Being fantastic with money simply boils down to doing just a few things right. It's remarkable how easy it can be, and yet most people choose not to do it. Imagine waking up one day and finding out that your financial life is perfect. That you're no longer doing any of the "wrong" things, financially speaking. Truth is, you could easily get there if you just work on it slowly, one day at a time. And once you build the right money habits, you're basically set for life.
Here's all you have to do. Here at Frugal Hackers HQ, we practice all of the following strategies and tips down to the letter. We only preach what we practice religiously ourselves.
So how do you be fantastic with all things money?
Build an emergency buffer fund
First things first, build an emergency buffer fund for yourself. This should constitute at least 1-2 months of living expenses. Longer if you're self-employed or have inconsistent, fluctuating income. This will prevent you from using your high-interest credit card whenever you have emergencies.
In short, if it's going to take you 3 months to find a new job in the event you lose your job, then your emergency fund needs to be 3 months. Since interest rates on savings accounts are pretty low these days, it really doesn't matter where this money lives. Ideally not in your main checking account. Just create a 2nd savings account with your bank (make sure it's free) that can't be accessed via a VISA debit card and put your money there. DO NOT invest this money in stock or bonds! You may however hold it in money markets or CDs (certificate of deposit). I prefer just raw cash since money markets and CDs barely give you any interest these days anyways.
Clear all debt
- No credit card debt, period. All cards paid in full each month. Mrs. Frugal Hacker and I have paid $0 dollars in credit card interest throughout our lives.
- No student loans. You need to work on paying these down every single month. It's worth making extra payments on this once you've built your emergency fund.
- No auto loans. Either pay for your car in cash, or have a plan to get rid of your car loan in less than 12 months. If you can't, sell the car and get something cheaper.
- Put all your savings towards clearing debt once you've built your emergency fund.
Build a budget
- Build yourself a realistic weekly & monthly budget. Know how much and where to spend your money each week and month. And then stick to it! Use a spreadsheet, or a piece of paper, doesn't matter.
- Minimize gifts, charity, and tips (a type of charity) until you get to this step. You have to spend on yourself first before you can think about spending on other people.
Take full control of your spending
- Actually look at the price of every single thing you buy. Don't take anything for granted. Verbally ask yourself (literally) what value you are getting out of what you buy.
- Subscribe to email and text notifications each time you buy something. My bank (Chase) sends me mobile push notifications and emails every time one of our credit cards gets used somewhere. An added bonus? You get notified of fraudulent charges right away so you can report them to your bank pronto.
- Force yourself to write down every single purchase and transaction you make on a spreadsheet (see Figure 1 below). It sets up a negative feedback loop where every purchase is associated with some small amount of work. Over time, you'll want to reduce your purchases. It also sets you up nicely to help you calculate your total weekly/monthly expenses. Even if this process seems overly manual, it's worth measuring. You can't optimize what you don't measure.
- Always look for cheaper ways to buy something. Can you rent it (library?), buy it used (craigslist), or find an alternative for free (ask a friend/neighbor/coworker)? Sometimes the cheapest way to acquire something is to not buy something at all. Do you absolutely need this item/product/service right now? Ask yourself if you can postpone this purchase and kick it down the road. Sleep on it a couple nights and see if you still want it then. Leave it sitting in your Amazon shopping list (not cart) a couple days and see if you still want it. Disable 1-click ordering. Unsubscribe from Amazon Prime if you have an Amazon spending problem.
Start planning for your retirement in your 20s
- Have a solid plan for retirement by saving at least 20-25% of your after-tax income. Start this habit in your 20s. The earlier you start, the less you have to save each month due to the positive power of compounding. Saving 20% of your after-tax income means you're not allowed to spend more than 80% of your after-tax income. The more you save and invest, the faster you reach financial independence. Some people think you don't have to worry about retirement until you get to 40. Nothing could be further from the truth. You need to think of retirement starting from your first job at 22/23.
- Max out your 401(k), then your IRA. This is not optional. Everyone who has done this over the last 20 years is grateful for doing so today.
- Start investing excess savings in a low-cost index fund (like VTI or VTSAX), and don't plan to ever sell it. Use a robo-advisor like Wealthfront if you're confused/unsure about how to get started.
Look for ways to save on taxes
- Taxes are often people's first or second largest expense after housing.
- 401(k) and Traditional IRA is by far the easiest way to save on taxes, so make sure you max these accounts first before investing anywhere else. It's an easy 20-35% return on your money.
- Sign-up for your employer's transit plan, e.g. Wageworks. This money comes out of your pre-tax dollars which means you don't have to pay taxes on that income that you use to spend on your commute.
- Look for other ways to use pretax dollars, e.g. HSA and FSA for health expenses. Ask your company's benefits coordinator to help you out with these programs. They are there to help you take advantage of all the tax credits provided to you!
Read, read, read
- Finally, spend at least 30 minutes a day reading up on at least one topic, blog, or book on money, personal finance, frugality, or investing. Some introductory books if you want to become better at money are Your Money or Your Life, Rich Dad Poor Dad, and The Millionaire Next Door (read my book review here).
- Subscribe to Rockstar Finance's Daily Digest. They email you 3 finance-related posts to read every day which usually takes between 20-60 minutes of your time. Definitely worth the time investment to see what everyone else is doing to improve their personal finances, and to learn from them and maybe adapt some of those learnings/lessons to your own life and finances.
- Subscribe to this blog if you like reading our articles on money. The best people to learn from are the ones that achieve (or are on track to achieving)financial independence before the age of 35 by working very normal middle-class jobs for under 10 years. That's us.
Do you think the tips listed in this article are practical for you? Can you think of reasons why everyone couldn't be fantastic with money, especially if they started out with the right habits when they were young? Let us know in the comments!