Let’s Talk About Money: How To Build A Strong Financial Foundation
“What should I do with my money?” is a common question people ask me. They’ve snagged their first solid job or want to wipe out debt from student loans or credit cards. They’re excited to take the next step, and also overwhelmed by the sheer amount of options. Building a financial foundation sounds intimidating.
I love to share what I’ve learned from years of reading about financial topics, plus experience with living below our means and saving/investing. Nothing complicated, just concrete, actionable advice that I wish I’d received early on.
Rather than constrain these thoughts to individual emails, I decided to condense the ideas into a blog post.
This kicks off a multi-part series about getting your financial life in order. Referencing my favorite sites and resources, we’ll travel from deep in debt to launching investing to FIRE (financial independence, retire early) and beyond.
Today, I’ll start with the basics for setting yourself up for financial security down the road. All you van lifers (perhaps) have a head start on this, but I promise there are takeaways in here for everyone.
Getting Your House in Order
When you’re beginning your money journey, you need to build your financial house. And house construction starts from the ground up, not with choosing paint colors or light fixtures. Don’t get distracted with the fancy stuff when you need a foundation, walls and a roof.
Before you even think about investing any money, this means automated finances, ingrained spending habits, a safety buffer, and tracking those dollars.
It doesn’t make sense to heat a home that doesn’t have a door or windows. Investing money before you deal with credit card debt or nail down spending habits is the same.damn.thing.
Just Starting Out: Building the Foundation
Before you can run, you have to walk…but first you’ve gotta crawl. Luckily, you can learn from my mistakes!
When I got my first real job, I made the mistake of thinking, “F YEAH, IT’S TIME TO INVEST.” I was pulling in a paycheck, but after a year of overseas travel, I had zero savings and plenty of student loans.
I was living on a college student’s budget, so I wasn’t spending each paycheck. What did I do with the extra? It sure didn’t look like building a foundation; more like installing a fancy home automation system!
DAY TRADING. I was all over the Motley Fool looking for hot stocks. For suuuure Beacon Energy was going from a penny to $1.50 and Intuitive Surgery was headed to the moon. I was going to be RICH.
Never mind that a) I knew nothing about investing b) there are companies who hire geniuses to profit off over-confident idiots like me and c) even the billionaires who hire those geniuses often don’t beat the market.
Talk about misguided. I wasn’t investing, I was gambling.
With some losses (Beacon went to zero) and lots of reading, I managed to course-correct . Looking back, I wish someone had told me to do the following before even CONSIDERING investing money:
Treat ANY credit card debt or student loans like an emergency
Paraphrasing the mega-popular financial blogger Mr. Money Mustache, debt isn’t something you work on. It’s a HUGE, FLAMING EMERGENCY. For almost everyone, pay off credit cards and student loans before you invest anything!
Use the debt snowball approach: aggressively pay down the highest interest rate credit card, then attack the other with those funds. Here’s another approach.
Automate your finances
Humans are amazing at increasing spending as their income increases. “HOLY BANANAS, I’M RICH!” screams our inner child after a raise.
When you get a raise, celebrate by doing something fun. Then get back to basics. Instead of spending all your hard-earned cash, set up a system for managing your money that saves money before you even have a chance to spend it. This blog series on automating your finances is da bomb.
Rather than (more) new shoes and (another) expensive dinner since you can “afford them,” put your money on auto-pilot. Each paycheck, allocate a percentage to bills, savings, investing, an emergency fund (see below) and specific funds like wedding/house down payment/travel.
Why? If the money never hits your checking account, you’ll never miss it. This is a Super Money Hack, especially as your income increases. Keep living low to the ground and spending in line with your hierarchy of values and the savings will stack up.
Cut Your Spending Where It Matters
The financial wizards at Choose FI have The 10 Pillars of FI for gaining control of the big expenses in your life.
Lower your housing costs. Do you HAVE to live in an expensive coastal city, or does it just sound cool? Forget that – do some geo-hacking! You don’t have to live in the Philippines as a digital nomad either. Boise is an affordable city with amazing outdoor access and there are other fantastic cities that cost far less than places like San Francisco, Seattle or New York.
Even here in Bend (by no means cheap), there are two bedroom apartments for ~$1,000 and house prices that Californians and Seattlites drool over. (Note: I’m aware of the very-real affordable housing crisis, but the impacts of people moving from expensive to relatively affordable locations and driving up prices is outside the scope of this post.)
