This may seem like a trivial topic but I think it is often the most overlooked by other creators in this space. There are so many specific videos and articles about side hustles or the best credit cards to hack or how to house-hack but a lot of those assume you already have your house in order. You might point to someone like Dave Ramsey’s Baby Steps as an example but I think those are far too vague. “Save a $1000 emergency fund.” Ok, how? Especially in an age of information overload, I wanted to start with a simple topic. The beginning.
Step 1: Start simple
Now you might be confused given my point about the Baby Steps being too vague. Vague doesn’t necessarily mean simple. What I mean by simple is true simplicity. Don’t start with a goal of being a millionaire by 40. Or making $2000 per month from side hustles. Start by savings $20 a week.
That amount might be variable but it gives you an idea of the level of simplicty we are talking about. Read any book or article about habit formation and step 1 is almost always starting a small habit. You don’t become a gym rat who looks like Chris Bumstead overnight. You start by going to the gym 3 days a week. Then tracking your macros. Then tracking your progression on lifts. The key to habits is always to start simple.
Your brain isn’t optimized for very high stress situations and according to the APA, nearly 75% of Americans are stressed by finances. So if you try to dive into the deep end and overhaul your finances in a month you will quickly become overwhelmed and your brain will quite literally shut off. Think of stage fright. One becomes so stressed they can’t remember lines they have practiced and memorized. Now imagine how paralyzed you can become when trying to optimize your finances for the first time from scratch. It just won’t work.
So what are some helpful actions that count as “Start Simple”.
- If you don’t have a savings account open one and start a small recurring deposit
- If your job offers a 401K match you aren’t taking advantage of, see what it takes to get it. It’s free money afterall
- Set each credit card to automatically make the minimum payment every month. This way you never accrue late fees or ding your credit score.
Step 2: Don’t compare yourself to others
Theodore Roosevelt once said “Comparison is the thief of joy”. Finances can be difficult enough without comparison. The truth is we don’t all start in the same place and we don’t all learn the same things growing up. A Credit Karma survey found that only about 12% of people said they learned anything about finances in school. Meanwhile only 37% said they learned from their parents. That still leaves 51% who had to learn themselves or haven’t learned at all. That is a huge portion of our society and those in that 51% are likely at a disadvantage when it comes to wealth building.
This was a difficult lesson for me to learn. Admittedly, I can be quite competitive and seeing others so much more successful than me hurt. Seeing other finance channels that were millionaires at my age or earlier stung. I felt behind. Almost hopelessly behind. I decided to stop the comparison. In most, if not all of those instances their substantial leg up came from the very reason I was watching them or reading their blog. They had a huge following which generated far more money than I had ever earned. They were just able to use that money more effectively due to the lessons of frugality or minimalism they were talking about. So I forced myself to stop the comparison to others and focus on the comparison to myself.
Love him or hate him, I feel like Mathew McConaughey (which I absolutely had to google how to spell while writing this), has a great speech that I think applies here. He recounts a story of being asked who his hero is. He says “It’s me in 10 years” then in 10 years when the question is asked if he is his hero now he says he isn’t even close. His hero is always him 10 years from now. Now, if you take this idea and reverse it you will find who you should compare yourself too. Are you in a better financial spot now versus 30 days ago? What about 2 years ago? How far have you come over time? those are the questions and comparisons you should make. Those are the comparisons that will benefit you and help you grow, even if it is just 1%.
Step 3: What gets measured gets managed
If you have ever had a corporate office job you have absolutely heard this phrase. I know I have said it more than a few times at work. While it may be overplayed a bit in the office, it is absolutely true of finances. A survey performed by Mint (not of the Ryan Reynolds mobile phone variety) found that 65% of Americans don’t know how much money they spent last month. On top of that, you can’t google the word finance without seeing study after study about Americans lacking savings. Now, I don’t want to discount systemic factors causing the later problem, as there are absolutely systemic contributing factors. However, I think these two are at least related. How can you expect to build any amount of savings or investments if you don’t know what is coming in and out every month?
This is a step that can really be difficult for a lot of people. The truth is, sometimes ignorance really is bliss. If I don’t know how bad my situation is, I can ignore it. Once you look, you can’t unsee the issue. This part falls a bit into the last point, don’t compare yourself. You’re in the here and now and you can’t time travel to the past to fix the issue. Try to perform your first real review of spending and finances in as much of a non-judgmental headspace as you can. During this first review just list where all of your accounts are whether that is positive or negative. Then try to roughly review where you spent money over the past month. That’s it. It shouldn’t take more than 30 minutes this first time.
