It’s payday. You’re happy. But your joy doesn’t seem to last for long.
You start to pay your bills one by one, and quickly the money leaves your checking account just as soon as it got there. In the blink of an eye, you’re pretty much right back to where you started …
You’re living paycheck to paycheck, and you can’t stop worrying about money. And unfortunately, your story is not unique.
According to a report from CareerBuilder, seventy-eight percent of full-time workers said they live paycheck to paycheck, up from 75 percent from the previous year.
If you think that simply earning more money is going to solve your problems, think again! In the same article, they state that nearly 10% of people who earn $100,000 or more can’t seem to find a way to make ends meet.
So what’s the solution? Why is it that some people seem to be less stressed about money while others can never seem to get ahead?
In this post, I’d like to give you five strategies for building better money habits that you can use to pull yourself up out of the hole and put your financial worries at ease.
But first: What is it that each of these tips will have in common? What’s the common goal that each one will have you working towards?
The Ultimate Solution to Your Money Worries = Financial Freedom!
Think about what it is that sets you apart from the Rich and Wealthy.
You might be able to list a few (and I could tell you a few of my own ideas in this article here).
But all-in-all, there is one main underlying thing that the truly Rich and Wealthy have achieved when it comes to money that helps them to be worry-free: They’ve got financial freedom.
What is financial freedom?
Financial freedom is the point where you’ve got enough savings or other income streams that you don’t have to work for money anymore. Essentially, you could afford to live your current lifestyle for the next few decades without any concerns about money.
The classic example of financial freedom is a retiree who has saved up $1 million dollars. If this was you, using the 4 Percent Rule for retirement, you would be able to withdraw 4% of your savings ($40,000 per year) for at least the next 30 years without any worries of running out of cash.
Now that’s confidence!
This is why building up your nest egg and savings is so important. For most people, your nest egg will be the ultimate key to leading a life of financial independence.
This is exactly the place I want you to get with your money. It won’t be easy, and it will take a lot of effort. But the closer we get, the more at ease you’ll feel about your finances. Your confidence will grow, and your time will be freed up to focus more on improving other (more important) areas of your life.
Sound good? So how do we get started?
1- Get Control of “Money In” vs “Money Out”
Step one any time you want to improve your finances is always very clear:
You need to get a VERY clear picture of how much money is coming in and how much is actually going out.
It sounds so basic … I know. But it’s a step that is often so trivialized that we tend to overlook it and allow our expenses to pile up.
For example, we one time went back-to-school shopping for our kids. On the drive home, my wife and I guessed that we had spent probably $500 on items for our kids. But later when we actually added up all the receipts, the damage was more like $1,000.
Somehow all those extra purchases just snuck up on us!
Why is tracking your finances always so important?
There’s a very popular quote by management expert Peter Drucker:
“You can’t manage what you can’t measure.”
It doesn’t matter whether you earn $10,000 per year or $100 million dollars per year. If your outgoing exceeds your income, there are going to be money problems! (If you don’t think so, just look at the financial trouble actor Johnny Depp got himself in back in 2017.)
So how do you track your finances?
Step 1 – Make a list of how much money is coming in.
This part should be relatively easy. For most people, their main source of money comes from their job.
But if you’ve got other streams of income coming in, be sure to note that too.
Step 2 – Understand what you’re spending your money on.
The best way to do this is to start a monthly list or fire up a spreadsheet in Excel or Google Spreadsheets.
Start by looking back through your checking account over the last 3-6 months and seeing what bills you’ve paid, checks you’ve written, etc.
If you’ve got credit cards, break those down into separate categories too such as Food, Auto, Clothes, etc.
What do we do with all of this information once we have it?
You create a budget!
Step 3 – Creating your budget.
I know … everyone likes to hate on budgets. But like we pointed out with the Drucker quote, if you’re not tracking what you’re doing, then you really have no hope of ever improving it.
Here’s the truth about budgets: They only work when you actually follow them. And its up to you how you design them.
Make them too strict, and you’ll choke. But make them with realistic goals and with enough room to fit your lifestyle, and you’ll be okay.
The goal, of course, is to always be tracking! Always be understanding clear as day how much money is going in and how much is going out. Without that information, you won’t know how to react and where improvements need to be made.
Bonus tip: To have complete peace of mind when it comes to budgets, I prefer to work with annual budgets over monthly ones.
Annual budgets let me see how my finances will look and if I’ll be on track over the course of an entire year! Honestly, it’s pretty hard to be financially surprised when you can look 12 months ahead and have a pretty solid estimate of how money is going to be in our checking account.
2- Dramatically Reduce How Money is Going Out
There’s nothing like having a few thousand dollars in the bank ready to help you stop worrying about money. No matter what the situation or the emergency, you’ll know that you’re covered.
But how do you save up “a few extra thousand dollars”?
Let’s be real … there are fundamentally only two ways to save more money:
- Earn more
- Spend less
Between the two, I want to focus on #2 for a minute: Spending less.
Spending less is something we all have the power to do.
Seriously! No matter how tight you think your spending is now, there is ALWAYS room for improvement.
What’s the best way to get started?
