Financial literacy is not an innate skill that one Is just born with; it must be learned. Achieving financial security requires both an understanding of how money works and the discipline to make wise decisions with money.
How many people do you know who live paycheck to paycheck or are always broke? Are you one of them? Do you ever wonder how other people manage to save money and live a good life, yet you’re struggling? It might seem like there is some secret formula to growing wealth, and a person has to crack the code.
I lived that way throughout my 20’s and early 30’s. What’s worse, I had higher than average earnings. The problem was, the more I earned, the more I spent. I didn’t get richer; the bills just seemed to get bigger. I bought more expensive clothes, drove a faster car, dined in posh restaurants, and did everything that I thought defined living the American Dream.
I had to learn the hard way that having financial security isn’t about how much money you earn; it is about how much money you save! On top of that, saving cash is only useful if it stays saved. That’s different than saving a bunch of money, and then one day, you impulsively decide it’s time to reward yourself with some luxury purchase that all but cleans out the account. (ask me how I know 😉)
Financial literacy + discipline = financial security
Therefore, suffice it to say that financial security is both rational and emotional. Not necessarily in that order either. For many people, spending money and accumulating “stuff” is a “fix” like a drug would offer.
There are thousands of great books about budgeting, financial literacy, and building financial security. Two that were highly influential in my turning point with money are The Total Money Makeover, by Dave Ramsey and RICH DAD, Poor Dad, by Robert Kiyosaki.
To begin, I have to tell you one thing. All of the information in the world will not help you until you are ready to look within yourself and make a change. However, once you are prepared to get brutally honest with yourself, you are already well on your way.
The 6 Steps to Financial Security
Steps One – Four: the pillars of financial stability
Step one: Make a budget
This is probably the easiest step. Here is a simple formula for a budget:
- Record all income per month.
- Make a list of all expenses. Divide them into two columns: fixed and variable. Fixed costs are expenses that are the same every month, such as rent/mortgage, car payments, insurances. Variable costs can fluctuate, such as gas, groceries, and some utilities.
- Add up all your expenses and deduct that from your total income. The remainder is what you have left for savings, incidental expenses that weren’t in your original budget, and disposable income. **(Step 4 is saving a minimum of 10% in a retirement account. The most financially savvy people I know “pay themselves first.” That means they take a minimum of 10% of their income right off the top for savings, and then use the remainder to calculate the rest of their budget).
- Track every penny you spend. Find a budgeting app that suits you and use it! Being mindful of spending will help guide your decisions. What’s more, you’ll also learn a lot about your unconscious spending habits.
If you’re serious about getting your finances straight, be rigorous in deciding what expenses are necessary. In the modern world, we’ve convinced ourselves that a 70-inch flatscreen TV and 400 channels are essential, but believe it or not, you will survive without one.
How you rationalize your spending speaks to your values.What does your spending say about you?
For a more detailed guide to budgeting, you may enjoy Budgeting 101: How to Create a Budget.
Step Two: Put $1,000 into an emergency fund.
If you don’t have this already, you should aim to get this done within a month, two max. This is probably the hardest step. Why? Not because $1,000 is a whole lot of money, but because if you don’t have it already, you probably need to make some serious changes. Change is hard, but the truth is you either get control of your money, or you let money control you. In other words, life isn’t all fun and games; live it up now and get into a funk when you need new tires, or make responsible decisions and have peace of mind knowing you’re tracking stability.
Chances are, you will have to cut something out to meet this goal. You might have to lose the $7.00 lattes or forego the latest and greatest gadget. Maybe you have got a closet or garage full of stuff that you never even use that can get sold on Facebook or eBay? In short, have a “whatever it takes attitude” and get there ASAP!
Remember that long term satisfaction is so much sweeter than instant (fleeting) gratification.
Step Three: Start hammering away at debt.
Start with the credit card or loan with the highest interest rate. Pay as much monthly as you possibly can. Make it sacrificial. Furthermore, make sure all payments are on time, and that means early. I have coached too many people who somehow think that 4 days late is “on time enough.” It’s not. It damages your credit, which means you will pay higher interest rates on future purchases. Here’s a quick lesson in financial literacy and the cost of money.
