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We have spent years mentoring individuals in numerous aspects of their lives and one topic that we find ourselves continually discussing is that of financial literacy. This shouldn’t come as too much of a surprise to since the majority of us are never formally taught how to properly manage our money. We were told it is important to learn how to do, yet nobody (including many times the school system) has taken the time to teach us what “right looks like” in this area. There are many strategies that one can adopt to get better at managing money and each person should have a customized plan based on their situation. There are a few basic principles, however, that we believe are important to use as a starting point on your journey towards managing your money effectively.
#1 Establish A Zero Based Budget
Unfortunately the term “budget” has a negative connotation in our society. Many people see it as unnecessarily restricting themselves from enjoying life the way that they want to. Budgeting is not unnecessarily restricting oneself, it is simply telling your money where you want it to go so that you can enjoy life on a scale that would otherwise have been unattainable. It’s about being intentional with the money that you have coming in and a zero based budget is the ultimate way to create that intentionality. This type of budget is often referred to as “spending your money in advance.” Essentially this is where you preplan where you want ALL of the money from your paycheck to go BEFORE you ever receive it. This type of budget will be a big help in keeping you from overspending in non-essential expense categories like: going out to eat, entertainment, etc. Most people believe they know where their money is going, but in reality have a very large portion of it slip through their fingers every month because they aren’t preplanning properly. Dave Ramsey isn’t the creator of this type of budget but is one of the most well known authors on the subject and one that I highly recommend checking out to learn more.
#2 Pay Yourself FIRST
It’s tempting whenever we have money coming in to either spend it immediately or to use it to “catch up” on the bills/debt that has accumulated since the last time we got paid. We recommend you take a play out of best selling author, Robert Kiyosaki’s, playbook on this one and learn how to “pay yourself first.” This means that when your money comes in, before you pay off any bills or pay anyone else, be sure to set aside a small portion and put it into a savings account. What is this not? It is NOT setting aside money for yourself to blow on pleasure seeking items (i.e. buying clothes, going out to eat at a restaurant, etc…). This strategy is designed to help you first and foremost establish an “Emergency Fund” for yourself in case an unforeseen large expenses comes into your life. This way you avoid stepping into debt (or more debt than you are already in) due to charging this large expense on a credit card or from taking out a loan.
The second reason for paying yourself first is to continue to build a “safety blanket” for yourself. The goal is to eventually have 6-12 months worth of income saved in the bank so you can survive for an extended period of time without a loss in lifestyle in case anything ever were to happen to that source of income.
The level at which an individual pays themselves first is different for everyone and dependent on their situation. When we first got started in our careers after college, we only put $25 per paycheck into our savings account. This is because we had so much debt that we needed to clear but also wanted to make sure that we were establishing some sort of savings for ourselves. Gradually this increased to us putting 10% of our income into our savings per paycheck and beyond. It’s important that you start somewhere though, even if it is only $25 at a time.
#3 Build Assets
If you were to ask the most financially successful people on the planet they would tell you that they have multiple streams of income (usually 7 or more) and that the majority, if not all of them, come from assets that they have created. The unfortunate thing is that many of us, like is the case with managing money in general, are not trained on how to develop asset based income in our lives. We are told that our house and our 401K are our most important assets and we should just focus on increasing both of those. While these are both very good things to have, the unfortunate fact is that your house doesn’t’ generate income for you on a monthly basis unless you are renting it out (in the majority of instances it is costing money until it is sold which is considered capital gains not asset based income), and your 401K isn’t going to be a consistent income stream for you until after you turn 65 years old. This means that it is critical that we figure out other ways to build assets in our life if we want to create the financial security and flexibility that we are looking for. One of the things that we have learned over the years is that it takes an investment of either time or money to build an asset. When we didn’t have the money, we learned to funnel our non-productive time (i.e. TV time, hangout time, etc…) into avenues where we could build assets for ourselves and start to secure and ultimately enhance our lifestyle.
These 3 tips are by no means the end all be all for improving your finances, but we believe that they are a good starting point to focus on in your journey towards financial literacy. Establish a strategy, act upon it, be patient, and adjust when necessary. If you do those things you will start to see a great shift in the security and flexibility that you have in your life.
Brandon & Amanda