There are a lot of broke finance professors out there. People who know the ins, outs, ups and downs of money, yet they're deeply in debt. How can that be?
Because information alone is not enough. Especially when it comes to managing money, 80% (or more) of your long-term success comes down to your behavior around saving, spending and investing, The other 20% comes from knowing what to do.
That's why I put this section in the front of this guide. If this is the only section of the guide you read, you'll be ahead of 99% of people.
Your behavior of spending, saving, and investing will all be automated
You won't have to force yourself to do a thing
All of your money will go where it's supposed to – automatically
One reason we don't save money is the pain of putting money into our savings accounts each month.
Just like cutting back on lattes we may do it once or twice but if we have to make the decision EVERY paycheck, we're setting ourselves up to fail.
That's why automated finances work so well. By setting up a bulletproof personal finance system, you can start to dominate your finances by having your system passively do the right things for you.
It will help you automatically manage your money, guilt-free, for years to come.
Here's a 11-minute guide on how to set up your money and accounts to automatically pay bills, save, and even invest every month:
Your behavior of spending, saving, and investing will all be automated.
Then, you know exactly what you have left to spend (guilt-free) each month.
$5 latte? Sure! A round of drinks with friends? Absolutely.
I'm not the guy who wags his finger and tells you “No, you can't do that. It costs too much.”
I say “Okay so you want to buy that expensive pair of shoes? Cool, let me show you how you can actually get it.”
Unlike most people in the personal finance world, I actually spend lots of money eating out and traveling, and never feel guilty.
Rather than taking a simplistic view of “don't spend money on ANY expensive things” there's a much more nuanced approach to spending.
Spend extravagantly on the things you love, and cut costs mercilessly on the things you don'tTweet this
The only problem is most people aren't deciding what's important to them and what's not.
Lets take a look at a case study to see how you can decide what's important to you and build a plan of conscious spending.
My friend spends over $21,000/year going out.
Most people's reaction to that: “OH MY GOD, THAT'S SO MUCH*#%(#%(#%!”
But let's break it down. And see, is it really extreme?
Let's say you go out 4x/week – to dinners and bars – and spend an average of $100/night.
I'm being conservative with the numbers here, since a dinner can run $60/person and drinks could be $12 each. I'm not including bottle service, which might cost $800 or $1,000. (He lives in a big city.) That's easily $400/week.
Now, this guy also makes a healthy six-figure salary, and he's invested quite a bit in his 401(k) and outside investments (including real estate). The key here is that he works such long hours that he's only really free Friday and Saturday nights. And so he goes out. Hard.
And although $21,000 sounds outrageous on the surface, you have to take context into consideration.
For example, look at his spending by percentage: Just for easy calculations, if we assume that this guy makes $210,000/year net, his going-out budget is roughly 10% of his income.
For my friends who make $35,000/year, you can be damn sure that they're spending more than $3,500/year ($67/week) on going out.
But my other friend has a plan and he's decided to spend his money this way.
By that, I mean we're not being proactive about planning where our money should go.
We're going through life doing whatever, and inferring our spending patterns from the bills we get at the end of the month.
We not only lack a prescriptive budget (“I want to spend 20% on my retirement account, 10% on savings, 20% on going out…”), we even lack a descriptive budget (“Where the hell is my money going?”).
You can spend on the things you love, too, but it takes a plan. And it's really as simple as that.
First, categorize your spending: know where your money goes so you're in complete control of every decision. Conscious spending is about making a plan on how you want to spend your money.
Then, optimize your spending to fit these recommendations:
Now to find the the categories you've yet to fill out, you're going to have to go a little deeper. Just take last month's expenses as an example. Just look at a recent credit card or bank statement to do this.
Now, subtract these amounts from your take-home pay, and you'll have a sense of what you have left over for the other categories of investing, saving and guilt free spending.
Notice I said guilt free spending money. That's the fun money. You can use this for anything you want, guilt free, once you know where the rest of your money is going.
One of the most common reasons people can't get ahead is expenses they just didn't expect. I constantly hear things like this:
I was just about to pay off my credit card debt FOREVER, and then I had to get a new __________ for my ________
God, I didn't expect to get that traffic ticket
Every time I think I'm getting ahead, my car breaks down or I have to replace some appliance.
Here's the trick: A lot of what seems unpredictable is extremely predictable — over the long term. What seems like surprise expenses is actually not a surprise if you analyze your spending for the past 5 years. Which of course nobody does.
For example, that “surprise” car repair? It might not happen in the same month, but every year, you might average spending about $400 on car repair. That's $33/month. Once you know that, set up an automatic deposit into your sub-savings account and you're done.
(Formerly ING Direct)
I save $100/month into it. If there's anything left at the end of the year, I take out 20% to reward myself, and roll the rest back into my main savings account.
Keep a “Stupid Mistakes” sub-savings account. Just the simple fact of having one will sharpen your focus on avoiding the mistakes in the first place. And when you do make a stupid mistake, you'll be able to use your sub-savings account as a buffer to keep your automation system on track.
And join thousands of people who've successfully saved $1,000 or more they didn't even know they had.
“I cancelled LinkedIn Premium, gym, and web site memberships and saved $460 on Day 1 of @ramit's Save $1,000 Challenge. #save1000”
“I cancelled experian credit monitoring, big cartel & saved $540 on Day 1 of @ramit's Save $1,000 Challenge. http://iwillteach.co/save-1000/ #save1000”
Show me how to get myself an extra grand this month