One of the secondary reasons that I embarked on this 'no new things for a year' challenge was to dial back my spending and make a change to my lifestyle to test whether I could walk away from high-salaried corporate life for a freelance creative venture of my own.
No matter how much money you make, there's a sense of freedom in questioning how you spend it and realizing that you can do less and get better results.
Although this is a concept that I intuitively understood, I knew that long term success required me to learn more about personal finance: it's a topic that makes me incredibly uncomfortable for a number of reasons but not least of which is my utter lack of thought, planning and strategy in that arena.
For years, the extent of my personal finance strategy was to simply make sure I was living within my means, paying my bills on time, and saving a little every month. Obviously, I knew there was more I could be doing, but the topic bored me, long term plans scared me, and I didn't really understand investing.
When I started thinking about what I really needed to live a comfortable life, I did some research and came across "I Will Teach You To Be Rich," Ramit Sethi's simple guide to accumulating wealth. It's sort of a "get rich slow" scheme. In addition to describing the most pragmatic perspective on how to think about money I've ever heard, Ramit outlines very simple steps you should be taking with your money to make the most of it.
People, I took copious notes. As in, disregarded the guy sitting in seat 4C and just kept elbowing him as I furiously scribbled away in my notebook. Then I researched them, talked to my husband and have implemented in full. Although I highly encourage you to read the book (arguably the best $7.13 I've spent this year), here's a summary straight from my plane seat…
Key takeaway: You don't have to change your lifestyle to improve your financials
When I think about saving money, my mind wanders to an image of me sitting forlorn on an old futon in windowless room, eating lukewarm ramen noodles out of a Styrofoam cup. When I think about making money, I imagine scenes from Wolf on Wall Street and feel a sense of shame that my ability to decipher the NASDAQ ticker is somewhat reminiscent of my ability to decipher my 6th grade French textbook.
Ramit argues that becoming wealthy doesn't require a lifestyle overhaul, and has NOTHING to do with investment strategy. Your personal finance strategy should enable your lifestyle. With small adjustments and some thoughtful planning, you can actually spend more on what you care about in the long term. But first, you need to establish the right foundation and set up a system to manage your finances… and it's simple to do. Here's the short, step-by-step version:
#1 Stare your finances in the face
Gather the facts on your current financial position: this includes debts, expenses, savings, what you have coming in, and where you're spending your disposable income. This is your current financial position.
#2 Figure out your 'non-negotiable' expenses
If you want to improve your financial position, you need to consider what expenses are important to you, be it a beautiful apartment in a desirable location, designer bags or traveling the world. When I sat down to really think long and hard about my non-negotiables, it was a surprisingly short list.
#3 Scale back on 'negotiable' expenses
Cut back on every possible expense that does not support your top priority or priorities. For me, that meant cutting out things like coffee shops, frequent fancy dinners, manicures/pedicures and Sephora runs which sometimes ended up costing hundreds of dollars in the course of a month. And that outrageous cable package for my husband… Netflix it is, folks!
#4 Pay off debt
This should go without saying, but paying off any debt should be priority number one. There's a lot out there on debt payment strategy, but fundamentally you want to get rid of it as quickly as possible.
#5 Set up auto-pay on all of your bills
You'll never miss a payment or pay a fee again. Those cute little fees add up.
#6 Decrease your APR payments
If you're paying for anything on an installment basis (a credit card, a loan, a car, etc.), you can sweet-talk your way into a lower annual percentage rate (APR), or what you are charged for the full year for that loan. Just pick up the phone, and politely ask them to decrease your APR by 50%. If they say they cannot do it, continue asking for a supervisor until you find someone who can grant your wish.
#7 Increase your credit score
Assuming you've paid off debt and are paying all your bills on time, the easiest way to increase your credit score is to ask for a credit increase on all of your cards and DON'T SPEND ABOVE YOUR CURRENT CREDIT LIMIT. This is actually genius: 30% of your credit score is your credit utilization, meaning how much of your credit you've spent. If you have credit increases, but aren't spending it, your score goes up. And your interest rates go down. Ba-da-bing, ba-da-bang. It's that simple, people.
#8 Open a high-interest online savings account
Ramit recommended CapitolOne, I researched it, and it's the best interest you can earn on money that's just sitting in savings (between 0.6% and 1% depending on how much you've got saved). And there are zero fees. None.
#9 Open a Schwab online checking account
Read my lips (ok, read my typeface): no ATM fees, free checks, free bill pay, and 0.6% interest earned on any balance. It cannot be beat. You have to open a brokerage account with your checking account, but it's free and you don't have to use it. Downside is that there are no Schwab brick and mortar banks if you like getting the free lollipops, and it takes a couple of business days to access your money should you need to make a large payment beyond what can be offered by your billions of now-free ATMs.
#10 Automate transfers
Between your sparkly new Schwab checking account to your high-interest savings account, and any other accounts you might want to set up. CapitolOne will let you set up as many savings "accounts" as you want, so you can earmark for things you want such as a kitchen renovation or a $4,000 purse (see 'non-negotiable expenses' in #2 above).
#11 Max out your 401k
Sadly, I hadn't been doing this and have lost a lot of free money. If you've got a corporate 401k, figure out what your company will match, and max out that percentage. Then sit on it and watch the dollars roll in. Your 65-year-old self will thank you (in addition to judging your 25-year-old self for wasting what could have been 401k match dollars on TJ Maxx shoes). Live and learn.
#12 Open a Roth IRA at a discount brokerage
It doesn't matter what brokerage, as they are all the same (no offense to any brokers who may be reading this). Ramit says that playing the stock market gets you no real returns in the long run. So open one, max out your contributions, and don't touch it until your anti-wrinkle cream routine becomes a fruitless venture.
#13 Create a spreadsheet to keep everything in one place
Make it an extremely simple document so you can manage it over time. Put all of your financial accounts (banking, credit cards, loans, etc.), login/passwords, interest percentages, monthly contributions, etc. into one place so you've got the ability to check in and keep your system working seamlessly. And obviously store it in a safe place.
That's it, now you can sit back in your La-Z-Boy recliner and watch the money build up. I'm kidding, of course, because no reader of this blog would voluntarily own a La-Z-Boy nor would just let this passive personal finance system be the end of the story. The whole point of this is to set up reliable structure that enables savings to become automatic, and also focuses your disposable income on what you actually care about. I really love Ramit's tip for having separate, labeled "accounts" to save for the things on your non-negotiable list. Imagine how much more free you'd feel traveling, knowing that you've earmarked and already have saved the thousands it's going to cost!
As you increase your income over time, this system can also flex to accommodate additional accounts and investments.
If you have any other tips for making the most of your money, please let me know in the comments!
(And, last but not least, special thanks to my friend and cousin Becky Howe for the artsy photo above...)