Managing your finances and investing for the future may seem complicated. But it’s really not. It’s mostly about discipline; setting up smart strategies and systems and then following them religiously for years and decades.
As with most things in life, the simpler the system, the better. Financial writer, Trent Hamm, recently shared the 12 strategies that have made his money life simpler and thus better.
Have an emergency fund. Keeping 6 to 8 months of living expenses in a savings account provides a buffer against the unpredictability of life. If your car breaks down or you lose your job, this cash stash prevents you from plunging into financial darkness, including credit card debt.
Firewall your checking account. Keep a minimum balance in your checking account to avoid overdrafts. This practice simplifies life by eliminating the need to check the account balance before writing a check or using your debit card. Hamm and his wife pretend that a $1,000 balance means their account is empty. That extra money doubles as a modest addition to their emergency fund.
Automate your bills. Your bank probably offers the ability to pay all your monthly bills automatically. This is a great idea, assuming your monthly income is always more than the total of your outflow. It eliminates the chore of paying bills, saves postage, and removes the threat of late-payment penalties.
Automate your investments, too. I call this practice “paying yourself first.” Enroll in your employer’s 401k and your contribution will come right out of your paycheck – you’ll never see it, or have a chance to spend it. No 401k? Set up an IRA and arrange to have a set amount direct-deposited into that account every payday.
Withdraw your spending money at the start of the month. Hamm withdraws a certain amount of money for small indulgences like books, nice lunches or hobby supplies. He takes some in cash, the rest he puts in a PayPal account. When the money is gone, so is the fun – whether that happens on the 12th or 31st.
Understand your investments. Hamm won’t invest in any asset that he can’t explain in one sentence. He owns a lot of index funds with an emphasis on American companies.
Keep a tax envelope. This one is a low-tech wonder. At the start of the year, Hamm takes a manila envelop and writes “Taxes” on it. Any receipt or other documents that might impact his tax return for that year goes in the envelope. This eliminates the time-consuming late winter scramble to find all those scraps of paper necessary to file the ol’ Form 1040.
One card, pay it off. Hamm pays for most of his daily expenses on a credit card that offers an excellent bonus program. He pays off the balance at the end of the month using the automation described above. This simplifies his bill paying, and allows him to reap the rewards of using a credit card without paying any finance fees.
Talk to your partner about money. Hamm and his wife stepped all over each other when they first combined their finances. There were checking overdrafts and no coordinated investment strategy. Now they talk constantly about money – everything from long-term goals to daily expenditures. The result has been better money management and less stress in the relationship.
Buy in bulk. The Hamm family clearly loves ‘em some Costco. Hamm says buying mass quantities of staples like toilet paper and trash bags saves money and simplifies life by eliminating trips to the store.
Process the mail once a week. Hamm lets the mail pile up until the end of the week and deals with it in one sitting. What about bills, you say? Well, remember, most of those are paid automatically.
Keep an allowance calendar. If your kids receive an allowance, track their payments and spending on a calendar. This allows you and the children to see exactly how much they have available in their “account” when they want to buy something. Hamm insists this system is easier than keeping track of cash in a piggy bank – it also provides a closer approximation of real life money management.