How to take control of your finances.
You can take control of your finances. No matter how much money you have coming in or going out each month, it is possible to set yourself up for greater financial success and freedom in the future.
These four rules help me build more and more financial freedom every single day, week, month, and year. It’s all about understanding your finances on a basic level and sticking to a plan. Develop a strategy that works for you and that fits the lifestyle you’re living. Be a little aspirational where possible but build a foundation first and start with these four rules.
Basic financial independence starts with making a budget. You need to know what money you have coming in every month and what money you have going out. What’s your income? What are your expenses? These are the most basic questions you have to ask yourself.
Make a budget that represents your life.
Income and expenses look different to different people. It’s important to make a budget that represents your life. I have a spreadsheet that tracks monthly, quarterly, and annual sources of income and expenses. It’s dynamic and I use Google Sheets so I can access it anywhere.
Things to include in your expenses:
- Average Grocery Expenses
- Average Gas (Car) Expenses
- Any Subscriptions (i.e. Streaming, Food, Fitness)
- Outstanding Debt/Loans
These are very common items to account for in your budget. Other items might occur less frequently, such as insurance payments, tax payments, maybe you see an uptick in shopping around the holiday months, vacation travel, childcare expenses, and so on.
What about your income?
If you have money coming in, make sure it’s properly represented in your budget. Do you have a set salary or are you paid hourly? Do the hours you work vary or are you paid on commission or in another non standardized way? Account for whatever way you’re paid in your budget.
Are there gaps in your income throughout the year? For example, teachers might not take a salary during the summer months. Maybe you work a seasonal job. Whatever the case, note that in the budget. You can break out the spreadsheet by month. Make as many recurring line items for both expenses and income as possible and adjust each month where needed.
For the non monthly line items, group them into the month you’re most likely to make those payments or receive that income. If you’re unsure of where that could be, take a look at what you did last year.
A budget works for everyone.
It doesn’t matter how much or how little money you’re making or spending. A budget works for everyone. I would say especially if you want to be making or saving more money, then you need to create a budget. Just doing so lets you take more control over your finances.
Even if you are making what you would consider a small amount of money, making a budget allows you to see the overall flow of your finances. You can find places to eliminate expenses and ways to maximize your income. But, you need the budget to see it in the first place.
After you have a budget, then you can start finding ways to make your income and expenses work more in your favor — that means saving and investing more. Without the budget though, you’re just guessing.
Saving vs. Investing
I look at saving as setting money aside for something needed in the short term. Investing, on the other hand, is setting money aside to work for you in the long term. It’s a more automated process and it’s money you don’t plan on needing anytime soon.
You invest for your retirement. You save for a new car or for even shorter term items like gifts or an upcoming household repair. You might also be saving to pay off a debt or loan. We won’t dive fully into reducing your debts, but these are key pieces to callout in your monthly budget and to consider when deciding what you should be saving or investing toward.
Reduce your debt and increase your income — that’s the ultimate goal. For now, consider the debt payments part of that monthly budget.
Investing is for larger, longer term bucket items. Saving is for smaller, shorter term bucket items.
Having a budget let’s you know how much you can both save and invest. Let’s specifically talk about investing though. Investing is a way to grow your wealth. Saving, being the more short term action, is not for growing your wealth but rather for accomplishing something more immediate.
How to grow wealth.
Investing sets you up for future success.
Investing is meant to make your budget work for you in the future. That also means that you can’t over stress your current budget while you’re investing. The number one rule of investing is — don’t invest more than you can afford to lose. In other words, don’t gamble with the rent money.
Step 1 — making your budget — tells you how much money you have leftover every single month. Then, you have to decide what to do what that money. If there isn’t any money leftover, you need to reevaluate your expenses or consider ways to find another source of income. This can mean reaching out for help which is 100% okay to do. In fact, if you need help, you should reach out to friends, family, or services designed for that very purpose.
It’s better to invest or save some money than none at all. Even if it’s just $50 or $100 extra each month, you’re doing great if you’re able to set that money aside and invest it regularly, over time.
I won’t get into specific ways of investing in this post because there are so many and they vary depending on what stage of your financial life you’re at. The good news though, is that financial services are becoming more and more equitable and accessible every single day. There are lots of banks, fintech platforms, and the like who offer checking, savings, and investing options all in one platform.
Find a system that works for you.
I’ll keep it general for now. Take what you have leftover each month and put it to work the best way possible. I have a retirement account that I contribute to. I also have a more standard brokerage or investing account and a 401k account through an employer.
You might’ve also guessed by my account name that I invest in cryptocurrencies like Bitcoin. Regardless of the investment bucket, I invest in them in a methodic, recurring way that I track on my monthly budget spreadsheet.
Savings accounts aren’t what they used to be. You’re lucky to find a savings account that earns just 1% interest. Finding a way to make your cash work for you and earn yield is critical to getting ahead financially. Because of that, I like to say that cash is trash.
Cash doesn’t do a lot for you just sitting in a checking or savings account. The general rule of thumb is to have somewhere between 3–6 months worth of your necessary expenses on hand in case of an emergency. You might be laid off from your job or suffer an unexpected injury that ups your expenses in the immediate short term. That’s what you need cash on hand for.
Look at your budget and determine how much 3–6 months worth of cash is. Then, make a plan to start saving toward that amount and maintaining it month in and month out. That can be your savings and anything leftover can go into your investing bucket.
3–6 months is just a guideline.
The amount of months worth of cash you should have on hand can vary. I would consider my job to be stable. I’m also part of a dual income family. Maybe the same things applies to you. That means, you might be able to get away with keeping only 3 months worth of cash on hand versus something more toward the higher end.
Make your cash work for you.
Once you’ve set aside that safety net of a fixed amount of cash on hand, you can make the remaining cash work for you. That’s where you get it into your investing bucket and find a way for it to earn yield.
Cash on its own isn’t going to make you any money. Over time, it will depreciate in value. This is why you see other assets such as Bitcoin or gold or even things like real estate appreciate in value. These are all ways to put your cash to work in a bucket that has the potential to grow. And again, if this is too much to consider in your situation right now, don’t sweat it. Take your time and ask people around you for their advice.
You can start slowly, investing and saving in a way that is manageable and that matches your risk tolerance.
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By now you’ve realized it — you can account for your entire financial life on paper. You can see your budget and how it changes month to month and generally over time. That means you’re also able to manipulate it.
One way to further optimize your savings or investments is to automate where possible.
After you’ve established your budget and saving or investment goals, you know what you want to do with that leftover cash each month. You can automate in a basic sense — for example, adding a line item to your budget each month to save a certain amount of cash for that car repair. This is a more “manual” type of automation. You build it into your budget and don’t touch that money except for the purpose you’ve assigned to it.
You can, however, automate using your financial platform or bank. Setting money to be moved automatically each month (or in any applicable time interval) to an investment account, savings account, or to be put directly toward a credit card or loan payment can be critical in making your budget work better for you over time.
Make your budget work for you.
I mentioned above that everyone’s budget is different. It applies to your specific life so you should make it work for you. Greater financial independence allows you to live with less stress, knowing what’s around the corner. And if something unexpected comes up, at least you’re better prepared to handle it when it does.
Try these four rules for financial freedom to get you started. Once you’ve got a better handle on your budget and how to make it work in your favor, you can really start to optimize things for you, your family, and the future. Let me know some of the ways you’re managing your finances in the comments and share any other financial tips you might have!