“Everything should be as simple as possible, but not simpler.”
The two most important principles to follow when it comes to personal finance are:
- Spend less than you earn.
- Save and give the rest.
If you follow these two principles, you will achieve financial success.
It is really that simple.
I am not a personal finance expert, but I do enjoy learning how to be smart about money. I’m not trying to get rich. In fact, my goal is to make our personal finances so simple that I rarely have to think or worry about it.
Everything you read below is an effort to expand on the two guiding principles while keeping the approach as simple as possible, but not simpler.
1. Spend less than you earn.
Our culture cultivates consumerism. We learn early on to buy things we don’t need with money we don’t have. People are in enormous amounts of debt and, if they are like I was after I graduated college, they think this is normal.
Step 1: Change your mindset.
Spending less than you earn is a lifestyle choice. A growing number of people are embracing minimalism, decluttering, and frugality as a way of living. This not only leads to better financial success, it leads to a happier life.
Step 2: Limit your spending.
A lot of people find success by setting up spending boundaries with a monthly budget or something similar. Tracking expenses and then changing the way you spend money is an important part of spending less than you earn.
Step 3: Increase your income.
Finally, in addition to cutting back on spending, you can increase your income by applying to better jobs, asking for a promotion, selling stuff, freelancing, and starting a side-business.
2. Save and give the rest.
Ten years ago, my wife and I were given a copy of Dave Ramsey’s Total Money Makeover. I haven’t found a simpler or more effective path to financial freedom than his seven baby steps:
- Baby Step 1: $1,000 cash in a beginner emergency fund
- Baby Step 2: Use the debt snowball to pay off all your debt but the house
- Baby Step 3: A fully funded emergency fund of 3 to 6 months of expenses
- Baby Step 4: Invest 15% of your household income into retirement
- Baby Step 5: Start saving for college
- Baby Step 6: Pay off your home early (**After ten years, we are here.)
- Baby Step 7: Build wealth and give generously
I have found the most effective approach to saving towards each of these steps is to pick a percentage of your savings (income – expenses) each month to go towards the financial goal/baby step you are on.
A Simple Approach to Investing
Once you get to baby steps 4, 5, and 7, what do you do?
- Retirement: Automate your investment up to the employee match in your 401(k) then invest up to the maximum allowed in a Roth IRA (or Traditional IRA)
- College: 529 College Savings Funds
- Income: Vanguard
- Low-cost index funds (not individual stocks).