10 Simple Financial Concepts That Have A Huge Impact
Today’s post is contributed by Marc, who runs the personal finance blog Vital Dollar. Marc has been working online full-time since 2008, running blogs and sites in a variety of different industries like web design, photography, and travel.
When it comes to money and financial topics, there is no shortage of advice and available reading material. You could easily spend years devoted to learning more about managing your money and investing.
While there are plenty of in-depth, complicated financial topics that you can study, there are also some very simple and basic concepts that can have a massive impact.
In this article, we’ll look at a few of these simple concepts that are easy to grasp. If you make the effort to implement them, you’ll see a huge payoff.
1. Pay Yourself First
This is pretty common financial advice, but most people ignore it. The typical approach to managing money involves paying bills, buying the stuff that you want, and then saving whatever happens to be left over. The problem is, with this approach there is almost never anything left to save.
In order to be effective at saving and building your nest egg, you need to make it a priority. Most of us are good at finding excuses, and there’s always a reason why saving isn’t convenient. But if you pay yourself first and then create a budget around the amount that you want to save or invest, you’ll find that it’s possible to make progress even when things seem tight.
When I was in my mid 20’s, I was living on my own and getting by, but I didn’t have a lot left over after paying bills and necessities. I had a 401(k) available to me at my job, but for a while I wasn’t contributing anything because I was afraid of not having enough money to pay bills.
Looking back, there weren’t a whole lot of expenses I could have cut. I was living very frugally, but one thing I could have done to free up some money was live with a roommate. Living with a roommate probably would have saved me about $300 a month (even if Andrew doesn’t like the idea).
If I had paid myself first, in terms of contributing to my 401(k), and built my budget around what was left, I would have been able to make it work. That $300 per month would have been $3,600 into my 401(k) in one year, and that doesn’t even factor in the company match or the savings from reducing my taxable income.
2. Power of Compound Interest
I wish students would learn more about the power of compound interest in school. The combination of compound interest and a long period of time to let it work its magic is shocking.
Many young people don’t feel the need to save or invest because they think they’ll do those things when they’re older. But the reality is, the younger years are the best time to save because of compound interest.
That $3,600 that I could have contributed to a 401(k) in my mid 20’s could turn into more than $78,000 in 40 years, assuming an 8% return.
But if you invest the same $3,600 and only have 10 years to let it grow, it will only amount to $7,772 at the same 8% interest rate.
Those numbers are based on only one year of conservative saving. Imagine what could happen with several years of an aggressive commitment to save in your 20’s or 30’s.
3. Track Your Expenses
In order to manage your money effectively, you will need to know where it’s going. Creating a budget is a guessing game if you don’t know how much you’re currently spending in different categories.
Budgeting can be a really helpful way to take better care of your money, but from my experience, tracking expenses has been even more helpful than budgeting.
When I was fresh out of college and getting by on a very low salary, I would track every dollar I spent in a spreadsheet. Each night when I got home I would record any purchases I made that day. I remember even entering $1 when I bought something from a vending machine.
At the end of the month, I would total it up and see how much I spent in different categories. For me, knowing that I was going to record and track the expenses made me extremely careful about how I spent money.
By tracking expenses you are holding yourself accountable, and that can be a very powerful motivator for spending wisely.
4. Invest in Yourself
This is another one that you hear a lot. It sounds great, but what does it really mean?
Investing in yourself can involve a lot of different things, like getting an education, paying for training or coaching, improving your skills, starting a business, and many other things.
The purpose of investing in yourself is that it will pay off in the long run by way of more money, more freedom, or more happiness.
For me, investing in myself meant dedicating time and effort (and a little money) to start my own business back in 2007. By late 2008, my income from my online business allowed me to leave my full-time job. In my case, it also involved a sacrifice and risk on my wife’s part, as her income would have needed to support us if my business failed.
If you were to look at our financial situation before that time and compare it to now, it’s drastically better now. Putting in the effort and taking the chance on my own business paid huge dividends for our family.
