This is an old blog post I wrote in 2021. I recently used the ideas of this post for a webinar I hosted two weeks ago. I am resharing the post for the benefit of those who never read it in the past and for those who missed the webinar.
Also, I am hosting monthly money coaching calls. I will share my money strategies and answer questions you have about your specific financial situation. If you are interested fill out THIS FORM.
This post is 1,998 words, a 10 min read. Enjoy!
Do you remember the first time you took calculus? You were probably as confused as I was.
But one of my professors used to say, “Calculus is just hidden algebra.” He meant, we just need to break the problem down into its core parts. From there we can use simple algebra to solve the problem.
It is the same thing we must do with money. There are so many different parts of our personal finance. It is very easy for things to get complicated very quickly. My goal is to make the basic concepts of money as clear as possible so you can begin moving toward your goal.
First, we will begin with my guiding money principle which is:
"Live on Less Than You Make, Invest and Save the Rest"
This has been the Guiding Light to help me understand money better. So let’s break it down.
"Live on Less Than You Make"
The first step of your Personal Fiance is understanding the money you have coming in and the money going out. It’s asking a few questions:
How much do I make every month?
Do I make enough money to survive?
How much do I spend every month?
Part 1
To answer these questions, you need to Track Your Expenses. Here are a few ways you can do this:
Use an app/website like Mint.
It will automatically load and categorize all your expenses from various accounts.
Caution: you will still need to clean up the Mint categories to match your personal spending.
Manually go through your old bank or credit card statements combined with excel to categorize and add up your monthly spending.
Using an app like Monefy or Paper and Pen to track your spending over a specific period of time
Caution: your month-to-month spending can change so add a buffer at the end of your monthly tracking.
When tracking the main categories are as follows:
Needs: Rent, Bills (power, water, gas, internet, etc.), Insurance, Debt Payment, Transportation (Gas, Bus/Train Fare, Car Note, etc.), Food (Groceries).
Wants: Eating out, Travel, Streaming, Clothes, Shoes, Drinks, Movies, etc.
Savings: Emergency Fund, House Down Payment, Car, Gifts, 401(k), Roth IRA, etc.
You can create as many subcategories as you need for your specific life.
By doing this, you will be able to visualize exactly what is happening with your money. Be prepared to be surprised.
When you have all your numbers, do one simple calculation:
Income-Expenses = Monthly Excess or Deficit
Two Questions to ask at this point:
Do I make Enough?
If you don't make enough, it means you have an income problem.
You need a new job or an additional source of income.
Am I spending too much?
If you make more than enough, it means you have a spending problem and are living a lifestyle you cannot afford
You must be BRUTALLY HONEST in answering these questions. To be better with money, we must HONEST with ourselves. After doing this some of us will need to make some drastic changes to our lives.
Part 2
Tracking gives us the information we need to Create a PLAN aka Budget. I know some of us hate the “B-Word”, but understand that a budget is just you planning out how you choose to spend your money in the future. It is not a limiting document that tells you NO. Rather it is a way for you to determine how you want to live your life.
A simple Budget you can use is called The 50-30-20 Rule. It looks like this:
You can adjust the numbers to fit your life needs. For me my budget is more:
50-60%: Needs
20-25%: Guilt-Free Spending
25-30%: Savings and Investment
If you need a walk-through on doing this, I suggest using Ramit Sethi’s Conscious Spending Plan. It is the best guide I have found to get you started.
My Advice: First focus on controlling your expenses, it is the one part you have the most control over, and can begin working on immediately. When focusing on reducing expenses focus on the big expenses like insurance, rent, car payment, etc. Saving $100/month on insurance adds up faster than $10/month by cutting Netflix. This does not mean you don’t also cut Netflix if necessary. However, asking the hard questions will force you to accept what you actually like and what you can do without.
However, move on from just cutting down or out expenses. Learn ways to increase your income. I am still trying to do this part.
"Invest and Save the Rest"
The next stage in your financial journey is learning to save money for the things you want. But also to invest money to build wealth which is what gives us true freedom (which is what most of us actually want). Warren Buffet shared a key to saving money:
Saving money
There are two kinds of savings:
Emergency Fund
Consumption
Most of us do a pretty decent job of the second type of savings. We can generally make the necessary sacrifice when the result is tangible. But it is not good enough to save just to spend the money. You must also learn to save for the sake of savings. Because as we all know LIFE SUCKS!
Emergency Fund Savings
An Emergency Fund serves as a cushion for those moments when Murphy’s Law kicks in. It will protect us from going into debt in order to solve a problem (Plus it has a nice bonus of relieving us from a bunch of anxiety). Here’s how to save for your emergency fund:
Open a completely new High Yield Savings Account. I recommend Ally, Marcus, and Sofi.
