I’ve been writing a lot about travel recently. Mostly because I’m trying to catch up on all the trip reports, hotel reviews, etc. from our trip around the world. However, because of that I’ve kind of slacked off on the other focus of my blog, which is personal finance.
The more I thought about it, the more I realized that once you have your systems in place personal finance is well… boring. Sure, I have some occasional fun playing around with our investment allocations or moving cash around our budget to make it balance, but overall its pretty mundane and kind of hard to blog about on a consistent basis.
However, I began to realize that not everyone has systems in place around personal finance. Therefore, I figured I’d write about the systems I’ve put in place to automate our personal finances and make it boring.
Now systems can consist of a variety of different things, but probably the most effective one is automatic contributions/payments. If you’ve been around personal finance long enough, you’ve probably heard the phrase, “Pay Yourself First”. That means when you get a paycheck make sure that some of it is going towards YOUR savings/investments.
Many people in the world today are so caught up in keeping up with the Joneses that they forget to pay themselves first. However, if you learn to automate your savings, this tends to be less of a problem.
First things first, figure out how much your take home pay you can afford to save. Once you’ve determined the percentage, set up automatic withdrawals to an investment account on the same day you get your paycheck. This what paying yourself first is all about. The money comes out of your checking account before you even notice.
Living paycheck to paycheck? Start small. Setup automatic withdrawals of $10 per paycheck. It’s all about forming a habit. You’ll start to see your investments grow and you’ll want to contribute more each pay period.
Invest Those Automatic Withdrawals
As you may have noticed, I talked about investing those funds that you use to pay yourself. Nowadays most savings accounts pay interest of less than 1%. This is barely enough to keep up with inflation. You’re much better off investing this money in the stock or bond markets. I’ll try and dig into our investment strategy in a future post.
Pay Off That Debt
If you’re sitting on debt that’s charging interest of over 1%, you’re better off paying off the debt than letting it sit in a savings account. When I got my first job after college, I always hated paying extra on my student loans because it felt like I was just throwing money away. I’d rather have that extra money sitting in my bank account. However, my frame of mind quickly changed when I started tracking our net worth. I started to see how that money was chipping away at my debt and consequently increasing our net worth.
It does get a little trickier when your student loan is between 2-5% and your investment portfolio is earning 6-8%. Obviously, math would tell you that you should invest rather than pay extra towards your student loans. The issue is that the 6-8% in earnings is not guaranteed so this decision will depend on your risk tolerance.
Track Your Spending
It is fascinating to me how few people track their monthly expenditures. This is a key component of personal finance. You need to know where your money is going. I find that it’s much easier to track my spending via credit card and bank statements. If I use cash, it’s very easy to lose track of where that cash was spent.
There are some great applications out there like Mint, YNAB, and Personal Capital that will help you track all of this data.
Reviewing Your Spending Habits
Unfortunately, just tracking your spending isn’t enough though. You also need to review your spending to gain a better idea of areas that you might be overspending in. My wife and I try to sit down and review this on a monthly basis.
Side note: Everyone has a certain area in their budget that they are willing to splurge on. For my wife and I, this area is travel expenses. On the other hand, I have some of my friends who like to splurge on eating out at restaurants. All this to say, you shouldn’t judge someone for choosing to splurge on something that they find enjoyment in.
Make It Boring
These are just a few of the systems we have in place to ensure that we’re staying on track in our pursuit of financial independence. They are pretty basic concepts, but once you have them setup it’ll help to make your personal finances relatively boring (which is a good thing).