5. Live Below Your Means
What do most people do when they get a raise or promotion? Typically, the response is to spend the extra money that they’re making. It could be a one-time purchase, or it could be something like a new car that comes with a bigger payment each and every month.
If you want to get ahead financially, the key is to live below your means. And when you get a pay increase, don’t wipe out that increase by adjusting your lifestyle and spending more money.
Living below your means will allow you to save and invest month after month, year after year. If you do this consistently, you’ll be able to enjoy the rewards later.
This Dave Ramsey quote is very applicable here: “Live like no one else now so later you can live like no one else.”
6. Save More When Times Are Good
Although we should be saving and investing for the future all the time, it’s especially important to make an extra effort when things are going well and you have the money to spare.
Being self-employed, my income has been inconsistent for the past 10 years. We’ve learned to live with unpredictability, for the most part. But what has made it possible is saving up significantly more when the income is good.
Instead of buying expensive things when we have the money, we’ve typically saved because we might need that money later. This approach, along with living below our means, allowed us to build up our retirement savings pretty quickly, and it’s helped us to avoid trouble when my income isn’t as high as we would like. Just this year I sold a website that had been my primary source of income for the past year. That meant reduced income going forward without the website. Fortunately, planning ahead made it possible because we had saved leading up to it.
7. Prepare for Emergencies
Most financial advisors will tell you that an emergency fund should be one of your top priorities. Without an emergency fund, you could be in trouble if something unexpected happens, like a job loss or major health issue.
Emergency funds aren’t exciting or sexy. All of us have plenty of other things we would rather do with our money than build up an emergency fund. But it’s one of those fundamental financial principles that you should follow, or you could regret it later.
8. Set Financial Goals
Setting financial goals can be extremely powerful. Yet, most of us don’t take the time to set specific, measurable goals. If you have goals you’ll have something specific to be working towards, rather than just a general goal of saving money.
Goals can be especially helpful if you’re a competitive person. Almost 5 years ago I set specific net worth goals for 5, 10, and 20 years. So far I’ve hit my 5 year goal, I’m not too far away from my 10 year goal, and I still have a long way to go for my 20 year goal. But I’m on track, and thanks to having goals I’m motivated to do what’s necessary to reach those milestones.
Setting goals isn’t hard, and it doesn’t take a lot of time. Simply think about your end goal and then work backwards and set a few smaller goals that will put you on the right pace to hit your ultimate goal.
9. Money Matters Less Than the Opportunities it Provides
Most of us think about money a lot (especially those of us who write on the topic). But it’s not really the money that’s important. What’s much more importance is what you can do with the money.
Money makes a lot of things possible.
Over the years, I’ve worked to increase my income and net worth. But the most important things resulting from my business haven’t been related to money, although they are possible because of the money.
My favorite thing about being self employed and working online is the flexibility that it provides. I’m able to take a 20 minute break in the afternoon and pick my daughter up from kindergarten. I’m able to take days off on short notice when the weather is nice and we want to go somewhere as a family.
Don’t chase money for the sake of having money. Think about what’s important to you and how money can help you in that way.
10. Give to Others
One of the most rewarding things you can with your money is share it with others. There are countless worthy causes out there, and none of us can give to them all. Pick one (or more) that are of particular importance to you. We all connect to something different, and giving to something that truly matters to you is a great way to use your money.
My parents taught me the importance of giving from an early age. I always gave some of my money, but I mostly did it because it was what I was supposed to do and seemed like an obligation.
Within the past couple of years, I’ve become more aware of a few causes that really resonate with me. Giving to these causes is fun and rewarding. It motivates me to increase my giving and have a greater impact.
What About You?
Which of these simple financial concepts have had a big impact on your life? If you have any others that weren’t mentioned here, please feel free to share in the comments.
Note: This article originally appeared at Wallet Squirrel.
Category: Personal Finance
