No one plans to fail, but many people fail to plan. This proverb is SO true in personal finance. In fact, no amount of money will ensure financial "success." Many people making tons of money have come to financial ruin because they found a way to waste and overspend their considerable resources. It is not as important to make a bunch of money as it is to manage what you make correctly.
Start by living on 80% of what you make. 10% of your income should be invested in assets that will get you through emergencies and provide income when you are not able to earn money yourself. The first investment should be in an emergency fund. You need to sock away 6 months of living expenses in a low risk, liquid asset. A bank CD is a good option. This will be money in case you lose your job, or your company can't pay you. After funding your emergency fund, you should invest in longer-term vehicles like index mutual funds. The next 10% should be charitable giving. If you are part of a Christian Church, your 10% should support it. You should also include in your charitable giving supporting a child through Compassion International or similar organization.
Once you know your 80% you need a CLOSED LOOP budget. Closed loop is a geeky engineering term that says feedback exists. Some people have an OPEN LOOP budget.
Start by living on 80% of what you make. 10% of your income should be invested in assets that will get you through emergencies and provide income when you are not able to earn money yourself. The first investment should be in an emergency fund. You need to sock away 6 months of living expenses in a low risk, liquid asset. A bank CD is a good option. This will be money in case you lose your job, or your company can't pay you. After funding your emergency fund, you should invest in longer-term vehicles like index mutual funds. The next 10% should be charitable giving. If you are part of a Christian Church, your 10% should support it. You should also include in your charitable giving supporting a child through Compassion International or similar organization.
Once you know your 80% you need a CLOSED LOOP budget. Closed loop is a geeky engineering term that says feedback exists. Some people have an OPEN LOOP budget.
- Decide how you want to spend your money.
- Track how you spend it
- Look at the end of the month to see how you did
Others use a CLOSED LOOP budget
- Decide how to want to spend your money
- Track how you spend it
- Using feedback adjust how you spend your money during the month so that...
- At the end of the month, you will not have overspent.
While there is value in an open loop budget, there is much higher value in a closed loop budget. Therefore, find a system that curbs your spending in categories if you start to overspend. There are two primary ways to do this.
Cash EnvelopesAt the beginning of the pay period, place a certain amount of cash in an envelope for a particular category such as groceries, eating out, or entertainment. Do this for categories that can be paid with cash and are hard to control. When the envelope is empty, you are done until payday. Research and experience confirm that people spend less when using cash than credit or debit cards. With cash, you feel the emotional loss of your money.
TechnologyAlternatively, you can use a system such as Mvelopes or spreadsheets to track your spending in each category. The trick is to keep the system up to date and continually refer to it before spending. When you want to spend, check your system to see if you have enough money in that fund. If you don't have enough, don't buy it.
You can also combine these systems and track some categories in cash and some using technology.
When and if you marry, decide to live on 80% of a single paycheck. This will give your family the freedom to have one parent work, and one take care of the children. Take the second paycheck and invest it and buy foundational items. These items might include a house downpayment, quality furniture that will last a lifetime, and anything else with a very long life.
Finally never forget the opportunity cost of money. In every transaction, there are TWO items.
Cash EnvelopesAt the beginning of the pay period, place a certain amount of cash in an envelope for a particular category such as groceries, eating out, or entertainment. Do this for categories that can be paid with cash and are hard to control. When the envelope is empty, you are done until payday. Research and experience confirm that people spend less when using cash than credit or debit cards. With cash, you feel the emotional loss of your money.
TechnologyAlternatively, you can use a system such as Mvelopes or spreadsheets to track your spending in each category. The trick is to keep the system up to date and continually refer to it before spending. When you want to spend, check your system to see if you have enough money in that fund. If you don't have enough, don't buy it.
You can also combine these systems and track some categories in cash and some using technology.
When and if you marry, decide to live on 80% of a single paycheck. This will give your family the freedom to have one parent work, and one take care of the children. Take the second paycheck and invest it and buy foundational items. These items might include a house downpayment, quality furniture that will last a lifetime, and anything else with a very long life.
Finally never forget the opportunity cost of money. In every transaction, there are TWO items.
- The item you are buying
- The item you can no longer buy because of it.
Always be aware of both items, and intentionally decide it is worth the trade.
Ignore the pressure from the world to spend more than you make to get it all NOW; instead, live within your means. Be patient with your financial plan, and build slowly. You will be happy you did.