So, now you have done the review. You know where your accounts stand and now is the time to start measuring. The biggest tip on this is to be honest. Don’t say you can cut your shopping budget to $50 if you spent $400 the past 6 months. You will feel deprived and start to resent this work and likely you will fall off the bandwagon. Think about it a bit like a diet. If you set your goal to lose 20 pounds in the first month you are setting yourself up for failure. Set your spending targets at levels you’re likely to hit. Then stay at that level of spending for a month or two. Then you can take the action to start dropping it down steadily over time.
The question you might have is “How do I budget?”. There are as many budget ideas as there are diets out there. Some will work for you and others won’t. I can’t make a blanket recommendation but I can give you some ways to think about it. Are you a bit of a techie and enjoy using your phone and possibly gamification? Use a digital tracker that connects to your accounts like Mint. Are you a bit more old fashioned and find writing things down really causes it to sink in? Try making a hand written budget. There are even some fun templates online you can print out to use. The most important part is just to do it, experiment a bit, and find a budget that works for you.
Step 4: Do research but stick to the plan
This is less of a single step and more of a consistent reminder. There is myriad information out there about personal finance. Some of it is good and A LOT of it is bad. Like A LOT of it is bad. Unfortunately, you will need to wade through some of this terrible information to continue learning. On top of that, thanks to our technology overlords the algorithms will kick in and feed you more and more of this information. A lot of the bad information drives engagement so you may get fed some terrible advice. Always remember, if it sounds too good to be true it probably is.
Another risk with overconsuming this information is baked into how our minds work. Or maybe just my mind. The more we dive into a topic the more risk we have of eventually losing interest. If you take that firehose of information right to the face for 2 weeks you can get burned out and disinterested then fail to put in the work to improve your finances. If you feel like you are approaching this point, take a step back and spend more time enjoying another hobby or interest. Read your favorite book if you love reading. Watch versus battle YouTube videos instead of one about finance. This financial information should add to your life not overwhelm it.
Here are a few recommendations on how to slow your consumption from when I hit this stage.
- Use playlists on YouTube to keep track of videos you might want to watch instead of binging them. Then watch them one video a day until you make it through the playlist.
- Read Books. The truth is everyone is slower at reading then watching.
- Take a pause. This doesn’t mean from your budgeting or other efforts. Just take a pause from any finance related content.
Step 5: Automate to forget
This is the most advanced step on here but I feel like it is important in this day and age. More over, it is becoming easier every year due to technology. The truth is that humans have terrible memories. I guarantee you that you have, at some point in the past week, remembered something you meant to do and completely forgot. I can probably think of at least 10 times in the past week I have done that. (side note: yes I am working on that and have ben using to do lists a lot more now). Finances is one area where forgetting to do something can be catastrophic.
A 2017 Federal Reserve study said that of people who missed a credit card bill, 35% simply forgot to make the payment. Missed payments on credit cards can severely damage your credit score. Your credit score can be used from things like home loans to being approved to rent an apartment. I’ll being doing things in the future regarding credit scores and how to work on yours. On top of that if you miss paying off a card on time you get hit with that 17%-25% interest on that balance. Those are just examples with credit cards. There are issues with other bills like rent or utilities that can be just as catastrophic, if not worse. So, the moral of the story is to automate what you can.
There is one big issue to watch out for when it comes to automation. Don’t over extend yourself. For example, say you’re ready to start investing and automate $100 dollars a week to get yourself started. If you aren’t financially ready to handle that $100 per week expense you could be in deep trouble. You could either lose money on it if the market drops and you need to pull out the money from the market. If you invest in certain retirement accounts you might not be able to get the money out without penalties at all. I recommend adding or tweaking one automation per month and then monitoring on how you handle the change to your finances. This will help ease the burden on your memory but keep you from over automating.
Conclusion
Personal finance isn’t as difficult as people make it out to be. That doesn’t mean it isn’t difficult to get started though. If you’re one of those 51% who never learned much about personal finance then I hope this and the other content I create can help you. The truth is that I was you not that long ago. It is a difficult place to be but I know you can improve your situation. Take these steps one at a time and I know you will be in a better spot a day, a week a month or even a year from now.
SimpliFI 