Step Zero: Decide What You Want Money to Do For You

What's right for you may be as unique as you are.

Before you can become "good with money", you need to answer this question:

What is the difference between someone who is good with money and someone who is bad with money?

Someone who is good with money makes sure they spend on important things first.

Someone who is bad with money spends on unimportant things first, and doesn't have enough left over for what's important. They don't plan, and sometimes this makes them waste.

With simple logic, it follows that before you can become good with money, you must decide what is important.

Personal finance is just that: personal. Everyone has different goals in life, and something that would be a waste to one person would be very meaningful to their neighbor.

  • Do you want to support six kids on a single income?
  • Do you want to collect and consume luxury products?
  • Do you want to travel?
  • Do you want to eke out a dignified survival, faced with the constraints of your situation?
  • Do you want to die with the largest pile of money possible?
  • Do you want to have the freedom to flip off your boss, and fear not the consequences?
  • Do you want to change the world with art or activism?
Everyone has different dreams and desires, and everyone has different privileges and disadvantages. But everyone is the same in that we have a limited amount of resources (time, energy, money) and we have to make the most of it. Not even the richest, healthiest, most privileged man in the world has infinite time, energy or money.

You've got to actively choose what is most important to you, and you've got to be honest with yourself about what you're giving up when you make choices.

So if you choose to have Netflix and a takeout meal each month, but choose not to have an emergency fund, the question isn't  "Is Netflix and takeout worth the $300 I'll spend on it this year?" but, "Is Netflix and takeout worth not being able to handle an emergency?" or, "Is Netflix and takeout worth not being able to pay my student loan on time?"

So, the next time you spend money on something that isn't necessary to keep you alive, or keep you employed, think to yourself: Is having this thing worth what I'm giving up to get it? Sometimes, you'll find that it is. Sometimes, you'll find that it isn't, and that's the signal to adjust your spending.

Sometimes, you'll realize later on that you didn't fully understand your options (Student loan debt anyone?) but there's nothing you can do about your past decisions except learn from them and educate yourself for the future. Which, I hope, is why you're here!!

Time is Money

Because of compound interest, time has a major amplifying effect on money. Buy a $2 candy bar on a credit card and watch it become an $8 candy bar in a few years. Or, invest $100 today and watch it double in about 10 years or so.

When you're thinking about what you're giving up when you make decisions, keep that in mind. Future money is always more valuable than right-now money. Check out this "Don't Spend That Money" calculator to drive home the point!

...and Money is Time

Have you ever thought about how the rich stay rich? It's not because they earn a high wage. It's actually their money which "earns a wage" for them through investments. This is called passive income. The logic follows that if you have enough money in a stash earning passive income, you no longer have to work for active income at all.

You don't have to be super wealthy to let your money start earning money for you. Sure, you may be earning five cents a month instead of five thousand dollars, but the snowball effect is real, and holy cow does it feel good to earn money you didn't have to bust your butt for... even if it is pennies. As you save, the number slowly gets bigger and bigger until someday, you can retire.

So every little bit you can squirrel away translates directly to freedom- freedom to leave your job, or to no longer fear losing it.

Money does not disappear if you don't spend it right away!

Those of us who grew up poor have this mindset. I'm not sure where it comes from, but I've felt it before, along with millions of people. It's why you see people buying big TVs after a windfall instead of saving the money- these people aren't stupid, they're just conditioned that way.

You must shake this out of your psyche by any means possible or you will be poor forever. Whether it's a jar on the countertop, a savings account, an IRA (a bank account for retirement with special tax treatment)- do something to show yourself that you can save. Make it a habit until you have an emergency fund.

A great balm for the poverty mentality is watching a small sum of money grow into a larger one. It does more to alleviate the self-esteem-zapping stress of poverty than a luxury "treat".

Two ways to cut spending

Most of us know we should take a razor to our spending, if not a chainsaw. Most personal budget cuts fall into one of two categories:

Little Cuts:

The famous "cut out your $5 daily coffee to save $3000/yr!!!" example falls into this category. For most of us these days, assuming we can afford a $5 daily coffee is assuming we're in a better position than we already are. But it's not just daily coffee that's taking multiple tiny bites out of your paycheck that add up to thousands.

-Restaurant meals, like chipotle burritos- or even food waste at home
-Buying yourself treats that end up causing you stress later when you realize you had better uses for that money
-Unnecessary clothes and shoes
-Buying plastic doodads at the dollar store which seem useful on the shelf, but gather dust when you get them home
-Gas/maintenance for the car when you make non-essential trips

Of course, this is going to look different for everyone.

Big Cuts

The big cuts category is for things like this:

-Can you find a cheaper apartment or move into a smaller house that requires less maintenance?
-Can you get a cheaper car so you're no longer drowning in the payments?
-Can you move to an area you can afford better?
-Is it wise to make a major move about your debt (consolidation or refinancing)?

These are cuts that require big changes. Don't get so caught up in the little cuts that you forget to think about big cuts, too. Sometimes, a big change is necessary to get back on track. I had to literally move cities to find a job which paid a living wage, get rid of my car entirely, and get used to a different type of housing before I could get my finances on track.

The Next Step

Naturally, you can't make decisions about something you don't know, so start monitoring your spending. Every time you part with your money, make sure the transaction is recorded somehow. You can make a spreadsheet, use the envelope method, an online service like Mint or YNAB, or even a little notebook if that's your style.

Tracking is more important than making budget categories. I use personal capital (it's an app on my phone, and a website where I link my accounts.) The neat thing about Personal Capital is that it shows you your net worth, so you don't have to do that math every time! Tracking your net worth is important because you can't hide behind loans and debt to make you feel richer than you already are.

At the end of the month, take a good hard look at where your money went. Make a list or a spreadsheet of everything that came in and everything that went out. Is the money going where you want it to? Be honest with yourself about what you're getting and what you're giving up. Then make your little cuts and big cuts accordingly.

Once you're no longer spending more than you're bringing in, move on to Step One: Your Emergency Fund.

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