We’re already up to five posts! I hope you found my series on productivity useful. Since money is one result of productive work, and since budgeting is a huge source of stress for millions of people, I thought I would do my best to share the most effective money management strategies I’ve discovered. In my view, the single biggest obstacle between most people and financial wellness is simply an unwarranted fear of the problem; expertly handling your cash takes a little work, but it’s really not hard once you follow a few pretty simple rules.
Disclaimer: I’m pretty good with money and my personal finances are in great shape, but I’m not a financial adviser, an investor, or a lawyer. Always do your own research and think carefully about all major life choices. I don’t get paid by or on behalf of any person or company I recommend in this post, they’re just people I do business with and personally trust.
Rule #1: Pay Yourself First!
If you only change one thing about the way you manage your money, please do this. Savings rates in America have plummeted dramatically over the last 50 years and are now at barely 1/3 of their historical average. As of this writing, the average American household saves just 2.9% of its income. This is not remotely enough for – well, anything. Even if you never have a single major emergency expense in your entire life (you will), after adjusting for inflation, you’re getting a grand total of about 1 year of retirement – maybe 2 or 3 at best – for every 100 years that you work. That’s not a typo.
It all starts here. Personally, I like to recommend saving at least 25% of your income, if not more. I realize that for a great many households, that’s not feasible right now; that’s okay. It doesn’t have to start happening tomorrow, but if you’re not already saving that much, you really need to begin working toward it in small steps if you desire real financial independence. The rest of this post will cover some specific strategies on how to get there, but the
golden platinum rule is this, and it’s inviolate – pay yourself first! Yes, even before your bills are due, put something into your savings account (or life insurance policy, or investment portfolio) and don’t touch it, ever (except in case of truly extreme emergencies). If, for now, you can only spare $5 per paycheck, so be it – put it away, and don’t feel silly about it. The discipline you build by making it a habit now will be tremendously useful in years to come.
Rule #2: Put Your Savings to Work!
Thanks to federal law, savings accounts in the US are prohibited from paying interest.1 Inflation chops the real value of your money at a rate of roughly 50% every 20 years, which means if your savings is just sitting in a regular account or in your mattress, you’ll be in for a nasty shock when you’re ready to retire. In order to (partially) overcome the damaging effects of inflation, you need to put your money somewhere where it can gain value faster than it inflates.
- Whole life insurance is a great starting point if you’re not sure where to begin saving, or if your risk tolerance is generally low. There are myriad benefits to life insurance as a vehicle for long term savings and emergency expenses, like the option to take loans against the value of the policy at very low interest rates and to collect portions of the death benefit in advance in the event of a terminal illness. Consider talking to an expert, like David Lewis over at Monegenix.
- Employer-sponsored 401(k) plans can be advantageous, but use caution: money in a 401(k) isn’t actually yours, in several significant ways. Most such plans will offer notably better rates of return than life insurance, but there is more risk of loss, as well as a phone book of restrictions on how and when you can access the money. Personally, I’m not a fan of not being able to access my savings when I want or need to, but your mileage may vary; these kinds of plans can be useful for some people.
- Gold and precious metals are, in my view, a must-have addition to any portfolio. 10% of my savings is in gold and it’s one of few hard assets that, as a general long-term trend, holds a more or less constant value in terms of its real purchasing power. Gold is also highly liquid and can be quickly turned into cash if you have an immediate need.
- High-risk investing in stocks and bonds is not something I have much to say about; because it’s so potentially risky (but also proportionally rewarding in some cases), I’m just going to tell you to talk to a professional.
Rule #3: Live Within Your Means!
Remember in rule #1 when I said to pay yourself first, if that’s the only thing you change? That’s true and I stand by it, but this is really the other thing you need to do. And when I say “live within your means,” I mean well within your means. If you can afford a $3,500 mortgage payment after you’ve already paid yourself 25% and you’ll still have grocery money left, then by all means, flourish away (no sarcasm). But most of us aren’t quite there – yet. Pretty much every study ever done on the subject confirms that most people tend to immediately spend the extra money every time they get a raise or an unexpected bonus, or pay off a major loan. Resist the temptation!
If you’re already trapped under an expensive house and two new cars and it’s not leaving you with much cash left over at the end of the month, your best way to gain some breathing room might be to simply prevent further accumulation of debt. If you get a raise or a bonus, don’t buy a new toy with it – pay down your loans or toss it into savings (see rule #4). This is one of those things where an ounce of prevention is worth a metric ton of cure, but if you’ve already bought more than you can comfortably pay off, all hope isn’t lost – cut what you can, where you can (see rule #5), and stop taking on more debt. Future you will thank you when you actually have a nice nest egg 30 years from now.
