It’s hard to know where to start when you want to get a handle on your finances. I’ve boiled down the 7 simple financial guidelines that have worked wonders for the health of my finances.
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1. Use a budget
Ok you saw this one coming, right? It’s the most important first step to getting control of your finances. Open a spreadsheet and list your monthly expenses such as mortgage/rent, groceries, phone bills, car payments, insurance, household supplies, utilities, subscriptions, etc. Just seeing these numbers will give you a good idea of where your money is going, and you can begin to figure out where you can cut spending. Can you switch to a less expensive cell phone provider, cancel a subscription, or eat out less? These changes will add up immensely in the long run.
2. Pay attention to interest rates on accounts
Take a look at your current bank statement. You’re probably earning .01% interest which is basically nothing. Your money can’t work for you if it doesn’t have the opportunity to make interest! If you use a high interest savings accounts like Ally’s (the one I use and love) at 1% or more, you could be making 100 TIMES more interest than you currently do. This is the difference between making $50 in interest in your current account to making $5,000 in interest on the same money if it was in a high interest account.
3. Never pay full price
I save money on literally everything I buy by using a cash back credit card (I recommend Discover’s It Card for the best cash back amounts) on top of using services like Ebates to get cash back on online shopping and Ibotta to get cash back on my in-store shopping. P.S. Ebates & Ibotta will both give you $10 to try them out! Use code HQLCTLT to get your Ibotta bonus. Your Ebates bonus will be applied the first time you use it. Free cash alert!
The card that saves money and looks beautiful!
4. Cut back on expensive habits
Constantly eating out, getting manicures, stopping for lattes, and shopping for things you don’t really need might feel good, but it’s keeping you from growing your wealth. And if early retirement is your goal, these expensive habits are actually what keeps you to chained to your job.
5. Think of long term costs
Calculate how much you spend on routine luxuries and how many extra years you are working to pay for them. Think about the Starbucks, manicures, cable subscription, hair stylists, drinks at the bar, dinners out, etc. Let’s pretend you’re paying $500 for these each month, and you plan to work for another 40 years. At the end of 40 years, you would have spent $240,000. If you make $40,000 per year, you’re working for six extra years just to pay for these luxuries. Now let’s take it up a notch. If you would have instead invested the $500 each month toward your retirement and you got a 7% return, you’d have $1,320,062 at the end of 40 years. YES, $1.32 MILLION.
6. Always invest in low fee index funds
Make paying off your high interest debt (anything over 5%) a priority. Once this is accomplished, it’s time to build wealth! Investing sounds scary, but it’s quite simple if you stick with index funds. If you asked your financial advisor how you should invest, they’d probably tell you to put your money into actively managed funds. They make money off the high fees, but over a 10 year or longer period almost all actively managed funds will underperform low fee index funds. For example, an index fund might return 10% on average over 10 years, but an actively managed mutual fund might only return 8%. Add the 1% fee to this and you’re only actually making a 7% return! This small percentage change will add up to hundreds of thousands of dollars in the long term. Always choose index funds and keep an eye on fees. Never pay more than .5% on a fee for an investment fund. I like Betterment because they offer high performing, low cost index funds. Plus they reallocate your portfolio automatically, and I love that you don’t ever have to worry about it. Just set it and ride!
7. Start investing as early as possible
When you start investing at a younger age, compound interest will reward you handsomely. A 25-year-old who invests $6,000 per year for ten years will have contributed a total of $60,000 to her retirement account (just contributions, not interest). If she never contributes again in her life and opens up her account at age 65, she’ll have a total of $1,006,993 assuming a return of 8%. Not bad for only putting in $60,000 of her own money!
Her coworker is 40 and realizes he needs to start saving for retirement. He contributes $12,000 per year for 25 years, so his total contribution is a whopping $300,000. Assuming an 8% return, his retirement account at age 65 will be $957,366. So even though he contributed 5 times more money out of his own pocket, he still ends up with less than his coworker who invested from age 25-35.
Follow these financial tips & you’re well on your way to financial freedom.
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