Although it probably wouldn’t make David Letterman’s Top 10 List, we are sharing our top ten strategies for success in personal finance. They overlap with our principles, which you can read about here.
Planning starts with evaluating
One of our key principles is planning. It’s important to plan for certain and uncertain expenses so you avoid crummy debt and are able to save more of your earnings. Emergency Funds are just one of the basics. You have to know where your money is going every month. If you are new to this stuff, you need to try a budget on for size.
Before apps like Waze could guide you out of a traffic jam, you had to actually carry paper maps. The ability to find alternate routes in a pinch is a critical skill to develop. Like Waze, financial budgeting tools like Mint and YNAB (You Need A Budget) are excellent for beginners if the old fashion spreadsheet or pen & paper is not your style. These programs help you track where all your money is going, so you can figure out how to reduce waste and save more. You know – find the best route for you. It can be a real eye-opener for the budget novice.
Hopefully, over time you will find you need these tools less and less. In addition to Mint, we also use Personal Capital and SigFig to track our investments. We use them more for the convenient dashboard features rather than helping us budget.
2. Saving sometimes means delayed gratification
Hand and hand with planning is resisting those urges for instant gratification. We aren’t saying that you can’t treat yourself from time-to-time (see #6 below). Shopping every weekend for ‘entertainment’ is going to lead to poor spending decisions if you can’t resist the urge to buy every pretty little thing you come across. Successful savers sometimes follow three-day rule. As in, if you really want to buy something – wait three days and see if you still think it’s the right purchase decision.
Having patience can also pay off in that when you avoid buying things in the spur of the moment, you can research to see if there is a better deal out there for the same, similar, or sometimes even better quality item. Mr. Need2Save is a ferocious researcher when it comes to big purchases. He takes the time to read reviews, and research features before locking on a particular brand or style and then finds the best deal possible.
3. Taking chances can be scary, but rewarding
In the professional world, to get ahead, you sometimes have to stick your neck out and risk having your head chopped off. Another way to look at this is, if you want something and you don’t make your desires known, chances are slim to nill that you are going to get it. This is true in terms of compensation, promotional opportunities, additional training, and even more engaging assignments. You have to be your best advocate and ask for the things you want! (Mr. Need2Save here. I always tell my team at work: Don’t ask for what you think you’ll get – ask for what you want)
4. Shiny things tarnish
Putting too much emphasis on ‘stuff’ will weigh you down. Literally, physically, and financially. Coveting stuff that you don’t need will keep you from reaching financial independence and clutter your life. We are not exactly minimalists around the Need2Save house (actually far from it), but we have seen the benefits of shedding our extra belongings, getting rid of stuff we don’t use (or rarely use), and generally rethinking our future purchases. There are a vast array of things you could rent (or borrow) should you ever have the need for that particular tool/thing again in the future. For the ladies, how many swanky purses or shoes do you actually need? For the fellas (or maybe ladies too), how many gadgets and gizmos can you use at one time?
5. Pay yourself first
I was in middle school when my mom first told me about ‘paying yourself first’. As a single mother raising four kids, she had to rely upon her own good senses to make sure we could keep the lights on and also save for her own retirement. Times were often lean and tough. I remember the day vividly, sitting at our kitchen table, she showed me how much of her paycheck was left after taxes and her 401(k) withdrawal came out. At the time, I didn’t really have any sense as to how much things cost like groceries or the mortgage and it was a real eye-opening experience. I’m quite sure it was one of the early seeds that got me on the path to sensible money management and general awareness of the costs to raise a family.
This was the first time that I had heard what a 401(k) was. After college, one of the first things I did when I got my first ‘real job’ was sign up for the 401(k). I was 21. About 6 months later when Mr. Need2Save finished college and got his first engineering job, I urged him to do the same (but he didn’t need much of a nudge). I’m sure we didn’t max out our contributions back then, but as our earnings increased over time we bumped up our contributions as well until we were able to contribute the max.
