Normally, I write about fun stuff that is cheap or free and occasionally about the simple luxury that can be enjoyed as a treat. However, recently I learned that some of my friends and coworkers don’t live within their means and have no concept of savings.
This shouldn?t have been shocking to me because I know that the American savings rate is now 0% and the average American owes their first born in credit card debt. But I always thought that those statistics were skewed by stupid people. These people, my friends, seem smart. What are they thinking?
Anyway, it really started to bother me, so I made a list of 5 boring things you can do to keep your financial house in order. There?s nothing sexy or new about any of this stuff. Most of it is common sense and all of it is available at financial websites like the Motley Fool. I just figured I should post this stuff here, because obviously some people don?t go to financial sites and haven?t really thought about managing their finances.
Disclaimer: I am not a financial adviser and I don?t play one on TV. These are some things that I do. They work for me, but they require discipline. They probably won’t make you rich. I am not rich, but I am happy.
- Live below your means
Save money for known and unknown expenses.
- Make a budget and stick to it
- Track where you spend your money (it may surprise you).
- Find ways to cut back and save. ($20 a week is $1040 a year. If you can find a way to save $20 a week you?ve given yourself a $1000 a year raise.)
Don?t borrow money (for stupid stuff)
- Pay yourself first (use paycheck deductions and auto savings plans)
- Build a liquid emergency fund (cash not beer)
- Build a long term tax deferred retirement fund.
Try to avoid borrowing money at all. If you must borrow money, consider why. It is acceptable to borrow to buy an asset like a house or a car (if necessary, you can sell the asset to pay off the loan). You can borrow for education or a business because these are likely to increase your income or create cash flow (hopefully at a higher rate than the interest). Don?t borrow more than you need and don?t buy more than you need. (Think ?used Civic? instead of ?new Hummer?.) Don?t borrow money to pay for a vacation or luxuries. That?s living beyond your means.
Always take guaranteed free money.
Boring (but simple) investment options
- If your company matches your 401(k) contributions, it?s free money. You must take advantage of it. Contribute enough to get the maximum company match. Only contribute more if the investment choices in the 401(k) are diverse and reasonably priced. Otherwise invest the rest of your retirement savings in a tax deferred IRA of your choice.
- If you have the discipline, use a credit card that pays cash back. You must pay off the full balance each month or you should lose the credit card all together in favor of a debit card.
- Invest in an S&P 500 index fund (always check the expense ratio and compare it to Vanguard)
- I-Bonds at Treasury Direct. No commissions. As safe as the US Government. Inflation adjusted interest rates. Automatic savings programs. Nice tax rules. The government is borrowing money. Shouldn’t they be borrowing from you?
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