1- Challenge all of your purchases.
Why are you buying the things you buy? Are these things you actually need, or just simply things you want?
2- Ask yourself: How will this purchase improve your life?
Again, I love to buy things just as much as you. But sometimes it helps to stop yourself and ask if this thing you’re about to spend your money on is actually going to improve your quality of life in any way, shape, or form?
3- Multiply the purchase by 7 and then ask yourself it’s still worth it.
I’ve previously written an article that showed how a dollar saved today is actually worth $7 in the future. So if that thing you want is only $100, you should really think of it as costing you $700 in future savings. Will the purchase still be worth it?
4- Last question: Can I do better?
Can you get a cheaper quote or buy this item online for less? I’ve found that 99% of the time the answer is almost always YES. I’ve had experiences where I’ve put in the effort and ended up saving hundreds or even thousands of dollars on single purchases. It’s amazing what kind of deals you can get if you’re just willing to work towards them!
3- Save More By Paying Less Taxes
As I mentioned in the previous one section:
Spending less is one of the best ways to build up your savings.
BUT, what if instead of spending less on the things you actually like, we spent less on the things you DON’T like … such as your taxes!
How can you do that?
By calling your employer’s HR department in the morning and bumping up your 401(k) contributions!
Remember that with a 401(k), you’re saving your money BEFORE the taxes are taken out. This means that effectively you’re saving approximately 28% more than you normally would if you tried to save your money post-paycheck (like everyone else tries to do).
Whether you’re saving an extra $100 or $10,000 per year, this 28% addition can be a very significant advantage to all savers. Year after year, it’s really going to start to compound and add up!
(Curious why 28%? Here’s a post that explains the math.)
Don’t forget: In addition to the tax-deferred savings, your 401(k) also gives you the opportunity to:
- Invest your money for long-term growth as well as …
- Rack up additional employer contributions along the way.
Over time, all of this just means good news for you. And nothing makes you feel worry-free about money quite like knowing you’ve got a growing nest egg heading towards six or seven figures!
The bottom line: I can’t recommend this enough … work towards that goal of maxing your 401(k) every year!
4- Invest For the Future
Of the elements in the machine that takes our savings and turns it into passive income for life is investing for growth.
Suppose you were able to save $10,000 per year over the next 30 years. You are given two choices: Either save the money in a regular bank account earning no interest or invest it in a stock market index fund.
Which one would likely produce the better results?
The stock market index fund of course! And by a long-shot: $944,608 vs $300,000.
In terms of potential monthly passive income, that’s $3,149 vs $1,000. Over three times as much!
This is thanks to the magic power of compounding returns!
What this means for you: In order to generate future long-term, worry-free income, you need to think big and invest for growth.
There’s a very smart way to do this: Simply put a portion of your savings that you feel comfortable with in a stock market index fund. As an example, the S&P 500 index has returned between 9-10% over the past 25 years.
The rest of your money can go in a more conservative bond index fund.
Two very popular choices, low-cost choices are:
- Vanguard Total Stock Market Index Fund Investor Shares (VTSMX)
- Vanguard Total Bond Market Index Fund Investor Shares (VBMFX)
What’s the right proportion to invest in stocks?
Again, what / how much you decide to invest (called asset allocation) is a personal comfort question.
But if you’re looking for some sage investing advice, the Rule of 120 seems to be a good place to start.
This works when you take your age and subtract it from 120. The result is the percentage of your nest egg that you should have invested in stocks. Everything else should be invested in bonds.
Example: If you’re age 30,
120 – 30 = 90% invested in stocks.
100% – 90% = 10% invested in bonds.
Just an FYI: There are other variations of this Rule where you start with 110 instead of 120. Again, it’s just a guideline. It’s up to you how aggressive or conservative you’d like to be with your investments.
5- Work on Your Financial Habits Daily
These tips for handling your money aren’t just a one-and-done solutions.
Just like your education, health, and weight, practicing the right habits are what’s going to keep you on track for the long-haul and give you the peace of mind you’re looking for.
Your goal: Practice the advice you’re reading and actually work it into the things you do daily.
When it comes to your finances, everyone always thinks the time to apply what you know is when you’re about to make a big purchase like a new car or house. But that’s not true. You can use these techniques all of the time to be constantly saving and improving your money.
For example, the next time you go to buy something online, take an extra 5 minutes and see if you can find a coupon or promo code that will give you a few bucks off.
I did this when we were in line at a store waiting to buy some new patio further. Lo and behold, I found a coupon that knocked off $60 – just like that!
This is an example of the kind of habits I’m talking about. As long as you’re always:
- Tracking your money
- Spending less (and hopefully way less) than what you earn
- Challenging your purchases and getting the best deal possible
- Investing for long-term growth,
Then you’re going to be able to stop working about money, achieve financial freedom, and live the life you’ve always dreamed!
Readers – What are some of the strategies you use to worry less about money?
Photo credits: Pexels
I keep my finances lean by investing first and that helps me avoid extra expenses. I also used to track expenses and that help for a bit. Setting up a discretionary spending budget amount monthly also is a good trick. The secret is not to go over the planned amount.