While a couple of percentage points on a loan doesn’t sound like a lot, picture this:
Two guys buy the same exact $25,000 car. One has excellent credit because he has always paid their bills and paid them on time. The other has ok credit but has been late a few times for whatever reason.
The guy with excellent credit gets a rate of 2% over 5 years so he pays $1,291.40 in interest for a total of $26,291.40 for the car.
The other guy gets his loan at 5%. He pays a total of $3,306.80 in interest, so the same car cost him $28,306.80.
The difference = $2,015.40. I don’t know about you, but I have no friends at the bank that I’d like to fork over an extra 2 grand to. Imagine a pile of money on the ground and lighting it on fire. That’s’ what late payments cost you, and that’s on a car loan. The number is exponentially higher on a mortgage.
If you’re stuck with high credit card interest, consider transferring them to a lower rate offer. But I recommend doing this no more than once as there are fees involved, and in the long run, it’s better to establish a credit history with a single creditor.
Step Four: Bump up your emergency fund to a full 3 (good) to 6 (better) months living expenses.
To begin with, $#!+ happens. Indeed, as I write this, the country and much of the world is closed due to the coronavirus. Do I need to say more? Probably not, but I will. Coronavirus pandemic is an anomaly that no one could have foreseen. On the other hand, downturn economies, layoffs, (personal) health issues, and other unfortunate unknowns do happen, and financially savvy people have a plan for them. For most people, it’s not a matter of “if” but “when.” Times like those are when many people run into financial ruin because they don’t have a safety net. In extreme cases, 6 months of savings may not even be enough, but it sure as heck softens the blow. If financial security is truly what you seek, this step is a must! It will take time, but make it a priority and get it done!
Step Four: Invest 10-15% of your pretax income in a retirement plan.
Let your money work for you! If you have a 401K or 403B available to you, max them out and never touch them unless it is a dire emergency, and then pay it back ASAP if you do. If you don’t have an employer facilitated retirement fund, you can still stash money in an IRA. There are several types, so you’ll have to determine which best meets your needs. If you need guidance, find a mentor to coach you and to help you plan out a budget and your finances.
Steps Five – Six: Build Wealth and Live in Luxury
Step Five: Invest and Plan for the future
Do you want to buy a home? Putting down a minimum of 20% will get you the best interest rates and save you from paying a nasty monthly fee called PMI (private mortgage insurance).
Besides that, you might have kids. If you do have them, will you contribute to their higher education?
Do you dream of owning a yacht or a summer home? Maybe you’d like to travel the world? Retire at 50? You can make possibilities become a reality if you plan for them correctly.
There are many ways to invest money and watch it grow. Real estate is often considered one of the soundest investments over the long term, although history teaches us that stock markets trend upward over time, even when factoring in the ups and downs of market trends. Safer investments have smaller returns, while those with higher risk offer larger payouts. When you get here, it is imperative to either do extensive research or enlist the expertise of a financial planner.
Step Six: Give
One well-known advantage of giving is that contributions are typically tax-deductible. However, the benefits of giving extend far beyond a tax break. Giving connects us to the community and makes us feel a part of the greater good. Research proves giving to charity creates the brain response associated with happiness. Helping others and being a part of something bigger than ourselves cultivates a deep sense of purpose and passion in life.
Many people believe that giving is the foundation of receiving. This is a fundamental principle of the law of attraction and is grounded in the belief that giving freely (without expecting any return) supports an abundance mentality that opens us up vibrationally to attract more abundances.
In summary, financial security is the result of knowledge + discipline. Having all the information in the world will not do you any good if you don’t act on it. It takes courage and determination and it will involve change. Please remember, permanent change comes from within.
Final thoughts to ponder when beginning your journey to easy street
What are your beliefs about money?
…about people who have lots of money?
…about people who don’t?
What emotional needs does money serve for you?
Where you spend your money speaks to who you are….what do your spending habits say about you? Changing your beliefs about money, and your relationship to it, may well be the cornerstone of actualizing your financial goals.