For better or worse your finances can solve or create large problems for each and every one of us. Below is an outline of the Top 5 moves you must take when dealing with cold hard cash:
Think in Percentage Terms: This is one of the hardest tasks for the human brain given that we’ve been taught to think in terms of prices, $1, $50 or $1,000 is all relative to the person you’re talking to. Money depends on entirely on a person’s disposable income. In order to become financially savvy we must learn to think in percentage terms. If you make $2,000 a month that $50 shirt is actually 2.5% of your entire income, quite a large number. If however the person makes $10,000 a month, it is only 0.5%, a small sum for a t-shirt. This switch in your brain will allow you to manage your money better by setting up an automated spending, saving, fun and shit hits the fan scenario accounts.
Automate Accounts: Simply put, humans have a hard time estimating costs in the future. Your car breaks down, a slug of friends decide to get married, you get a speeding ticket, you have dental problems… the list goes on. The trick here is to set up an automated paycheck distribution the day you begin your job. Below is the correct set-up
- 401K: Max this out to your employer’s match, no excuses (a match is a 100% return)
- Debt: Auto pay down all debt at rates that avoid charges that accrue higher than your risk free return (eg. ~1% today)
- Living Expenses: Your checking account should only see money that will be used for real expenses mortgage/rent, food, water, internet, electricity. Calculate the exact amount
- Emergency/Spend/Invest: Assuminga-c are all in order take your remaining percentage divide by three and split into these three categories so you always have money in an emergency, cash to invest into the future and money to spend and live a fun and interesting life. (One note, as soon as you reach 3 months of liquid savings for an emergency account feel free to invest and spend the rest in a fashion that makes you happy.)
Save Lump Sums: If you ever receive a lucky lump sum, split it into debt, investing and emergency funds. Notably, we are not advocating a single cent of spend for roughly 3 months. Why? As soon as people receive a large amount they get an emotional high that takes a few months to come down. This is important as the simple act of moving the money into different accounts will make it psychologically harder for you to spend it 3 months later, like breaking through a plateau in the gym your body now “remembers” the feeling of the money.
Invest Early: This is quite possibly the most important move for anyone with a few thousands dollars or more in the bank and gets magnified substantially dependent on your net worth. To put it simply, the more you have the more you lose by not investing. If we assume that you are lucky and have $100K or more to invest, if inflation is at 2% and your cash account runs at 1%… You’re losing 1% a year every year. This over the course of the next 30 years? Roughly 35% loss
Abuse Reward Credit Cards: Contrary to crap that is out there about an all cash diet, to be successful with money you must learn discipline in the form of self control. Every single item that is purchased should be bought with a credit card and treated like cash. This means you will be getting something for every single purchase you make, be it 1%, 2% 3% etc. To start off slow we recommend the Chase Freedom Visa Card as it has $0 in annual fees and gives you 1% to 5% in rewards dependent on purchases
Conclusion: While the five moves to financial freedom seem to be easy in print, they are actually quite difficult to pull off psychologically. That $10K windfall will more likely than not be blown on items you don’t need. The automatic savings you’ve created will be broken if you allow yourself to continuously check how much you have and think of the emergency fund as liquid. If you come into a lot of money, many people attempt to “hang on to the exact amount for dear life” which then makes them directly prone to inflationary losses. With this said hopefully you can apply the five simple money management principles and continue to invest in yourself, grow your portfolio and become financially free.
