When I first got out of college and started earning “real money” I found that a good chunk of my paycheck was being used to service debt payments. The majority of my obligations were student loans but I also had a a car payment and some credit card debt. All of these payments left me with limited money to pursue the activities that I enjoyed or save for my future. To add insult to injury a lot of the “things” I had purchased with debt weren’t exactly making me happier. A few expensive car repairs and the stress involved with continually paying off debt made me realize that I had to change my ways. The first thing I did was build up an emergency fund of cash in a savings account. This prevented me from having to take on more debt when unexpected expenses found their way into my life. The next thing I had to do was find ways to save so I could put more money towards paying off my debt quicker. Here’s some of the methods that I employed.
Have A Plan, Be Flexible
I started keeping a monthly budget and tracked my spending. I still do this today. Occasionally I do go over the amounts I had planned, but I don’t freak out about it or try to make up for it in the future. My budget isn’t cast in stone. I view it as a high level plan. I’ve found that I need to and do allow myself some flexibility. If I’m within 5% of what I planned I consider that a pretty good month. I don’t use any fancy software to do this, a simple spreadsheet works just fine.
Pay Yourself First
I borrowed this idea from Robert Kiyosaki. I’m paid monthly on the last day of every month and before I service any bills the first thing I do is transfer money into my savings account–I pay myself first. I’ve gotten in the habit of doing this for the past several years. Psychologically it has become very reassuring to know that I’m setting money aside (even if my transfer is only $50). When I first started doing this I started out small as I was still paying off student loans. Over time this has simply become a habit and I’m currently saving and investing over 50% of my net take home pay.
Automate Savings and Investing
When I pay myself first I do this manually as it helps me develop and maintain discipline around my finances. This was something I was able to do, but I realize some may not have the willpower. Fortunately most banks and credit unions have automatic transfer capabilities that will move funds from one account to another on a scheduled date. For a number of years I used this feature to contribute to my Roth IRA account and I was even able to automate the investment selection within the IRA.
Cut Out One Big Expense
I don’t watch a lot of TV so I decided to say goodbye to cable and scaled back my service to internet only. I have no regrets. I purchased a digital antenna for a one-time cost of $40 which allows me to get all of the major networks in high definition. I subscribe to Netflix for movies. Not only am I saving $100 a month but I’m less distracted and more productive with my free time. Another thing I’ve done is purchase a cable modem. Most cable providers charge a monthly fee to lease a modem which can add up to big money over time. I paid a one-time cost of $80 for mine and it paid for itself within a year. I’m still using that same modem years later.
Wait To Purchase Something
This is a trick I’ve developed to help prevent myself from making impulsive purchases. When I see something that I want and had not planned on purchasing I have a three day rule that I impose: I have to wait three days before I can make the purchase. What I’ve found more often than not is that after three days my desire for what I wanted has faded and in some cases I’ve forgotten about it completely. In a few circumstances I may still have a desire to purchase the item and I’ll try to work the cost into my budget. Usually this doesn’t happen.
Understand Yourself, Buy Things That Are Important To You
Understanding the things I want to accomplish has been one of the biggest advantages I have when it comes to saving and spending. When I do spend large sums of money I spend it on things that matter to me and add value to my life. I always plan ahead and pay cash. My recent purchase of a carbon triathlon bike wasn’t exactly small, but I’m really into competing in running and wanted to start triathlons. It is something I know I will use for years to come.
Use Credit Cards Wisely
I use credit cards to make most of my purchases, but I pay them off in full every month. I never carry a balance as the interest rates are outrageous. Credit cards have also provided a major advantage in helping me track my spending. The rewards are nice too, but they’re never a reason I choose to make a purchase–you’re really spending more than you get back.
This all seems simple but it isn’t easy. It required discipline and persistence and there were setbacks along the way. In the end it has led me to is a far more enjoyable lifestyle. I don’t have an expensive car. I don’t have a giant house. I do have a high degree of financial security and I’m building towards financial independence. This allows me to pursue the things in life that I enjoy and I couldn’t be happier.
What I’m Reading
Powerball Fever! (Pragmatic Capitalism)
Getting ahead vs. doing well (Seth Godin)
Why The Smart Money Chases Performance (A Wealth of Common Sense)
Napoleon Hill Retrospective (Michael Covel)