If there’s one thing all humans are bad at, it’s money management. If we were as good at budgeting and investing as we were at gossip, the financial problems of the world would be extremely low. We don’t have that luxury, however.
What we do have is a brain. In that brain, we can learn new things, get in good habits, and even teach other people the things we know. That’s pretty cool if you ask me.
What happens along the way is that we forget to do what we were meant to do. Our brains are a double-edged sword because we can use our intelligence to rationalize anything to ourselves. Sure we can have that beer, we worked out last week! Those pants are expensive, but I deserve it!
We haven’t evolved into creatures of money management. Over millions of years we have been conditioned to eat, sleep and reproduce. Only in the past few thousand years have we started to use money as a tool. It doesn’t help that every advertisement and business wants your money for themselves.
The one way we get past all this is by creating a system for ourselves. It works like this: Separate the money you earn into several different areas.
Whatever you do to make money, be able to live off 50% of it. If you make $5,000 per month, combine your rent, food and other bills to $2,500. Only you know how much you need for each. Take the time to create a budget and don’t go $1 over that 50%.
Credit Card: 10%
Credit cards are important because they allow you to build up, well, credit. This is a true necessity for when you get older. People who neglect their credit in their 20’s kick themselves in their 30’s. Without great credit, it’s tough to make any big purchase. Unless you become a millionaire within 10 years, monthly payments will be a necessity.
Of that $5,000 per month, use $500 to pay off credit cards and keep your balance low. A golden rule on credit cards is to not spend more than 20% of the balance each month. If you have a $1,000 limit, keep the balance below $200 at all times. This will make you look like a responsible credit manager, and increase your score over time.
You don’t want to use up too much of your paycheck on investments because any investment is risky. Even basic corporate bonds could one day dry up. If you’re going to invest, you probably don’t want to earn 1% on a CD, so the higher return also means higher risk. Experienced investors will tell you to invest only with money you are okay with possibly losing.
Current/Future Purchases: 15%
Everybody wants something, whether it is a car, a dress, or a hand-crafted Italian man-purse. This percentage tells you it’s okay to have these desires. Saving up $750 of that $5,000 salary every month for this purchase will get you there pretty quick, depending on what you want. It’s important to spend money on yourself and not just save for the future your whole life. We must enjoy the now, but also be smart how we enjoy it. This 15% gives you the liberty to spend it how you like while keeping worry at a distance.
Emergency Fund: 10%
Finally, 10% of your paycheck should be for emergencies. Don’t touch this money and don’t invest it. Let it accumulate over time. Inflation will reduce its worth, but its liquidity will make up for it. At $500 per month of your $5,000, it will hit $6,000 in one year. That is a nice cushion to have for any of life’s crazy issues. A statistic showed that many people don’t have $2,000 saved for any kind of emergency. Don’t be that person; be prepared.
This article isn’t going to get you rich. It’s not going to make you thousands of dollars. But it will provide a great base for your financial future. If you want to change the percentages around a little, do it. But make sure you get and stay in good habits.
Rarely do people become wealthy overnight. What it takes is a consistent effort of money management and investing. In fifteen years when you hit that 7-figure mark, you will be thanking yourself for the habits you got into years earlier.
The system is easy and you can start today. I highly suggest it.
Tyson Hartnett encourages you to find your personal trifecta: What you’re passionate about, what you’re good at, and how you can make money doing it. He is a professional writer and contributes to the Huffington Post, among others. His first startup, BasketballTrainingClub.com, is growing day by day and seeking active investors.
Category: Personal Finance