Author: Robert Raap
As the world is in the grips of a pandemic many people have been adversely affected by either losing their jobs or seeing their salaries cut. To help you now and to prepare you for the next time a calamity like this hits, I decided to share some advice concerning money management.
Don’t worry – I will not delve into very complicated, head-spinning details on how to run your finances. Instead I will just share a couple of the most important things that you need to keep in mind in order to get your financial house in order and grow your wealth over the long term.
If after reading this article you get a tingling sense of curiosity and want to explore this topic in more depth, I recommend that you learn from the best – Dave Ramsey. However, if you only have time for a brief overview of some of the key money management skills that will bring you wealth and financial freedom, just continue reading this article.
The first and most important thing is to pay yourself first!
It doesn’t matter how big your pay check is: EVERYONE is able to save at least 10% of their income. And they should definitely do that! In fact, I actually recommend putting aside 20%, but if that seems too steep, start off slow and steady with 10%.
While not a panacea, saving 10 to 20% a month will set you on a solid path to improve your money management habits and ensure your financial freedom and security over the long haul. It’s really all that simple – just make the decision that you are going to save 10 or 20% of your income each payday and commit to it!
I suggest creating two additional bank accounts: one for savings and the other for emergency funds. Then make an automatic monthly transfer to both accounts the day after you get your salary and put either 5% or 10% of your income into each of these accounts. You might think that 20% of your income is way too much to put aside and you couldn’t manage without it. But believe us – it is not. When you no longer have all that money tempting you in an easily accessible bank account, your brain will start working and finding ways on how to either earn more or spend less. And that is all that matters!
Think about it this way. If your salary is €1000 a month than yes – putting aside €200 outright would seem like quite a lot, wouldn’t it? But what if you manage to convince yourself to spend €100 less a month and find a way to earn another €100 in a side-hustle? I bet you can do that! Everyone can if they really set their minds to it. Remember – saving is one thing, but you should also look for opportunities to grow your income.
But as I already said – let’s start off nice and easy by just making these two transfers. Everything else will neatly fall into place in due time.
The first 10% of your income should go straight to your savings account from where you NEVER take the money out. Moreover, I suggest you find ways for this money to generate you some passive income. This means that you don’t necessarily have to work for your money, but the money works for you, generating some extra income.
Passive income can be generated with instruments such as dividends, interests from loans, royalties, incoming rent, high-yield savings account, etc. Just let this account grow by adding to it yourself each month and allowing it to expand using the aforementioned instruments. The simple truth is that the more money you have in that account, the more money it generates. And guess what – if you really commit to, by the time you retire you should be able to live off of just that passive income.
The second 10% of your income should go into an emergency fund, which you will only use in a serious emergency such as unemployment (due to Covid-19, for example), car repairs, unexpected health-care expenditures and so on. When the money in this account is equal to six monthly salaries, then you can ease off a bit. In this case, I suggest redirecting those 10% to grow your savings account or to lend a helping hand to a charity you care about.
Now all of this doesn’t mean that the remaining 80% should be labelled as “for whatever, whenever”. Quite the contrary. To effectively control the remaining 80% of your income, you should CREATE A BUDGET and TRACK YOUR EXPENSES! Break the budget down into smaller spending categories such as: food, household, clothing, utilities, children, entertainment, gas, car maintenance, transport, charity, or whatever you feel more suitable for your situation. For each of these budget categories set a certain amount that you can spend each month/week/day depending on how often you get paid. Just remember the total of all these categories shouldn’t amount to more than 80% of your income over the relevant period.
Keeping track of your expenses is essential. You would be surprised to discover how much money you spend on things you actually don’t need; things that are just for temporary pleasure. Now, don’t get me wrong – I don’t recommend saving everything you can and living off noodles, bread and water. You should enjoy life as well! A little bit of spending on entertainment or other enjoyable things is good for you and the economy. Just avoid excess.
With all that said, it is super important to PLAN YOUR PURCHASES! I mean it – really think them through!
Do you need a new iPhone just to raise your social standing? No you don’t! You can live with the old one just fine if it still works. You shouldn’t care about what others think. What matters is how you feel about yourself and your actions.
Do you need to eat out in expensive restaurants? No you don’t! There are plenty of guys or girls out there who don’t necessarily care too much for expensive dates!
Do you really need a fancy new car just to end up paying a huge amount for car lease every month? No you don’t! You can easily manage with something more modest!
What I want to say here is that it is important to get your priorities straight! If you want to get wealthy over the long haul you have to make some sacrifices at the moment. If there are just a few things to take away from this article, it is to:
(1) grow your income,
(2) put something aside each payday and
(3) find ways for that saved money to generate you passive income.
Creating wealth is a long-term process. You cannot get rich in a day or two unless you don’t win a lottery or have a rich Canadian uncle who leaves you a pile of money. Just follow these basic steps continuously and consistently and I promise you that your savings account will grow bigger and bigger. And in case misfortune strikes and you lose your job, an emergency fund amounting to at least 6 months-pay will have your back while you find a new job.
It is both as simple and as complicated as that.