Rule #4: Save Before You Pay Down Debt (Usually, Sometimes… For Some People)
There is an ageless schism over this question among financial samurai, and if the parentheses above didn’t make it clear, I don’t think there is a one-size-fits-all answer. That being said, I do think that for a majority of people, in a majority of situations, it makes more sense to build up an emergency fund before you worry about zeroing out your credit cards.
Remember what money is: a tool for taking you where you want to go, for adding value to your life, but it’s not the standard, the end-all-be-all, the final goal in and of itself. Yes, depending on your specific situation, you may in fact be leaving some money on the table by deciding to build your savings before paying down your debt. Even so, I think there are strong reasons to do it this way.
- Savings – cash in the bank, or wherever you’re putting it – is a hard asset. It can be used to get you out of a bad scrape, should you find yourself in one. Unless it’s a credit card or an open line of credit, a smaller pile of debt probably can’t. It might cost you some cash in the long run, but personally, I’d much rather have lots of savings (read: lots of options) and lots of debt than no savings (no options) and less debt. As long as you can at least make minimum payments on your debt, just take a breath – it will be okay.
- At least in some cases, it’s even maximally efficient to do it this way, especially if most of your debt is in the form of student loans, a home loan, or other types of debt that generally carry low interest rates. If your savings can be invested in such a way that it grows faster than the interest you owe on your debt, it’s truly a win-win. Bust out the calculator and see what you come up with.
- By getting creative and thinking long term, you might even be able to refinance your high-interest debt into much lower-interest debt and gain some hard assets all at once by utilizing your savings. For example, if you have lots of credit card debt, but you’re looking to buy a home, you may be able to put down a significant amount of cash during the home purchase to establish instant equity, and then borrow against your home to pay off the credit cards – now you have a house and the interest on your debt is ~4.5% instead of 25% or more. Had you just taken the cash and paid off your credit cards, you’d be debt-free, but perhaps not able to get the house you want without the down payment.
Rule #5: Brutally Slash Your Expenses
Okay, maybe this sounds obvious – if you want to save money, reduce your bills – but I think it’s the adverb brutally that is missing from many budgets. If you don’t already have a spreadsheet or other method of tracking all of your monthly expenses, make one for free with Google Sheets, then do some honest introspecting. What do you really need to commit to every month, and what’s a luxury that could stand to be cut? Personally, I find it helpful to color code each line of my budget – green for essential expenses, yellow for things of moderate importance, and red for luxury items. If I need to make some cuts, red items are the first to go, followed by yellow.
In addition to getting organized, you can ask yourself some direct questions – do you really need a $5 Starbucks drink every day, or can you live with homemade coffee at $0.25 per cup? If you smoke or vape, or drink regularly, eliminating those things might be good for your wallet (and your health, in some cases). Do you really need 4 different video streaming services? So on and so forth.
These kinds of tips are pretty basic; there’s a different, less obvious way in which many people leave lots of money on the table.
How much is your cable/internet bill? Your utilities? Cell phone bill? I find that a lot of people assume that just because a particular bill amounts to $X every month, that’s just how much it’s going to be. Hogwash. With a bit of patience and some charisma, you can save tons of cash on your regular expenses.
About once every 90 days, I spend an hour or two calling up everyone I give money to and politely asking if they can give me a better deal. Sometimes this involves changing your plan to a cheaper one, or one that wasn’t available last time you checked. Other times, companies that value your ongoing business (and hopefully, your stellar payment history) are perfectly willing to let you in on promotions or discounts you wouldn’t normally be eligible for, like those usually reserved for new customers. If they tell you no, it’s worth calling back one or two more times the next day to see if you can get a different answer from a different employee, just don’t be obnoxious about it. The last time I called around to shop for better deals from my service providers, I ended up cutting my bills by $140/month without even having to downgrade anything!
Rule #6: Get an App
Unless your budget is extraordinarily sparse and simple, you need some kind of external tool or software to keep track of it all. It doesn’t matter what specific programs or methods you use, as long as it works for you, doesn’t take up too much of your time, and you remember to use it consistently. Personally, I heartily recommend a combination of You Need A Budget ($84/year) and a simple spreadsheet. I track each payee, how much I owe them, and when in the spreadsheet – this is also where I color code each entry for its priority. A simple summation formula in one cell totals all the others, so I can readily see at a glance what my total monthly commitments are.
