Ever start reading a book that you can’t put down?
It doesn’t happen often, but from time to time I will come across a book that just grabs my attention and I burn through it.
On Friday I got Financial Freedom in the mail and it has quickly become that kind of book for me. Written by Grant Sabatier of MillennialMoney.com, I found myself nodding my head every page I read.
Grant’s ability to make something that sometimes deemed as really confusing (money) and make it simple is pretty awesome. It really got me thinking…
Money isn't that complicated!
So why do we keep making it so complicated? And if it isn’t complicated, how do we stop making money a complicated situation?
Stop Making Money Complicated.
Money is just a tool. Just like a hammer in the hands of a carpenter, who can build wonders with his tools. But in the hands of the wrong person – a hammer can be a deadly weapon.
Money really isn’t much different.
If you don’t understand how it works, it is easy to make a mess of it and make it seem really difficult. Sorta how like the simple concept of brushing your teeth is super challenging for a 7 year old boy… the more you resist the bigger the mess is and the harder it becomes.
But in order to make money less complicated, you need to first realize a few things that I got from the Financial Freedom book:
- Track your net worth often
- Find and create small daily wins
- Stop comparing yourself to others
- Payoff bad debt (high interest) and start investing 15%
- You can be frugal, but you have to earn more money
- Improve by a few % daily
- Get to a million as fast as possible and live off the returns
- Do what makes you happy – don’t just work to work.
Ok…so you read my list above and now you are freaking out (especially #7) – STOP it, you will be OK. Just keep reading so you can figure out 5 simple rules to make money more simple for you!
Simple Rules to Make Money Less Complicated
Money Rule 1: Know Your Net Worth
The bottom line, money is simple when you know where you’re at. Knowing your net worth is the first step to creating some action… because chances are it might not be where you want it to be.
When Lauren and I got married in 2016 out networth was negative $100,000. Fast forward to today and we have grown it $250,000. Most of that can be attributed to our awareness.
To simply calculate your net worth:
- Add up your assets (Real estate value, paid off car values, jewelry, cash, and any investments)
- Add up your liabilities (mortgage, student loans, consumer debt, and auto loans)
- Subtract your liabilities from your assets.
- You have your net worth (Full article here on net worth tracking)
For example, let’s say Jack and Diane own a home worth $300,000, have a paid-off car worth $5,000, an engagement ring worth $4,000, and their cash/savings/investments total $35,000. Their total asset column is $344,000.
Jack & Diane’s liabilities, $10,000 car, $7,000 consumer debt, $36,000 student loan debt, $250,000 mortgage debt for a total of $303,000 in liabilities.
So J & D’s net worth is $41,000. Now they need to look at it often and track it. The easiest way to do this is with free apps like Mint, or what I prefer – Personal Capital, which is great for net worth tracking.
*Awareness is always key*
Money Rule 2: Identify Your Number
What is your number?
If you have no clue what I am talking about think about:
- What would be your magic number to retire?
- Or your number to retire early?
- If you don’t have that kind of number, but you want a certain amount of money, what is that number?
This might be a new concept to you – I know 4 years ago it was for me – but you should have a networth goal or a certain amount of money saved by age goal. By having a number, you will most likely want to increase your savings rate (how much you save and invest).
Have a number, aka have a goal, so that you can continuously work towards making money work for you. A great way to find your number is to figure out your yearly expenses then multiply it by the number of years you want to retire.
Let’s say you plan on retiring at 50, and with life expectancy around 80, you would take your annual expenses and multiply it by 30. That is your number, ot help you find it easily, here is a great tool.
Money Rule 3: Have a goal to save 20%
I wrote an article last year about how American’s suck at saving money. In 2017 the average American adult was saving a record LOW of approximately 3% on average. Typically, a savings rate of 15-20% is recommended for someone who is planning on retiring one day.
So if you find yourself like most millennials and only saving about 3-4% annually, you got some catching up to do. But you don’t go from 3% to 20% overnight.
Instead, to increase your savings rate to 20%, work on increasing it 1-2% per month to slowly acclimate yourself to the increased savings rate.
