I put together a list of ideas that aren’t necessarily the commonly preached methods to better manage your money. We all know we should save, invest, and spend within our means, but the steps to doing so aren’t always so clear-cut. My hope is these 6 hacks to upgrading your finances will help you understand money in a different light, and lead to positive changes in your financial situation and life.
Automate Your Finances
Budgeting is good and all, but it doesn’t always accomplish its goal. The goal of budgeting is typically to spend less, save more, or pay off debt faster. Through itemizing expenses and visually determining unnecessary ones, you hope to “refrain” from those specific expenses. However, too often it’s easier said than done. After all, we’re only human and often make irrational emotionally-driven decisions. When you have a piece of plastic that reinforces spending, it can be hard to refrain from impulse buying.
The key to creating a budget and sticking to it is through automation. By automation, we mean setting up automatic transfers between your checking account, savings account, retirement account(s), credit card(s), student loans, etc. When transfers are automatically taken out of your checking account you can ensure that you’re saving, investing, and paying off debt with a set percentage of your cash flow every month. This makes implementing your budget much easier because you can automate to the point where you can comfortably spend while tracking towards your other financial goals.
Master Your Emotions
When it comes to our finances emotions play a big part in whether we’re successful at building wealth or maintaining it. Whether it’s making impulse buying decisions, selling during a market downturn, or procrastination, if you can self-reflect, and take time to think rationally, it can go a long way towards contributing to your financial success.
We’re all guilty of buying things we may not necessarily need. From clothing, accessories, games, or toys, the list goes on. The point is, these purchases can be temporarily satisfying but the happiness can be fleeting. Do they really contribute to your overall well-being and happiness? If not, maybe it’s not something you should necessarily purchase. By no means are we saying you should feel bad for spending your hard-earned money on items you want. However, you should be aware of the emotions that play into those decisions, especially if you are working on achieving other financial goals. Aligning your spending with your values and what actually adds value to your life is key.
The best example of emotions impacting investment decision-making came in 2008 during the Great Recession. As equity markets tumbled nearly 40%, many people saw their retirement savings dwindle. Depending on your age this probably affected you differently. If you had a long way to go until retirement it was a great opportunity to buy into the market at discounted prices. If you were near retirement, you probably experienced much more fearful emotions. And if you were in retirement, probably more of the same. However, bear markets rarely last for a prolonged period of time. Historically, speaking the longest bear market from peak to trough occurred over a period of 437 days. That’s a year and a few months. To put that in perspective our current bull market is nearly the longest in history. Rather than selling during these inevitable market downturns, buy at a discount, and be patient. Owning stock is real ownership in a company. Although its stock price may vary, the intrinsic value (Warren Buffett’s key metric) is not always accurately reflected in the price. During these downturns, it’s typically not, ironically due to investors’ emotions!
Goal Setting and Tracking
Any successful person will tell you that goal setting is integral to their success. When it comes to managing your finances it’s no different. Take the time to really think about what money means to you. Millennials, in general, are in the accumulation phase of their lives, being told to save for retirement, buy a home, get married, have kids… etc. But these aren’t everyone’s goals and money means different things to different people. Answering that question will help you define not only financial goals but lifestyle as well.
Regardless of what your goals may be, finding a way to track them and your progress towards achieving them, helps positively influence behavior, which leads to repetitiveness and a greater likelihood of achieving that goal!
Time Value of Money, Compound Interest, and Opportunity Cost
My Big 3 to unlock a better understanding of money. The time value of money demonstrates how a dollar today is not worth a dollar in the future. You’ve probably heard your grandma or grandpa tell the story of how gas used to cost 20 cents a gallon or how they could actually buy things with pennies. Due to inflation, the cost of those items increased over time. Had your grandma or grandpa sat on a dollar since that time thinking gas would always be 20 cents a gallon, they wouldn’t be able to buy 1 gallon of gas today. While this is an extreme example, the key point is goods cost more over time. A dollar cannot buy the same amount of goods in the future as it can today. Therefore we must invest our dollars to outpace inflation.
Compound interest is the eighth wonder of the world, as stated by Albert Einstein. My favorite example demonstrating compound interest is: would you rather have a penny doubled every day for 30 days or $10,000 every day for 30 days? Some may be tempted to take the $10,000 dollars for 30 days ($300,000), however, you’d be surprised that the first option would actually equal over 5 million dollars. This example demonstrates how the invested dollar, over time, will grow. Along with patience, and discipline, investing money and taking advantage of compound interest is truly the easiest way to build wealth.
Lastly, understanding opportunity cost can be very beneficial in changing behavior around financial decisions. Let’s say, for example, you were in the market for a new car. You’re considering the brand new $40,000 model, compared to the used version for $15,000. If you buy the new model, the opportunity cost is the potential savings of $25,000. As it is defined, the opportunity cost is the loss of potential gain from other alternatives when one alternative is chosen. If you chose to go with the $15,000 option, not only would you save $25,000, but it could be used for other potential investments. Over a period of years or a lifetime, these types of decisions add up. New cars every 10 years results in compounded opportunity cost, that money could be growing, rather than being used on a depreciating asset like a car.
If you’re able to visualize what your money could be doing for you INSTEAD, or as an alternative, your financial decision-making is bound to improve.
Upgrade Your Savings and Investments First, Then Your Lifestyle
We see it all the time, people who earn more, spend more. During my time working with retirees and near-retirees at my previous firm, we’d come across someone making half a million dollars a year, yet the only money they’re strategically saving is their 401(k) and stock options. Sure, that may sound like a lot once you max out contributions and receive another $20,000 a year in stock, but based on their spending levels, there’s no way they could maintain that spending in retirement when they don’t have the income from their job.
The next time you get a raise, bonus, or influx of cash, think about increasing your savings rate first BEFORE increasing your lifestyle. When your savings rate grows concurrently or even faster than your spending rate, you’ll set yourself up for success further down the road.
Build a Comprehensive Financial Plan
If you’re the type of person who knows they need to delegate certain parts of their lives or has no interest in committing the time and effort it takes to manage their finances, start the process of building a comprehensive financial plan. Knowing that your finances are in order and that you’re heading in the right direction, provides peace of mind. It can be a huge relief, especially if you’ve felt lost or out of control. Even if you’re doing a great job tracking, managing, and building your wealth, it can’t hurt to get an expert opinion. If anything, you may learn a thing or two to improve on what you’re already doing.
Our process and financial plans help tie these concepts together, to provide a clear outline to achieving your financial goals. We become your partner, your coach, and your accountability buddy to course-correct, and remain on the path towards building or maintaining wealth.
If you’re ready to gain direction and insight towards building or maintaining your wealth, schedule a free consultation today.