Money management has many different benefits to it. The devastating fact is, a large majority of people do not know where to go in order to properly manage their money. They think they simply need to earn more money in order to get ahead financially. While this is partially true, what good is making $150,000 a year if you spend $160,000?
The people who truly get ahead in life and are able to effectively achieve financial freedom not only earn a decent income, but they effectively manage their money so they can fast track their path to freedom. Therefore, in this post we will talk about how to approach money management and how you can achieve financial freedom.
Side note: This blog was created to document our journey to financial freedom while educating others along the way of our findings in hopes of inspiring others to strive for financial freedom as well. While we are not financially free yet, we hope you can find some value in it and share it with others if it helped you in any way.
Why is money management so important?
Money management is extremely important as you can’t outearn bad spending habits. No matter how much you earn, if you poorly manage your money, it will all come crashing down. Look at all the professional athletes who went from making nothing or very little their whole lives to making over $1,000,000 a year. They think that money continues to flow in so they buy bigger and bigger toys until the money tree dries up and they go bankrupt. It happens often where an athlete surrounds him or herself with a bad influence and they all want a piece of the pie since “they were there the whole time” and the athlete is not only buying themselves toys, but 37 other people as well.
Money management is extremely important because it’s not about how much you earn, but how much you keep that really matters. If you earn $50,000 and spend $50,000 every year, you’re not taking care of the future you. Likewise, if you earn $50,000 and are able to save $20,000 each year, you’re positioning yourself to truly get ahead in life.
While every person on this planet has obligations and responsibilities, that should be yet another reason to take your money management seriously. You have kids? Good, that means you should be providing and protecting their future as well by teaching them good money management habits. You have a house? Good, positive money management should push you to prioritize keeping the house and not losing it due to poor money habits.
If you have a dream to get ahead in life, you absolutely have to get a grip on where every single dollar you spend goes. Otherwise, you’ll be in the exact same situation 5 years or more down the road. You should strive to do better financially year after year in order to live the life you were born to live.
Good vs. Bad money management
There is a very small difference between good and bad money management. It really comes down to priorities and how you view money as a whole. There are people out there that think you should never buy a single cup of coffee or buy any clothes ever in order to get ahead financially. I disagree with this. You can absolutely buy that coffee, get those clothes, and do the things you want to do. The main difference between good and bad money management is whether you save for it or not.
What Bad Money Management Looks Like:
- Spends every last dollar they earn no matter how much they have
- They borrow money to buy things that don’t bring them a return
- Running their credit higher and higher without an effort to pay it off
- Thinking that their money comes forever with no sign of slowing down
- Buying wants before needs
What Good Money Management Looks Like:
- Allocates certain amounts of money towards a specific category
- Invests in cash flowing assets to bring a return on their investment then buys the toys from the cash flow not the hard earned cash from their job or business
- Borrowing money to leverage into purchase assets which bring you money, not liabilities that take money out of your pocket.
- Saving a portion of their money no matter what, no exceptions
- Paying yourself first, getting their needs taken care of, then buying the wants.
Personally, spending money without a care in the world is most often the exact reason that most people don’t get ahead. Think about it, if you $100 to spend on whatever you want, you will most likely spend it all.
Parkinson’s law states that work expands in accordance to the time allotted. The same goes for money. Our wallets expand to the amount we give ourselves. Therefore, if we give ourselves $100, we use the full $100, if we give ourselves $80, we’ll use the full amount.
So rather than use the full amount of money in your account, allocate certain percentages towards certain things.
How to manage your money starting today
The main point behind money management is to control it before it controls you. How do you expect to really get ahead in life if you’re not putting any sort of action plan in place? Below are the steps you need to take in order to start taking control of your money management. These are courtesy of George S. Clayson’s Richest Man In Babylon.
Pay Yourself First
Before you pay your bills, go out to eat, buy that new iPhone, you NEED to put some money away for yourself. At a minimum, you should aim to pay yourself $.1 for every $1 you earn or 10% of each paycheck. Therefore, if you earn $1,000 a paycheck, before anything else, put $100 into a specific account with the intention of investing. This can either be a savings account for a downpayment on a rental property, or it can be investing $100 into a stock account.
Whatever you wish to do with your $100 depends on your situation and where you wish to focus your investments. I am not a financial advisor and cannot tell you where you should put your money but I will recommend that you put it into something that will grow over time like stocks or real estate. This is just the tip of the iceberg, once your money management skills improve, you can easily bump that savings number up to 20, 50, or even 80%.