YNAB is great for recording each individual transaction and tracking the balances of all of your debts and assets; it can even automatically import transactions from your bank, if you’re comfortable letting it do that. Its real claim to fame is its category-based budgeting system, which makes it very easy and intuitive to watch your spending without spending tons of time micromanaging the balance of each individual account. I think YNAB is the best all-purpose budgeting app out there – it can do most things pretty well for most people. If you have highly detailed, complex investment accounts that you want to track on a daily basis, you may want to look for a more specialized program, but YNAB is superb for the average Joe. I spend 120 seconds per day (at most) on managing my budget and it’s always correct, efficiently recorded, and easy to understand at a glance.
The bottom line is: the “keep track of it in my head” method just doesn’t work. It might be fine for keeping a very vague eye on your major expenses, but if you really want to start saving for long-term goals and putting your money to work for you, it’s going to require at least a few tools.
Rule #7: Lowball Your Income, Highball Your Expenses
This one’s pretty simple: budget as though you make 10% less than you actually make and spend 10% more than you actually spend. For example, one of my monthly bills is actually just north of $90, but I budget $100 for it in YNAB and in my spreadsheet. Do the reverse with your income, and boom – 20% safety cushion. If you can live within your slightly more modest, hypothetical means, the occasional large bill or small paycheck is no big deal anymore. This tactic is especially effective when combined with everything else on this list; practice all of these tips together, and you’ve got a powerful system of multiple redundant safety valves against overspending.
Rule #8: Side Hustle for Gift Cards
You’d be amazed how easy it can be to rake in gift cards from legitimate companies in exchange for piddling amounts of your time and effort. Last year, I scored $1800 in Amazon and prepaid Visa gift cards from market research firms and short odd jobs posted in plain sight on the internet. Craigslist is an excellent resource for these kinds of opportunities. You can also google phrases like “market research +my city” and put yourself into the databases of companies nearby, who will then call you when something comes up you might qualify for. As an hourly rate, these types of side gigs often pay exceedingly well – it’s not uncommon to receive $100 or $150 for one hour of work. Best of all, gift cards aren’t considered income and aren’t taxable, so you can at least keep a small portion of your property all to yourself.
Rule #9: Don’t Count on the Government
I’m going to let you in on a surprisingly little-known secret: if you’re truly committed to flourishing, to living the best life you possibly can, for yourself – the government (in its current form) is not your friend.2 Specifically, with regard to the context of this post, I’m referring to mandatory “retirement” programs and entitlements that can’t be opted out of, such as Medicare and Medicaid (or whatever their equivalents are, if you don’t live in the US; virtually every country has programs like these). Recall that a flourishing person sustains his own life by his own effort; he neither gives nor takes the unearned (see my series on Productivity as Your Central Purpose). Government handouts are doubly damaging to your life and your self-esteem – both when they take from you without asking, and later when they give to you what they’ve taken from someone else. Yet, they can’t be avoided or opted out of, so what is a self-respecting, life-loving person to do?
In a word: take it on the chin, and ignore the bureaucrats as much as you possibly can without prompting them to take action against you. You can’t stop them from taking 20-50% of your money, but you can refuse to let that wreck your life or your soul. File and pay your taxes on time, then forget about it until next year. When it comes to things like Social Security, don’t plan on it being around to reimburse you for some of what it’s taking now, especially if you’re in your 20’s or 30’s. I strongly recommend planning your retirement under the assumption that you will get $0 from the government; the way things are going now, that becomes less of an assumption and more of a guarantee every day, anyway. If you’re counting on government redistribution of wealth to fund all or part of your retirement, I think you’re asking to be let down in more ways than one.
What if Social Security and other entitlement programs are still clinging to life by the time you retire, and you are able to get something out of it? Should you? Is it ethically justifiable?
Yes, it is – provided that you never fail to make it clear that you disagree with the entire system on principle and want it dismantled. You are fully entitled to receive a refund of funds taken from you against your will, provided it really was against your will and that you never advocate for that system’s continued existence.
There you have it – 9 straightforward ways to strengthen your budgeting habits and become a financial ninja. Do you have other ideas on ways to save money, bolster your income, or manage your cash more efficiently? Post them in the comments below!
Sources & Footnotes
1: Most US savings accounts technically do pay some interest, but let’s be real, the amount is capped by regulations and is so small that it means nothing. Balances of thousands of dollars might earn a few pennies in a year.
2: When it performs its proper function (protecting you and others from crime and fraud), the government is your friend; it is not your friend when it oversteps its proper function and begins to violate individual rights.
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