Another year means another chance to right your financial ship or at least start grabbing the wheel to prevent a shipwreck. In 2020, take control of your money, dial down debt and start building wealth with these 5 simple money rules.
#1 – Know Your Monthly Needs
Budgets are great but at the end of the day you only need to know a few numbers and concepts. This year know how much your monthly needs are and distinguish them from your wants. Here in the hyperconsumptive US, we aren’t too financially savvy. We go crazy over our wants, sometimes cover our needs, and often end the month wondering why our bank balance is at zero. Many times people don’t know the difference between a want and a need.
Needs are necessities. If they’re not met, you go hungry, the water and electricity turn off, you get evicted, you default on a loan, your credit score drops, etc. Basic needs usually include utilities like water, sewer and electricity; car payments & insurance; rent; student loan payments; credit card payments; groceries; etc. Needs are not premium cable subscriptions, gym memberships, or anything that doesn’t cover your basic living necessities.
Everything else is a want. Wants are things you can live without, even though you may tell yourself you can’t live without ESPN or buying that $59 espresso machine.
Tally your needs. These comprises your necessary expenses and their total amount is the amount of money you need to cover every month with income from one or more sources. Again, everything outside this is a want and while you may feel like your mani-pedi or happy hour expenses are a need, they are not.
Subtract your needs total, i.e. necessary expenses, from your monthly income. This is the money you have left for two purposes: investing money and fun money. To get ahead, you must start shoveling some of that leftover money into investments if you want to stop living paycheck to paycheck and get ahead. If you don’t even make enough income to cover necessary expenses with money left over, then you have to change variables in your life to get ahead – that can mean finding cheaper accommodation, roommates, a second job, etc.
In 2020, take your financial ship by the wheel by knowing the difference between needs and wants. Know what your needs truly are and recognize a want as a want. People who can’t do this will always have money woes, but you’re not going to be part of that crew in 2020.
#2- Follow the 70/30 Rule
Most people in the US live paycheck to paycheck, carry debt and have minuscule savings (if any). This is across the board, whether you make $24,000 or $100,000. We just don’t know how to save, spend or utilize our money really well. Again, we confuse wants with needs and have little fiscal discipline and less financial knowledge. Conflicting advise makes us unsure on amounts to save, spend or invest (investing simply means putting your money to work making more money for you).
Here’s an easy rule to remember:
Spend 70% of your net income and invest the remaining 30%.
Learning how to do this is easier said than done when you’re living paycheck to paycheck but it’s a helpful guideline for living within your means and building wealth. Most of us actually have substantial money in each paycheck that we just blow on wants and then say we don’t have enough money to invest. For example, I sat down with a friend who netted $2400 a month and was living paycheck to paycheck to help her figure out her budget. After subtracting all her necessary expenses from her net income we found $900 left over every month to use toward investments, extra payments on her debt, and to have fun with. She was shocked. She’d never realized just how she was spending her money or where. Many people live like this.
Now is the time to start tracking and limiting your total spending to 70% of net income while putting the remaining 30% to work building your financial security and wealth. The 70/30 Rule is one of the best ways to do this since it scales, meaning it adjusts as your income changes to keep you in financial balance.
#3 – Start Learning Financial Basics
You can’t get ahead financially in 2020 if you don’t even know personal finance basics. It’s not always fun and sexy to learn how to budget or understand the difference between an IRA and 401k and how they work but these concepts have huge real world impacts on your bottom line. Saying you’re not interested in the subject is a total lie. You’re very interested in having more money. If someone gave you $1000 tomorrow you’d be extremely interested, whether it was a gift from your grandma or a raise at work. Understanding personal finance is a monetary gift to yourself that will in practice bring in more than $1000. What’s not to love about that?
And for those who hate math and think personal finance requires fancy formulas and algorithms, this isn’t true. You just need a 5th grade understanding of math and a calculator. It’s really just addition, subtraction, multiplication and division. Most people can handle that so don’t let math scare you away from tackling this subject and getting educated in 2020.
#4 – Obliterate Debt
In 2020, resolve not to take on any extraneous debt and implement a plan to eradicate current debt. We want to stop the hemorrhaging this year, take a breather for a moment, then start erasing the debt that’s shackling you.
We tend to have finite paychecks and whether to invest in the future or pay off past debt can be a hard decision. Some people split their money to do both. Ideally you want your debt payments to be less than 30% of your net income. Anything over that is just asking for financial trouble because money is just too tight, which can spell financial crisis if you lose your job, have unexpected medical bills, etc. If you’ve got a lot of debt, well over this 30% threshold, focus on paring it down to the 30% mark to give yourself some air and stability. Then turn to making your money work for you via investments (even if that’s just an interest earning money market account).
There are two methods to paying off debt: the snowball and avalanche methods. One means paying off the debt with the highest interest rate first. You still make minimum payments on other debts but you make extra payments on that high rate debt. The other method pays off the debt with the lowest balance first to build momentum. After all, maybe you have a low interest debt of $500 and a high interest debt of $8000. Paying off $500 would be easier and quicker, making you feel a sense of accomplishment that might not come from tackling first that $8000 which might take a while by comparison.
Both are great methods and while one technically saves you more money over time, the bottom line is do what gets you out from under the mountain of debt. If one motivates you over the other, do that to move forward in 2020. Either way, you’ll be getting ahead.
#5 – Cushion Yourself
With the 70/30 Rule you live on a decent percentage of income and put the rest to work making more more money for you. If you’re carrying massive debt, maybe a great deal of that 30% needs to go to paying it down until you have some breathing room so you’re not so financially shaky. Whatever your circumstances, you probably need a little money on the side in case of emergencies. If you already have an emergency fund, move on to topping up your 401k or open an IRA if your employment situation doesn’t provide a 401k.
For those just starting out when it comes to saving or putting their money to work, the long-touted 3 to 6 months of income set aside in an emergency fund probably sounds like a pipe dream. If you’re new to saving, instead aim for building $1000 in your emergency fund this year, preferably in an interest bearing money market account (much better rates than your typical bank savings account but still easy to access). $1000 is a great and doable goal, plus it will bring some pride to see that figure tucked away and provide a huge confidence boost that you can do this. If a true emergency happens and you tap the fund, focus on topping it back up. Once you have this cushion and the discipline to build it, then move on to other ways of saving and investing.
In the new year, promise yourself a financially sound future. Follow these 5 rules to control your spending, tackle debt and build wealth in 2020. At the end of the year you’ll be thanking yourself – and you’ll be richer too.
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