For example, the average median household income of approximately $60,000 means you would have to save $12,000 per year, or $1,000 per month.
Now for most that is lot’s of money and the thought of saving $1,000 might even seem overwhelming… which is why you slowly increase your savings rate.
So if you are only saving 5%, or about $3,000 a year or about $250 a month, your goal would be to increase it 1% until you can increase it another 1%. A 1% savings rate increase would be $600 per year, or $50 a month. Simply put, this person would want to increase their savings rate $50 a month.
|Income||Savings rate of 1%||Goal of 20%|
|$60,0000||$600 annually or |
|$12,000 annual or |
The emphasis on raising your savings rate will actually cause you to take more action and create more awareness of your savings.
Money Rule 4: Pay off bad debt
I will change my stance a little. This is different from most of my blog posts where I say pay off all your debt then invest. While you can argue the math, either way, traditionally many will say pay off bad debt, invest money that way you can MAKE more money.
Bad debt is typically high-interest debt (anything over 7%). Now that being said student loans and cars can teeter between the line so it might come down to personal preference. Personally – we just want the student loan balance to say zero because inevitably we are paying it off, so why not get it done.
We also want to use all the cash we can to quickly invest more money each month. That being said, a quick way to see if you should pay something off, aka bad debt, is to use the cash flow index formula.
Using the CFI formula, complete the cash flow index equation for every debt or loan balance you have. A number over 100 means it is an efficient loan, below a 50 is an inefficient loan.
Any loans or debts with a score of 50 or less focus on paying them off. Over 100, it is an efficient loan, so it would make sense to pay the minimum and increase your savings rate. By paying off debt you are freeing up more money to do what you want with it, which leads to rule #6 when it comes to money.
Money Rule 5: Get good at money so can do what makes you happy.
Maybe the longest rule, but the best rule yet, getting good at money and making it not so complicated ultimately allows you to do one thing:
Whatever it is you want to do.
For example, let’s take a few passions of mine that I would rather do daily instead of maybe some of the required money-making activities I have to do. I truly love to:
- Play (Sports, golf, run around, go on adventures)
- Watch movies
- Go out to eat with groups of people
- Social gatherings
- Spend time with my wife
- Spend time with kids (when I have them)
- Help others with money or just grabbing a coffee
So in that shortlist of 7 things making money wasn’t really one of them, though I do enjoy doing that too. So if it follows rules 1-4 and applies to them, I can do more of rule 5 when it comes to money, which is doing what I want, with who I want.
I have always had the work hard, pay the price mentality so that I can do what it is I enjoy, but I never wrote it down.
And I think most people would agree, that if money wasn’t a concern there is a million things they can think of.
So in order to really make rules 1-4 functional and fully apply them, you need to first think of what you really enjoy doing. Write it down somewhere and look at it every day!
My take away when it comes to making money less complicated.
There is some sort of stigma out in the world that people that are good with money know something others don’t. While maybe that is the case in some regards, I would venture to say 25% of money is knowing, 75% is doing.
In other words, you could have a ton of financial wisdom, or know how the economy works, but you might not be financially prosperous because you have knowledge constipation. You are actually preventing yourself from the DOING part of money.
Making a simple concept (money) confusing is what might be tripping you up. So as we part, just remember to focus on three aspects of money like Grant from Financial Freedom says,
- Manage expenses and reduce
- Increase your savings rate
- Make more money.
Until next time! ~Josh
Question: What is a money rule you follow that you could add to the list?
Josh writes about ways to make money, pay off debt, and improve yourself. After paying off $300,000 in student loans with his wife in less than five years, Josh started Money Life Wax and has been featured on Forbes, Business Insider, Huffington Post, and many more! In addition to being a life-long entrepreneur, Josh and his wife enjoy spending time with their newborn son, their chocolate lab named Morgan, working out, being outside, traveling, and helping others with their finances! In case you were wondering, Josh uses Personal Capital to track his net worth and his first investment account ever was an Acorns account 😎