If you are like me, you don’t always think about your finances. You are probably vaguely aware of the “rules”: you need to save some money, avoid using your credit cards all the time and cut back on your leisure spending.
But things happen. There are unexpected car repair expenses and excruciatingly long and stressful work weeks that require epic (and expensive) Friday night blow-off-some-steam pub and club crawls. When these things crop up, it can be downright depressing to think about finances in general and staying on budget in particular.
The truth is: there will always be unexpected expenses, and, unless you win the lottery, you will always need to put some money away for when you are too old to work.
You can’t avoid these things, but you can take steps to put your personal finances on autopilot.
The first thing that you have to realize is that almost everyone focuses on the second word of the term “personal finance,” but the first word is equally important. You could even argue that it is more important. You need to save money, yes, but you also need to realize that money is tool that can help you live the kind of personalized lifestyle that will make you happy. Why not admit that this personal kind of spending is important too?
Here are five steps to help you set up a REAL LIFE personal finance plan that is practical, but that also allows you to put a premium on enjoying yourself.
1. Set up a baseline.
This step might be super easy for some, but very hard for others. You have to have enough cash coming in to cover your necessities. If you have a decent job, this might mean just figuring out what your necessities are and how much they cost every month. For the underemployed, it might mean actually going out and getting a job that pays enough to cover the month-to-month basics. Whatever your particular situation, you have to realize that putting your personal finances on autopilot and funding your desired lifestyle requires a regular flow of cash (that doesn’t come from your credit cards).
2. Make a plan to pay off your credit cards or get out of debt.
Everyone talks about getting out of debt. It can be depressing to think about this if you owe more than a couple thousand dollars to card companies. The best thing to do is to make a reasonable plan to pay everything off. Pick an amount that you can afford every month, then reduce it a little bit so that you are completely comfortable with it. If your credit score isn’t totally shot, you can probably transfer balances to a lower-interest credit card account or maybe even get a personal loan (credit unions are a good option for this if you can qualify for membership). You can attach your checking account to your credit card or loan account and set up automatic monthly payments. And, of course, it goes without saying that you shouldn’t use your cards until you have paid them off.
3. Make different accounts for different types of spending.
This is where the personal aspect of “personal finance” comes into play. You want to actively fund your lifestyle. The best way to do so is to make a different account for your lifestyle spending. For example, you can get a prepaid debit card to hold all the funds earmarked for your entertainment outings. American Express has a good prepaid option that is free if you link it to your regular checking account. A certain amount of money can go onto this card each month. Or, if you have enough cash flow, you can simply funnel whatever money does not go to other expenses onto the card. The money on this card could be for anything that is important to you: fishing tackle, cigars, vacations, video games, trips to the strip club… whatever. The important thing is that this money is separate from your other spending and that you feel that you are ACTIVELY funding the lifestyle that you want to live.
4. Save realistically.
Yes, you have to save for the future. But you can do so realistically. The rule here is similar to paying off your credit cards. Figure out an amount that you can save comfortably each month, then drop it down a little bit so you are totally at ease with the final figure. You can put this on autopilot too if you have the right bank. They can set it up so a certain amount of each check you deposit goes into a savings account. Savings accounts generally earn a modest amount of interest, but you can easily access the money at any time. Once you are comfortable with the amount of money that you are saving, you can start thinking about investing.
5. Learn to invest.
Investing is a lifelong skill. It is the best way to build wealth if you know what you are doing. There are two reasons why you should learn to invest in companies (be it with stocks or bonds or some other investment vehicle). First, you can make it personal. You can invest in companies or industries that you have knowledge of or that you are interested in. If you can find these companies, you can actually have fun with it and make investing more of a hobby than a financial exercise. Second, it is easy to practice buying and selling stocks without actually risking any money. Price information is published on many financial sites. This means that once you learn a specific investing strategy, you can try it out by making hypothetical trades. You can keep track of your “earnings” and keep your real money safe in your savings account until you are confident that you have the knowledge and skills to make a real profit. CNBC personality Jim Cramer has a number of solid books on investing, and so does Phil Town, who is one of the best teachers of the Warren Buffet style of conservative investing.
So there you have it. There is absolutely no reason to take the “personal” out of personal finance.