Today’s Money Mentality is 893 Words, a 4 min Read. ENJOY!!
The number one money advice we all get from anyone is to save money. The second piece of money advice is to MAKE A BUDGET.
Multiple times, I have given the same advice to multiple people. The only problem is most of us don't actually follow the budgets we create. We spend time creating these budgets but then never actually use them. Yet, this is supposed to be the solution to our financial problems. I began asking myself why this was the case. I believe it comes down to two things:
Budgets are backward-looking.
They only tell you what you've already done.
It doesn't help you with changes you need to make in the future
No flexibility.
If we do make a budget and follow it, we make it very specific.
Giving us no room for random life changes.
So when we inevitably go over budget or are not able to do specific things, we beat ourselves and quit.
So I have reached the conclusion. NO MORE BUDGETS!
So what do we do instead?
Make Plans
Use Rules of Thumbs aka Percentages
Automate Your Money
This seems very similar to making a budget but it is very different. Plans are you deciding what your future will look like. Using rules of thumb gives you flexibility for the ever-changing dynamics of life. I have shared this quote from Morgan Housel in previous posts but it encapsulates the beauty in rules of thumb:
If you’re going to act on a problem that is monstrously complex and uncertain, the stripped-down, rules-of-thumb response is not only good enough. It can be superior to tripping over yourself in pursuit of something that appears marginally more accurate.
Rules of thumb give you time to learn, and learning gives you rules of thumb.
Most important is accepting that when you’re dealing with uncertainty and complexity, simple ideas are not dumbed-down ideas. They are often complex solutions gift wrapped for you in a way that makes their application practical and sustainable.
To put both plans and rules of thumb into action, creating automatic rules for your money is the key. Creating automatic rules for your money frees you from the various money stressors of life.
I will be honest, getting the automation correct will take some time. However, once in place it will make your life so much easier.
Here are the 4 steps I use to make plans for my money:
I review my spending from the month before.
It is important that I know where I am starting from.
During the review, I separate between needs and wants. It is important that I determine for myself which is which.
Needs are things that I have no choice but to pay i.e. Utility bills, rent, insurance, food (groceries), etc.
Wants are things that I can do without but want in my life i.e. Streaming services (Spotify, Netflix, YouTube), Giving, Amazon Prime, Eating Out, Concerts, Travel, etc.
IMPORTANT NOTE: My wants will look different from your wants. Because money is personal, it should be spent on what we PERSONALLY enjoy
By making this distinction, I know how much I need to survive and how much extra cash I have. It also tells me exactly what to target.
I make my plan. Using the 50-30-20 Rule.
50% to my Needs
25-30% to my Freedom (savings and debt payment)
20-25% to Wants.
This is just a guide you can create your own and set it how you will.
My Freedom percentage is larger than my wants because I like investing so I spend more money there
If you have no idea how to create this, you can use Ramit Sethi's Conscious Spending Plan
IMPORTANT NOTE: It is unlikely, your numbers will fit very neatly into the percentages and that is okay. Just ensure you are around these percentages to keep you in check.
Also, when making adjustments and trying to remove items from your spending plan. FOCUS ON THE BIG ITEMS i.e. Eliminating a $500/month car payment is much more important than a $15 Netflix subscription
I automate all financial decisions.
I set up automatic payments on all my bills using my credit card
If you have credit card debt, do not use your credit card for this. Use your checking account
I set up automatic payments on all my credit cards.
This removes the worry of ever forgetting to pay for anything or overstretching.
I opt into my 401(k), which is an automatic withdrawal, to get my company match.
I also set up an automatic transfer from my Roth IRA and HSA
I create multiple accounts each dedicated to various savings and spending goals. Examples: Travel account, Dating Account, Giving Account, House Upgrade Account, Wedding Savings, Investing Brokerage, etc.
I use direct deposits at my job to transfer parts of my paychecks to each of these accounts.
You can accomplish the same thing by creating an automatic transfer from your main checking account where your paycheck is deposited
By doing this, I remove myself from savings decisions.
Every month, I do a quick 30 min review of everything to see where I might be slacking and if I need to make any adjustments.
It is important to always review so you are never caught SLEEPING
This is how everything will look.
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Remember GENEROSITY > greed
God bless Each and Everyone of y’all
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