Americans, by and large, punt personal finance. I don’t blame them. With tons of acronyms (403b, 401k, Roth IRAs), it’s hard to get your head around it. But when you don’t know the basics, you stop being a Hustler, and start getting hustled. We can’t have that. So we’ll give you the basics of financial planning.
1. Trust NO ONE. Question EVERYTHING
Financial “experts” are nothing of the sort. Pick up a Michael Lewis book. ANY of his books. You’ll be shocked to learn exactly how much of their “expert” financial advice is a blind guess. There is no substitute for arming yourself with good old fashioned research. A Hustler doesn’t just blindly trust what an “expert” is saying. That’s the fastest way to get hustled yourself. If you can’t understand a financial instrument, don’t put your money into it. Pro tip: find an advisor that doesn’t work on commission. If he’s making a commission on what he/she is selling you, he’s not an advisor, he’s a salesman. To learn more on this, look at the Department of Labor’s Fiduciary Rule.
2. Get a budget.
You need to know where you stand. So take an hour or two to map out how much you make and how much you spend each month. You’ll be surprised what you find when you lay everything out on the kitchen table. For example, it always surprises me how much monthly subscriptions add up to. Take $10 for Netflix, $15 for the New York Times, and add in HBO, Hulu, or any others, and you’re hitting high 3 figures in yearly spending. If after you map it all out, you’re still making alot more than you spend, CONGRATS. Make sure to look at your categories of spending. Here’s some helpful rules of thumb to give you an idea.
- Housing should be no more than 33% of your Gross Income. Always include in your housing cost any HOA fees, utilities, and maintenance/repairs that you do.
- Transportation (think everything from car payments, gas, parking, and Uber/Lyft) should be no more than 20% of your annual income. But really, it should be way less.
- Retirement gets 10% of your salary, no questions asked. Your kids can always take loans to go to college, but you can’t get a loan for retirement.
3. Prepare against the worst.
Life has a fondness to through curve balls at you. You NEED to be prepared. ESPECIALLY if you have loved ones counting on you. The first order of business is an emergency fund. You NEED 3 months’ worth of expenses saved up. MINIMUM. What happens if you car breaks down, or the washer dies, or you piss off your boss by telling him he can go to hell and you’re suddenly fired. You need to have enough funds to cover your basic needs while you line up your next job to at least ensure you’re not homeless until that next paycheck.
Moving up on the hierarchy of needs, you need to be insured. This means health insurance for you and yours. Modern medicine is EXPENSIVE. One trip to the emergency room WILL BANKRUPT you if you’re uninsured. An ambulance ride alone can cost you $2,000. If you have kids, you need life insurance. This is a blog post all on its own. Suffice to say, get term life insurance that’s enough to ensure your family can stay in their current house and your kids can stay in school.
This all assumes that you’re making more than you’re spending. If you’re not, then you need to…
4. Start the painful decisions.
You need to CUT some spending. I know, it’s hard. I’m not asking you to be super frugal. I just need you to have enough to save each month. Remember, the 10% for retirement doesn’t count. You need to consider that as an expense. You NEED to save for retirement. So, how do you get there. Here’s some easy fixes.
- Eat out less. This is painful, I know. I LOVE to eat out during lunch. Brown bagging my lunch is a chore. But all the lunch places near my job are at least $10 a meal. That’s $200 a month on lunch. If I can prepare a $3 sandwich just half of those days, I’m saving $70 a month. Remember, I’m not saying you should be a hermit, just spend less.
- Cut out subscriptions. Those add up. I recently removed HBO from cable subscription until Game of Thrones comes back online. I also removed my New York Times subscription. Pro Tip: if you use incognito or private browsing, you can continuously get around the 10 articles per user limit on the major newspapers.
- Downsize. This one is painful. Reassess your living and driving situation. These are commonly the biggest expenses in most households. Do you need a new car? Do you need any car at all? I live in a walk-able city with good mass transit. I know that’s not the case for many, but for some, downgrading your car is an option. Likewise with housing, do you need all that space? If you’re spending way above your means, there may be no choice but to get draconian on your budget. You may have to move to a cheaper unit if you rent, or figure out other uses for your house if you own. That brings us to the next item….
Money doesn’t solve all problems. In fact, it could in some cases lead to mo problems. But for some problems, there’s just no way to solve them except by outearning them. In today’s world, you have to look out for yourself. There’s no pension waiting for you after 30 years. There may not even be a full time job available for you in 10 years. You have to look out for yourself, and you have to diversify your income streams. Take inventory of your skills and assets, and figure out ways you can monetize them. Do you have more house than you need? Try Airbnb. Are you particularly good at something? Start giving lessons.
If you can’t diversify your income, then make your current income more secure. Be indispensable at your job. Always ask for more work. Foster a reputation as a man/woman who can deliver. And don’t be afraid to move around. Millenials get a bad rap for moving to a different job every 1-2 years, but that’s a great way to gain exposure, new skills, and to get those amazing pay bumps. I myself have transferred every 1.5 years on average, netting 7% raises each time. Look out for YOU first. No one else will.
That covers the basics. More detailed posts on specifics will follow, but these 5 bullets will give you a good foundation to get your house in order.