Maybe in the beginning when you first start out, you can only afford to contribute say 2% of your salary because you need the rest for rent and food. The first raise you get may be 3%. So take 2% of that and bump up your contributions to 4% into the 401(k) and use the extra 1% of your raise to start saving for other priorities. Before you know it, you’ll be maxing out those retirement savings.
Starting early was one of the best decisions we every made and critical to making early retirement a certain reality for us.
6. You have to live for the present as well as for the future
Horrible things happen to good people. We prioritize meaningful experiences with our families. In the event that our time together is cut short, we want to know that we took the time to love each of them deeply and hopefully improve their lives even if just a little. We don’t want to save up all our good experiences for retirement. We want to live some now. This means taking fun trips together and looking for ways to live for today. Sometimes we do free or super frugal stuff and sometimes we splurge a little. However, we always plan ahead and avoid leaning on debt to finance our fun.
This is a major reason I decided to take a break from my career for about 5 years and be a stay-at-home mom when our boys were very young. My career was important to me, but being a mom was also and I didn’t want to live with any regrets. In the end, my career did not suffer at all.
7. Money is only one resource
Around here we talk a lot about money. However, money is only one resource. Consider that you also only have so much time and that you have so much energy and deciding what combination of money, effort, and activity is best for your own well being is a bit of a crazy and inexact science.
Take volunteering for example. If you wish that you could give more money to charity but you can’t fit it into your budget right now, perhaps your time or your knowledge can be an asset to others? Later when you may have less time or energy to volunteer, maybe you will have the financial resources to donate more money. This can ebb and flow throughout your life depending on your changing circumstances.
Money is certainly important but it’s also not everything or even the most important thing.
8. Learning should never stop
We certainly don’t have all the answers. We are curious about new ways to do things and new perspectives. Even when we leave the 9-to-5 world, we will continue to learn new skills and develop our existing expertise. We want to push ourselves personally, physically, and emotionally to maximize our enjoyment.
Learning is important with investing and savings as well. If you feel overwhelmed or confused, you have to start reading more. Listening more. Stop sticking your head in the sand. Education will make you feel more confident about your financial decisions and help you avoid costly mistakes. If an investment sounds way too complicated, it probably is something you should avoid. You can have financial success with simple saving habits and low-index funds. There is no need to over-complicate things but you do need to invest the time to understand the basics.
9. Paying extra may not win with the math nerds but it feels good
As soon as we got a mortgage (I think we were 22 at the time), we starting paying extra on our mortgage payments. In those early days, we simply ’rounded up’ to the nearest $50 and then $100 when we could afford it. Over time, we graduated to paying an extra couple hundred dollars. Now, as we are within 3.5 years of paying off our current house for good, we pay an extra $1,600 a month and even more when bonuses come around. We know with such low interest rates, we may come out ahead if we invested those extra dollars instead but at the end of the day it feels good. Being debt free is liberating and we are so close we can taste it. Absolutely no regrets for us here. We recently elaborated on mortgage payoff pros and cons here.
This simple principle can be applied to other debts too. Car loans, credit cards, student loans. Crush these debts so you can focus on serious accumulation and growth. Good Debt, Bad Debt? Whatever. Debt is debt. You still owe that money to someone else. Free yourself so you can pay yourself!
10. Repetition reaps rewards
It may seem like you aren’t making a dent in debt reduction or savings at the beginning. Maybe you can only afford to pay an extra $100 or so a month towards your goals? The important thing is to establish regular habits and as you can afford to do more. Just add to it a little over time. Set things on auto-pilot by automatically having retirement and other savings transferred out of your checking account. Resist the urge to spend your increasing income on things that have no long-term value to your health or wealth.
These are just ten things that have helped us over the years. They probably seem pretty basic and common place. Nothing jazzy like real estate investing or alternative investments. However, so many people don’t see the obvious that is right in front of them. You can succeed on almost any budget size. You have to be aware of where your money is going, be conscious about how you spend and save, and keep an eye on both the present and the future!
What is the one tip that you have followed that has helped you stay on track in your own personal financial life?