Many people who are killing it in life routinely save upwards of 70% of their income. Therefore, their financial freedom path is expedited many times over. But pay yourself within reason. There’s no point in putting away 60% of your money if you have to eat ramen noodles each night for dinner. If you need to put away 40% and eat quality food, then by all means do it!
Find smart ways to multiply money
To tie into the point above. If all you do is take your paychecks to pay your bills first and then just tell yourself I’ll pay myself with the leftovers, you’re setting yourself up for a very slow path to financial freedom. Truthfully, financial freedom might never come if you tell yourself that you pay yourself after all bills are paid. Because inevitably, we always find an excuse as to why not to pay ourselves. Therefore, if you pay yourself immediately if you are then guaranteed you are taking care of your future self. Also as mentioned earlier, we will always find a way to be able to work with what you have. So if you make yourself work with 80 or 90% of your total paycheck, you will figure it out.
If anything, having less money in your account after paying your bills should motivate you to work harder to give yourself more breathing room by either increasing your income or lowering your expenses. The route I recommend is to cut costs mercilessly on the things you don’t need and spend money on the things you love like Ramit Sethi says in his book I will teach you to be rich. By giving yourself less to work with, you will always find a way to make that work no matter the dollar amount. If I give you $20 to buy food for the week, he will figure it out. If I give you $100 to do the same task, you’ll figure it out.
After you pay yourself, simply having the money sit in a bank account does you no good as it’s not doing anything for you. You need to make sure you’re looking for ways to make your money work for you not the other way around. Think of investing your money as planting a seed. At first, you won’t notice the seed doing anything, but the more seeds you plant in the more you water your seeds, the bigger and healthier the tree will grow. And from that tree, you’ll be able to lay under the shade after consistently tending to it. That is the power of investing; you reap what you sow.
Some recommendations I can make for investments are index funds, real estate, affiliate sales, starting a social media account or YouTube channel, and even writing a book. While these all have their own pros and cons, these are some of the more financially rewarding avenues you can venture down. Like anything in this world, it takes work to build. But if Financial freedom is something you’re very serious about, you will be able to make it happen. No matter what path in life you choose, it’s difficult, so choose your difficult.
If you guys are interested I can make more blog posts on each of these passive income streams. For now you can check out my blog post on 15 different passive income streams you can get started with today.
Invest with wise people
You are the five people you spend the most time with the very common saying in the personal development space. And it could not be more true. If you surround yourself with people who make you feel comfortable, it’s likely that you will just be the best of the average. But if you want uncommon success, you need to surround yourself with people who challenge you and are doing significantly better than you are.
High performers got to where they’re at because they do things differently than the average person. It stands to reason that if you want to be a high performer in your own life, surround yourself with people who don’t accept average effort. You can find these types of people in many different ways. Facebook, meetup.com, or even googling “(Niche) Masterminds/groups near me” is a great start. Type in a topic that you were wanting to excel at enjoying the group or go to a meet-up. Nowadays a lot of things are done virtually so you might be able to attend these meetings from the comfort of your own home. But the important thing is you’re looking for people Who have exceeded income levels that you might’ve thought were impossible.
Invest in what you know
While you might be able to learn about any skill on YouTube, what’s the point in draining yourself out mentally if you’re not enjoying what you doing? If A certain revenue stream doesn’t interest you but a lot of people are claiming they’re making a lot of money in it, that doesn’t mean you need to do that as well. There are over 1 million ways to make $1 million, you need to find the one that interests you and focus on it.
Follow
One
Course
Until
Successful
Don’t try to be a jack of all trades master of none, be a specialist in a specific field. By being a specialist, you become the expert and the payouts are much higher being a specialist. But on the other side of that, if you’re not sure where to start, try everything out. There’s nothing wrong with giving things a test run for a few weeks to see if it’s something that you actually enjoy doing. It’s better to try everything out for a few weeks than do something for five years and realize you absolutely hate it.
So I’d recommend trying a handful of different revenue streams out take copious notes on what you think about each strategy on what you like and don’t like, and then go with the one that makes you feel the most fired up internally. Because if it’s something that you’re going to do for many years to come, it needs to be something you both know, love, and can make money from.
Don’t try to get rich quick
You see this a lot right now on social media. A lot of people will claim that they made millions in a few weeks or within six months. While one out of 100,000 might’ve actually done something close to that, they don’t tell you that they basically risk their entire life to get to that point. So my recommendation is to not follow the wave of what everyone’s doing because most of the time that’s just speculation and hype. Do what has been proven to provide successful results. If you know nothing about sports gambling but a lot of people say that that’s the best way to make money fast, it doesn’t mean you need to do it too. Impatience and Incompetence are a recipe for disaster.
