ideals.” In other words, just because a precept is idealistic, i.e. impossible to live up to, it thereby does not negate its usefulness as a guiding principle in everyday life.
Hopefully it encourages you to up-skill yourself by e.g. teaching yourself programming with free online resources and getting a higher wage job (that’s what I did, btw, in order to escape my career in food service and pizza delivery).
3. Pay off bad debts
In terms of money management, this one is a no brainer. But easier said than done, especially once you get into a big enough hole with not enough income to dig yourself out (been there – done that). But regardless of the difficulty, getting rid of bad consumer debt should be of utmost importance to anyone’s financial goals.
What is bad debt? The classic example is credit card debt because the interest rates are so high.
It seems like a lot of people see credit cards as an easy way to achieve instant gratification. And speaking from personal experience, we don’t easily comprehend just how difficult it is to pay off all your bad debts.
The credit card companies have become absurdly successful banking on the premise that you will carry a credit card balance forever.
And for every dollar you give to the credit card companies in interest, that is less money that could be going to building your wealth.
Now, I wouldn’t go so far as to recommend that you cut up your credit cards or anything.
But I do recommend the basic “debit” mindset of spending money only on things that you have the cash to afford, the exception being “good debt” like mortgages, etc. (though, of course, it’s perfectly possible and quite common for “good debt” like mortgage to become bad debt when you buy more house than you can afford and you end up spending a huge percentage of your income on housing costs).
This general principle applies broadly within the realm of money management. It’s a pretty darn good rule to avoid debt whenever possible, unless you done a lot of careful research showing that the debt will lead to the ownership of appreciating assets.
But untold numbers of people have gotten into financial trouble because they had delusional hopes about some highly leveraged investment turning into gold only for the investment to fall apart and you being left with a ton of bad debt.
4. Learn to cook
Whenever I look at my fellow American budgets, I am shocked at how much people spend on going out to eat or takeout each month. This one is simple. If you value saving money more than you value fancy restaurants, it pays well to learn how to buy (affordable) groceries and cook at home. And it’s often much healthier for you as well! Not only that but it can easily turn into a engrossing hobby as well good material for nice dates with your loved ones. Cooking is arguably one of the most important life skills one can learn when it comes to better money management. Saves you money on healthcare too!
However, this is another area where personal finance becomes personal because if you strongly value the experience of eating out, then making room in your budget for that is perfectly acceptable. Just make sure you are accepting full responsibility for that aspect of your budget.
5. Invest in index funds
I could write a whole post (nay, book) on the virtues of index fund investing. It is not some special secret sauce. Many academics and financial experts alike will tell you that investing in low cost, low fee, low turnover, diversified index funds is the simplest and easiest way to retire as a millionaire, as well as the cornerstone of solid money management.
They work through the simple magic of compound interest. The key to successful index fund investing is more psychological than it is book smarts. One must have the emotional fortitude to buy and hold forever, resisting the temptation to follow the daily volatility of the market, avoiding the pressure of buy the latest, greatest growth stock or sell off when the market falls. When the market dips, buy and hold forever. When the market peaks, buy and hold forever. There is never a bad time to buy and hold index funds forever. That’s the name of the game.
Index fund investing works for those of us who are risk-averse and capable of patiently waiting decades for your investing to pay off. If you are seeking short term riches, index fund investing is not for you. But if you are looking for the simplest and most empirically proven way of building long-term wealth, index fund investing is the way to go.
6. Find affordable hobbies
This is another area where personal finance becomes personal. If your hobby involves buying very expensive things all the time, and that is your highest value, more power to you. But, just saying, if you value saving more money, then it would probably be prudent to find more affordable hobbies like reading library books or going on walks, unless you are already in a solid financial position with plenty of disposable income. Everything in moderation. However, the reality is that if you strongly desire to increase your wealth and your hobbies have minimal costs (or better yet could possible lead to extra income!) then you are positioned for financial success. At the end of the day, it is up to you to use your own values to maximise your own happiness and those around you.
7. Live closer to work
It’s amazing to me how many people are perfectly happy to commute upwards of an hour each way to their job. The hidden costs of such a long commute are quite astonishing, as Mr. Money Mustache has proven quite strikingly in his analysis. Better money managements definitely starts with spending less of it on transportation.
But yeah, personal values, etc., etc. If you work in the city but really value living out in the suburbs or even out in the country and don’t mind losing all that precious time every day and are financially prepared to absorb the exorbitant cost of commuting, then by all means, do it. But if you want to save a serious buttload of money, consider moving closer to work.