I was listening to the radio the other day and the announcer person asked, what would have helped you the most when you were first starting out? A woman called in and said, I wish they would have taught me how to budget my money and spending. That got me thinking. What are two simple things I could tell someone who has just started adulting. I know adulting is not a word, but you get it. Here are two ideas that will make an amazing impact on your future self.
Use YNAB to Budget Your Money
Here’s the definition of budget: An estimate of income and expenditure for a set period of time. It’s not a diet. It’s not a restriction. It’s an accurate picture of how much you have versus how much you need to spend. Usually, the period of time is a month, but it can be whatever you want. I have written several times in the past that I don’t think a lot of people really have any idea how much money they are spending each month. This is where the budgeting program, YNAB comes in.
YNAB stands for You Need a Budget. It is based on the envelope system where you take the money that you actually have and assign it to budget categories like you would if you were putting your money in an envelope. Most budgeting programs tell you where your money went. With YNAB, you give each dollar a job.
YNAB has 4 rules. They are as follows:
- Give Every Dollar a Job
- Embrace Your True Expenses
- Roll with the Punches
- Age Your Money
Basically, this means, you tell your money where to go rather than wonder where it went. You figure out what it really costs to run your life. Shit happens, and if you do the first three rules, you will be able to get a month or two ahead.
I’m not going to give a dissertation on YNAB, but here’s the best resource I have ever found to learn how to do the program and incorporate it into your life. My friend, Nick True has a You Tube channel that goes into every facet of YNAB. Here is a link to help you get started with YNAB: https://www.youtube.com/watch?v=exS0gU-Ie8E&t=102s
Save 20% of Your Income as Quickly as Possible
We spend way too much time talking about where is the best place to invest your money. Should I buy stocks or cryptocurrency. Are ETFs better than mutual funds? Should I do passive or active? Blah, Blah, Blah!
As soon as you possibly can, figure out a way to pay yourself first. I use 20% as an example. When you’re young, most people don’t have a spouse. They don’t have kids. Their life will be as far from, “responsible adult” as they will ever be. This is the time to get into the habit of paying yourself first.
With your YNAB budget, you can put, My 401k, Bill’s Roth, Sally’s investment account, for example, as one of your categories and allocate money to your future self. Hear me now. Believe me later. You will be very happy you did this, down the road. Here’s some simple time value of money numbers to prove my point.
Let’s say you’re making $50,000 per year. You’re 25 years old and after getting YNAB set up, you’re moving on to the 2nd step towards financial freedom. You save $10,000 per year, but for some odd reason, you stop saving at age 35 and never add another cent. Let’s assume your investment averages 8% return per year.
At age 35 you have the following amount in your account: $144,865. Yay you!
Starting at age 35 you just let it sit there until you are 65 years old and never add another penny to the account. Assuming the same 8% rate of return, at age 65, you will have $1,457,733. If you were to continue adding $10,000 per year from age 35 to age 65, you would have $2,590,565!
Now let’s assume you don’t read this article, don’t listen to Kevin, and wait 10 years to start your road to financial freedom. You have a long way to go until you retire. What’s the big rush? Live a little!
At age 35 you have 0! If you save the same amount, $10,000 per year at the same rate of return, 8%, at age 65 you will have $1,132,832. That’s still more than most people, but look at what happened if you bit the bullet when you were 25 and got into the habit of paying yourself first? Saving an extra $100,000 over 10 years results in having an additional $1,457,733!
Think about it. $10,000 per year works out to $834 per month which is about $28.00 per day. When you have a budget and tell your money where to go, you get to spend your money on things you value. Getting old sucks. Being old and broke really sucks.
I know there is more than this, but these are two simple things you can do that will have a profound impact on your life. Knowing how much money you have and telling it where to go versus wondering where it went is huge. I just saw a post today that said a recent study from LendingClub found that 36% of households making $250,000 per year were living paycheck to paycheck. I don’t find this surprising. I find it sad and avoidable. Then the second part puts the awesome power of compound interest to work for you as soon as possible. If you would like to talk to me about your situation, feel free to reach out to me HERE. As always, thanks for reading. KB