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 yield savings account at a bank like CIT Bank 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 yield account. If you want to earn even more interest, stash some funds in their short term CD earning 2.05%.
Take advantage of the higher rates offered by online banks. They are often able to offer the highest rates in the industry due to their lower overhead cost, and your funds are protected by the FDIC just like any brick and mortar bank.
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 (including booking hotels for travel) and Ibotta to get cash back on my in-store shopping. This combination easily saves me more than $100 each month.
Already have Ebates? I recommend checking out RebatesMe as well because they often have higher cash back rates for certain online stores. I use both services & always check which one has the best rate for the site I’m shopping with.
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.
See More: 11 Easy Tricks to Save Money Each Month
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. 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. I’d also recommend using an investment firm like M1 Finance that doesn’t charge commission or managemend fees.
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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