Where to Start ...and Finish?

With the hullabaloo of resolutions settling down, let's start fresh.

Not everyone who reads this blog or listens to the podcast wants to concern themselves with seemingly trivial things like a safe withdrawal rate, or updating their net worth regularly, or the difference between a mutual fund and an exchange traded fund (all of which I assure you aren’t as trivial as you may think). While those things are important, a number of you look for a much bigger perspective type of message. I have to say, there is something to this approach and something I think about more frequently these days.

We all have three common areas in our financial lives: debt, spending, and saving. Here are my thoughts on how to streamline your finances and key in on the important themes:

Debt: Avoid it

Few things will impact your ability to enjoy the present and prepare for your future like debt will. You’re quite literally paying for something that happened, good or bad, in the past with present and future income. Sure, I understand that some debt is most likely unavoidable for the majority of us. You’ll probably end up with some student loans, you may need to borrow money for a car at some point, and if being a homeowner is in your future, then a mortgage probably is, too. Borrowing money isn’t inherently a bad decision, but there are ways you can make your decision to assume debt more advantageous.

First, only borrow what you need. Don’t give yourself any unneeded cushion because it’s going to cost you money. The easy example here is a student loan. Don’t include living expenses in the amount of money you borrow. If you need cash while you’re at school, and who doesn’t, work during the summer and during the semester. If you’re borrowing money to live on, you’ll be paying for that 2:00 AM pizza and keg deposit for years, if not decades.

Second, avoid buying a payment. This is a super common tactic at car dealerships. Quite often a salesperson will ask, “what kind of payment are you looking for?” They skip right by how much you’d like to spend on a car and go for your pain point. How much can you afford per month? The sales manager and finance guy are more than happy to get you into a car with an 84 month car loan because the payment fits! Yes, you should know what you can afford to spend each month, but keep the big picture in mind and don’t tie up your future with a decision you make today.

Finally, if you’ve got debt, especially credit card debt, have a plan to dump it. We champion the momentum method where you focus on paying down the debt with the smallest balance first while making minimum payments on everything else. Once that debt is eliminated, you move on to the next by rolling the entire amount you were paying on the first debt to the next while still making the minimum payment. It’s quite an effective approach to becoming debt free.

Put simply, if you can avoid debt, do it.

Spending: Prioritize it

What are the things that MUST get paid every month? Mortgage/rent, car payment, utilities, debts, savings, and then? You may have quite a bit more room in your spending each month than you realize. Do you have that room right now? Well, not if you don’t prioritize your spending and aren’t willing to make some changes. If “traditional” budgeting terrifies you (and even if it doesn’t), consider looking at things in the following way. I want you to write down the non-negotiables for you every month. I already listed quite a few of them above. Beyond that (and even some of what I listed, honestly), you’ve got the power to change. You’re probably thinking, “what about food?” I agree. You’re going to need to eat. Where and how you eat is entirely up for discussion though. Dine out less, shop more consciously, plan your meals ahead, only buy what is on your shopping list. You’ll be amazed at what that can do for you.

What’s that? Food isn’t a budget problem for you? Great! I don’t know what spending categories may give you fits, but you do. What I’m asking you to do is, here’s that phrase again, consciously spend each dollar. Why? Because I want you to be able to spend money on things you care about. If you looked at your bills and realized that you could save enough money each year to go on a vacation (without going into debt) with your family by adjusting the thermostat in your house a few degrees either way and dining out half as much as you do now, are those things you’d do? Would you prioritize your spending to make that happen? Better yet, what would you prioritize your spending for? Spend some time thinking about it.

This is what I’m talking about. In order to spend your money on the stuff you want to spend it on, you’ll need to be aware of how you’re spending money on things that aren’t as high of a priority for you.

Saving: Automate it

Imagine, if you will, that you are responsible for sending in every single contribution you made to your 401(k). How many weeks do you think you would make it before you missed a payment or 4? Thankfully, that isn’t how it works. It’s all automated for you by your employer. You don’t have to think about it, it just happens. You’ve set yourself up for success by making one simple decision and then staying out of your own way.

This is why you need to automate your savings. I don’t care if we’re talking about saving to an emergency fund account, a Roth IRA, a 529, whatever. The majority of us will be way more disciplined if we set up regular transfers or contributions to happen without us having to initiate them. Just imagine, every 5th of the month, you know that you’re making your contributions to whatever accounts you’ve got set up. Yes, even if you forget they’re happening, they happen anyway. You no longer have to rely on your memory, behavior, or any being distracted by competing interests to make sure you’re doing something that you’ve prioritized.

Automate your savings, friends. You’ll be happier in the long run if you do.

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And that’s it. You don’t have to make your financial life out to be some intricately complex organism that requires a white board and a pot of coffee to explain to someone. Just do the basics. Spend a precious bit of time evaluating, prioritizing, and automating, and you’ll be considerably better off than you were, and most likely, better positioned than many of your friends and family.

Nail these three things and your financial life can be successfully simple.