Name it "EMERGENCY FUND"
I find that naming things gives them the power to keep us from messing stuff up
Create an automatic savings plan. This is very IMPORTANT!
The less you think about saving money, the more money you actually save.
ALWAYS SAVE FIRST!
There are two ways to create an automatic savings plan:
Using your Main Checking Account, set automated transfers to your Emergency Fund
To learn to do this set by step, Ramit Sethi has a great breakdown of exactly what to do.
Direct Deposits - my personal favorite
If your employer allows you to have multiple direct deposits, set up a specific amount to go to your various savings accounts.
It is much easier.
How much for an emergency fund?
I advise starting with $2000 or your largest insurance deductible if you have debt. After getting rid of debt, determine for yourself how much you would be comfortable having in a bank account.
Everyone's risk tolerance is different. For the longest time my Emergency Fund was $1000 because if I lost my job, I could go home to my mom. My biggest emergencies at the time were car problems. This is no longer the case for me. I now own a home that has a higher risk profile. I now try to regularly have 3 months of expenses saved.
Your situation will evolve over time as well. The typical advice is 3 to 6 months of expenses, this is where your tracking and planning help a lot to determine a number for yourself.
REMEMBER this money is for EMERGENCIES not to be used for random purchases.
Consumption Savings
We all need to enjoy the money we work hard for.
There are things that we all want but can't afford immediately. For example a car, a wedding, a house, shoes, a laptop, a cellphone, a vacation, etc. This is what this savings group is for.
I believe there is something about working towards an end goal that just feels good. Here are a few things to keep in mind when saving toward a goal:
Open a separate High Yield Savings Account and name it the goal you are saving towards, these are items that I am saving for:
Car - Call it the Name of the Car you are saving for “Rivian/F150 Lightening”
MSI Stealth 16 and Surface Pro 8
Wedding
Christmas Fund
Travel to Europe to See Soccer Stadiums
Pick the most important one and work towards it first
Determine the length of time you need to save toward the goal
PLEASE BE REALISTIC or you can easily be disappointed
Break it down into a monthly rate
Use the automation process above
INVESTING
Because of something called inflation, saving money is not enough. It slowly steals away our money over time. So to protect against inflation over the long term (think 5 or more years), you have to invest the money.
This is how we also build wealth that gives us the freedom we all desire.
However, investing invites the RISK of losing money. Therefore, DO NOT INVEST MONEY YOU NEED. If you need the money within 3-5 years, DO NOT INVEST IT!!
The good news is there are very simple ways to reduce your risk of losing your money. The best way is to stay invested for as long as possible.
Where to invest?
An investing account is called a brokerage. There are two types of brokerage accounts:
Tax-advantaged accounts
Non Tax advantages accounts
For now, we will focus on only Tax-advantaged accounts. These are great retirement investing tools created by the government to incentivize you to save for retirement. In so doing they will reduce your taxes. These are the accounts most of us have access to:
401(k), 403(b), 457, TSP - Employer sponsored account usually your employer will match up to a certain amount. You are only allowed to contribute up to $22,500. There are three types:
Traditional - You add pre-tax dollars. Great to reduce your current tax bill.
Roth - You add post-tax dollars. Great to never pay taxes when you use the money during retirement
After-Tax - Special account that I still don't fully understand so I won't cover it here
Individual Retirement Account (IRA) - You create this for yourself. Open to everyone over the age of 18. You are only allowed to contribute up to $6000. It is exactly like the 401(k) but you have more investment options and control. There are two main types:
Traditional
Roth - this is the one you will more than likely be opening.
There are other types but ignore those for now
Non-Tax-Advantaged Accounts get no tax benefit. However, they have no penalties to get access to the money. These are great for in-between goals you have. For example, for goals that fall between 5-10 years out. I use these accounts to fund those goals.
None of these accounts are investments. They are simply accounts. YOU MUST INVEST THE MONEY IN SOMETHING.
What to invest in?
The simplest investment to make to get you started is called a Target Date Index Fund.
To learn how to set up and select the perfect Target Date Index Fund, check out Jeremy’s set-by-step walkthrough.
Now there is a lot more to investing but this is the basic starting point.
And just like with saving. AUTOMATE THE PROCESS!
Congratulations, you now have the basics of money.
I know I left out A LOT OF details. The idea is for you to get started and learn more as you make progress. If you want more details, reach out to me via email at ramblingmindshow@gmail.com or on Instagram @bykelechiwuaba. I would love to take the time to help you understand more.
Also, if you are interested in an ongoing monthly money coaching call. Fill out this form.
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