The main ways you will see someone “get rich quick” is when they have a large following on social media or they spent a ton of money on their ads to promote a product or service boasting about how much money they made tricking a lot of people into believing that they can do it too. What these fake gurus failed to mention is it out of all the money that they spent on their advertising, they are barely turning a profit on their product or service. So the golden rule with proper money management if it sounds too good to be true, it is.
Believe me, at this point I’ve spent over $10,000 making mistakes and I promise you, the hype is almost always not worth it.
Saving vs investing (save to invest and pay bills nothing else)
With proper money management, saving on its own doesn’t do you much good unless you’re saving for something specific. If you’re saving for the upcoming baby, the wedding of your dreams, the down payment on the house, or an emergency fund, those are viable reasons to put away money for savings. On the other hand, if you were just saving to save, you’re essentially throwing money away because it’s doing no good sitting there.
Rather, invest in something. If you have not the slightest clue of what to do with your money, the simplest choices I could recommend are to either invest into a 401K/Roth IRA retirement account index fund, or house hacking through real estate. To me, there’s no doubt these are only three reasonable options to invest your money. Personally, if you would prefer a much safer, slower route, 401(k), Roth IRA, and brokerage index funds are your best bet. They will consistently bring a return of around 8.26% annually. The only issue with retirement funds is they can only be taken out at 65 tax free or you can pay some penalties to get the money out early. With a brokerage, you have a 1:1 relationship with the money you put in. Meaning there’s no leverage so the $10,000 you put in will grow annually at 8.26% on average.
On the other hand, if you don’t mind having a little bit more hands-on work but having an extremely higher return on your investment, I would highly highly recommend house hacking as you can either extremely reduce, eliminate, or even make money from your personal housing. If you would like to read into house hacking in a little bit more detail, check out this blog post.
Finding your money management comfort zone
Everyone has a different comfort zone on how they manage the money properly. Some people will literally sell their limbs and risk it all in order to become financially free. Others want to take a safer approach in order to make sure that they are covered in a worst-case scenario. We would happen to fall into the latter of the two.
With a baby and a wife, we can handle some risk but given the position I’ve been in the past, I try to plan for the worst-case scenario by setting up emergency funds and buffers in our personal accounts so we can pay our bills and then some if anything happens. But whatever is most comfortable for you is what’s most comfortable for me. The best I can do is recommend that you consider all options and decide at the pace in which he would like to become financially free and simply commit to making that happen.
Steps for proper money management
So right now write down how much money he would like to have saved on a monthly basis and after you track your expenses for 1 to 3 months, you will then have a baseline of what you currently save. So from there, you need to ask yourself what amount of monthly income would I like to receive in order to become financially free? (If you want a way to take full control of your budgeting and track expenses through a google sheets file, check out this post on Reddit.)
A recommended amount to receive monthly in order to become financially free is your current expenses with a 25% addition to that. Meaning if you spend $5,000 a month, you should aim to have a passive income of $6,250 coming in to “retire” reason for that is it’s enough to pay all of your bills and still have a bit of fun money sprinkled in to live life. While this isn’t a set rule, you can absolutely increase the percentage to give yourself even more room. Ideally, it’s 2X what you spend in a month but we often see 25% gets the job done without any issues.
Once you have your monthly income number, start building towards investing in assets to bring you that monthly income. For example, in order to earn $6,250 a month and recurring passive income, he would need five duplexes with each side renting out for $1,250 a month with your mortgage being $1,250 a month. Meaning one side would completely pay for the mortgage while the other side provides $1,250 in recurring revenue.
While this might seem like unrealistic numbers, the property we currently owned is a single-family residence with an Airbnb in the back which brings in pretty identical numbers. The second we move out we can turn our single-family into a rental along with our Airbnb as another long-term rental. So we would take that from a monthly payment of $400 a month to a net cash flow of about $1400. House hacking would be my number one recommendation for becoming financially free and retiring early. But this is not a one size fits all approach.
This is merely a way to open up your perspective on what is possible out in the world as you don’t have to work at your job for 40 years. I’m on the same journey as you guys. I promise you if you take control of your money, and really start to understand how much you’re spending, that will give you an extreme advantage over someone that has no idea where any of their dollars are going. And once you eliminate unnecessary expenses on things you don’t actually like, you essentially give yourself a raise and get that much closer to financial freedom.
Just imagine taking yourself from $5,000 a month in expenses down to $3,500. That dramatically shortens the timeframe to retire early. The fun part is increasing your income with various revenue streams. The hard part is staying disciplined enough to consistently follow that path. I’m excited to see your progress and let me know in the comments if this helps you in any way.
-Eric