Money skills are learned. They are not genetic. Many of us learned how to deal with money from our parents or grandparents. It was not a formal class or an organized discussion. It was merely watching the way they handled money while we were growing up.
Did they save for their future, or were they always trying to “get to the end of the month?” Did they argue about money, or was money a topic that was never discussed? Did money cause stress in your family when you were a child?
Think back to the sayings you heard about money. My father repeatedly said, “Money does not grow on trees” and “Save for a rainy day.” (No wonder I became a financial planner!) Ponder these “money messages” from your childhood, and you will likely discover that they have had a huge impact on how you manage money as an adult.
If the money messages you learned from your parents or grandparents were not positive, you may assume you will struggle forever with money. However, that does not need to be the case. Neuroscientists have shown that our brains are very malleable, due to a concept called neuroplasticity. Our behavior determines how we manage money, and you can choose actions that put you on a path to financial security.
Let’s assume you want to stop struggling with money. To take control of your money, let’s break it down into five steps.
1. PAY ATTENTION. How much money do you make? How much do you spend? What is your weekly budget? Many people who struggle with money neglect their finances, hoping they will fix themselves. It never works. We must make a commitment to improve our finances.
2. CREATE A NET WORTH STATEMENT. You can use the template on my website joyoffinancialsecurity.com/net-worth.pdf. Or you can simply write down your assets (home, investment accounts, bank accounts), then your liabilities (mortgage balance, car loan, student loan, credit card balances if they are not paid off each month). The total of your assets minus your liabilities equals your net worth.
This is where you are today. It is your starting point. I recommend you update your net worth statement each year, and you will see improvement.
3. START SAVING. If you are not saving now, you must start. Saving is the key to financial security.
Let’s assume you want to start saving, but there is never any money left at the end of the month. You have several options to reduce your spending: a) stop buying soda or sweets at the grocery store; b) eat out only once a week instead of three times; c) take your lunch to work rather than eating out; d) cut back on entertainment (movies, cable TV, Netflix, etc.; choose the one you like best and cancel the others); e) reduce your cellphone bill; f) use cash instead of a credit card; g) set a limit for buying gifts for kids or grandkids; and h) commit to not buying clothing for three months.
Another option is to increase your income by taking on a second job. Many companies hire employees for the weekend and having the extra income can make a huge difference in your finances.
You could also reduce your living expenses. If you live in a house that is more than you can afford, sell it and downsize. If you have a loan for a car that is fancier than you can afford, trade it in for a less expensive car and get rid of the payment.
Once you have freed up some money to save each month, how do you get started?
See the box for a recommended order for saving. An emergency fund is the highest priority; it should cover six months of your expenses in case you lose your job or have a medical emergency.
Next, take advantage of saving through your employer’s retirement plan, especially if your employer provides a match to your contributions. If there is a Roth option (Roth 401k or Roth 403b), use it rather than the regular 401k or 403b.
But don’t stop there: Open a Roth IRA on your own and fund it. You can fund both an employer retirement plan and a Roth IRA. With a Roth IRA, you can contribute up to $5,500 if you are under age 50, and if you are age 50 or over, you can contribute up to $6,500. As long as your income does not exceed $120,000 (for a single person) and $189,000 (for a couple), you can fund the Roth IRA to the maximum amount.
Once you have your emergency fund, you are contributing to your employer’s retirement plan, and you have funded a Roth IRA, the next account to focus on is to build a taxable investment account. I highly recommend building three different tax “buckets” to give you more choices (for where to withdraw money from) in retirement. The buckets include a tax-deferred bucket (your employer’s traditional retirement plan), a tax-free bucket (your Roth IRA or Roth 401k), and a taxable bucket.
4. EDUCATE YOURSELF. If you are saving and living within your means, you are on the path to financial security. Now it is time to build your confidence by learning about investments. There are several excellent websites. One is vanguard.com. From Vanguard’s home page, select “advice and retirement,” and then “investor education.” This will take you to information about goals, risk, asset allocation, diversification, and many other topics. Other good financial websites include: kiplinger.com, nextavenue.org (a site managed by PBS), wisebread.com and cashmoneylife.com.
5. REWARD YOURSELF. It is time to celebrate. You have moved from struggling with your finances to taking control of them. Treat yourself to something nice that will make you happy. It does not have to be expensive. Now that you are saving and investing and living within your means, you can afford to treat yourself. You have earned it!