The 3 Most Important Things You Need to Know to Be Smarter With Money This Year
If you’ve joined the ranks of people who’ve set financial goals as 2020 intentions, welcome to the club! It’s going to be a good year.
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There are so many ways to go about achieving your financial goals. The first step should be making your goals concrete. Printing out a tracking sheet to sock away savings, or checking off a box every time you pay down your debt puts your goals in center focus and can keep motivation strong.
But in addition to those specific, articulated goals, there are attitudinal and behavioral adjustments that can make all the difference in helping you achieve them. Saving money is just as much (probably more!) a matter of psychological discipline as it is about how much money you have or don’t have.
No matter your situation and whatever kind of goals you’ve set for yourself, here is some sound, universal, high-level advice for how to be smarter with your money:
1. Know What Money Means to You
This seems like a big topic, and it is. Taking the time to think about what you want your money to accomplish in your life is fundamental to making financial decisions that not only align with your life goals but help you realize them.
Eric Barker, author of bestseller “Barking Up the Wrong Tree: The Surprising Science Behind Why Everything You Know About Success Is (Mostly) Wrong” puts it this way:
Does money mean security? Opportunity? Freedom? Something else? Once you have that answer keep digging. You want to get a vision of what your real goals are along with an idea of your time horizons, risk tolerance and what kind of changes you’re willing to make.
Once you’re clear on the big picture (and this may take a while and several conversations, if you share your money with another person), you’ll have a vision that will govern all of your financial plans and decisions, big and small. For instance, if you value opportunity, you may choose to funnel a significant portion of your savings allowance toward higher education, while if you place more importance on security, you may opt to put as much as possible toward retirement investments.
This way of being smart with money doesn’t have visible, quantifiable results, but the practice is no less applicable to your daily life than the mason jar of spare change you clatter your coins into every night. With a big-picture view, each of your spending decisions will be governed by whether or not it contributes to what you really want in life and this is a powerful behavior influence.
2. Learn How to Pay Yourself First
This might seem like tired advice, but it’s easy to dismiss a pithy phrase with a yeah yeah, everyone knows that one without stopping to think what it really means and whether you’re really following the sage, time-tested advice.
Paying yourself first, at the most basic level, means that you have a portion of your salary pulled from your paycheck and routed toward savings, before you even get an opportunity to spend it.
When it comes to paying yourself first, automatic deductions are best, if you can swing it. It funnels money toward future goals without your easily-distracte brain getting in the way. Manual transfers make it too tempting to use the designated money on current expenses rather than funds for the future.
The earlier you can do this, the better. Even if the amount seems minuscule at the start, you’ve broken that barrier to setting aside savings and you will reap the result of having money saved and gaining interest incrementally. J.D. Roth of Get Rich Slowly describes it this way:
The real barrier to developing this habit is finding the money to save. Many people believe it’s impossible. But almost everyone can save at least 1% of their income. That’s only one penny out of every dollar. Some will argue that saving this little is meaningless. But if a skeptic will try to save just 1% of his income, he’ll usually discover the process is painless. Maybe next he’ll try to save 3%. Or 5%. As his saving rate increases, so his nest egg will grow.
Paying yourself certainly includes setting up automatic deductions from your paycheck to go into your retirement funds (especially if your employer offers matching!), but in addition to putting money into investment accounts there are other important ways to consider “paying yourself.”
First, pay yourself by adding money to a savings account for emergencies. Having a certain amount set aside in cash for things like the air conditioning unit breaking down unexpectedly or a last-minute flight to visit an ailing relative means that your financial plans and goals won’t be derailed by the curveballs life inevitably throws at you. Growing this fund automatically, without you having to think about it and make a separate transaction, means you’ve made building a cushion non-negotiable.
The amount you should have in your emergency fund varies. Dave Ramsey famously advocates setting aside $1000 before even beginning to pay down debt. Most experts recommend aiming for an emergency fund amount that can cover three to six months of living expenses. The money should be stored in a safe, accessible account.
Paying the premiums on certain types of optional insurance may also be considered paying yourself first, as can paying down debt, if that’s part of your financial picture.
3. Know How to Organize Your Financial Life
Organizing your finances puts you in the driver’s seat when it comes to your financial future and it encompasses several matters.
When you set out to organize your financial life, the first thing you should do is make sure you have a clear view of where all your money is and what it’s doing. Go through each account you have, including your mortgage or other debt, each bank account and investment account, and credit cards, and make a spreadsheet that details the amount you have or owe for each. Gather your tax records and shred anything that’s older than three to seven years (cases vary).
Once you have all the puzzle pieces of your financial situation on the table, it’s time to consider what your financial goals are. Revisiting the first point—defining what money means to you—will inform the types of concrete goals you’ll make, which could include things like contributing more to retirement, paying off your mortgage, giving to causes that are important to you, or saving for an international vacation with your family.
The way to set your goals in motion is budgeting, the final and most practical component of an organized financial life. Explore your options and commit to a budgeting system that works for you. While I’m partial to zero-based budgeting myself, there are many other budgeting methods to choose from. Pick one and use it.
A big part of successful budgeting (using your budget to help direct your spending and saving habits) is setting aside a regular time to go over your expenses and revisit your goals. Make it part of your daily or weekly routine, and if you share your money situation with another person, pencil in a deeper budget dive with them at least once a month.