At the very least, be open to either roommates or a small, affordable space until your money is dialed. However, don’t skimp on location if it means you’ll be driving a ton versus walking or biking. We lived in a 550sf studio apartment (the “itty bitty!”) right in the heart of SE Portland for a year and it was awesome.
Bike whenever possible. aka Get Rich With…Bikes. There’s a reason the IRS reimbursement rate for travel is over $.50/mile – cars are expensive! I’m no car hater and totally get their utility. (I’m driving one today to go mountain biking.) However, when biking or walking is an easy alternative, leave the car at home.
If you must drive, get a cost-effective used vehicle. Cars and their insurance/maintenance costs crush bank accounts faster than King Kong landing on Bank of America without a parachute.
Forget cable. Get Netflix, read books, start a social group, pick up a new hobby…do ANYthing but pay for an expensive cable bill.
Switch to cheaper cell phone service. From Republic Wireless to Google Fi, there are many discount resellers of Verizon, Sprint or T-Mobile.
Once your debt is gone, use credit card rewards to get cash back or travel rewards. Pay off the balance each month. If you can’t control your spending yet, ignore this item like it’s a radioactive T-rex!
Carefully consider the value you gain from eating out. Go to restaurants when you really want to, not because it’s convenient. For example, Chelsea has an important standing lunch date with a friend that is worth the cost. I’d rather cook at home because it’s healthier, (usually) tastier, and cheaper. Plus my fledgling chef skills still need work…
Negotiate! Look at recurring expenses and ask “do I need this.” If the answer is no, see ya! Do you really need a shave club membership? Is the monthly subscription to a Game of Thrones costume box still serving you? If yes, ask “can I negotiate a better deal or change things up?” Phone call time!
For example, last week I called our internet provider and referenced a competitor’s intro deal. A five minute phone call yielded $11/mo in savings, PLUS they doubled our internet speed. I did a similar thing with my office lease.
Start an emergency fund once your debt is paid off
Whoa, all the value-based cost cutting worked and you paid off your debt? Now you get to stack some money.
Take what you were paying toward debt and roll that into savings. (Say you were spending $150/mo on credit cards. Immediately redirect that via your automated finances so that money goes to savings.)
Contribute to it until you get to 2-6 months expenses. (If you spend $3,000/mo, aim for $6-18k; put it in a money market account.) You’ll sleep better with a buffer and won’t have to tap into credit cards if your car transmission explodes or you lose your job.
Some people debate the need for an emergency fund. “That’s what credit cards are for.” I’d argue that until you feel totally in control of your spending, a cash pile is essential. The exact amount doesn’t matter, but having a buffer to handle big one-time costs is tremendously freeing.
Set up a financial tracking system for your money
If you don’t measure your money, you won’t control it. (I’d argue that you can’t.) I’m still surprised by how many people have ZERO clue how much they are spending.
That’s fine if you’re financially independent and can choose to stop working tomorrow. For everyone else, trust me – if you track your spending, it’ll help you save more. Notice I’m not saying create a budget. That comes later. Simply look at your spending each month!
I hear the retorts starting. “Too much time, I can’t possibly, you can’t tell me…” Whaaaaatever. You’ve got time!
Each month, I use Quicken to sync all our transactions and review our spending. This takes me less time than I spend texting my friends each day.
If you can’t invest that paltry amount in your personal finances, you’re not ready to get serious. The Home Shopping Network and the latest Danny Macaskill video can entertain you until then.
I’ve used Quicken for almost two decades and love the ability to run varied reports. The Deluxe version is <$50/year. For simpler online tools, try Mint.com (free!) or YNAB (You Need a Budget).
Money Management is a Superpower
The magic of all these steps is that being debt free, automating your finances, having a buffer and knowing your spending habits is SUPER empowering. Celebrate because money is no longer your boss.
Now you’ll have cash in the bank in case of an emergency or if the economy tanks. Your credit cards are paying you with points or cash back rather than being a sinkhole of high-interest payments. You’re in control, and that’s a magnificent feeling.
Now what? Investing! Next time, we’ll talk about putting our hard-earned money to work for us instead of the owners of the fancy restaurant down the street.
HOLY BANANAS, I’m bookmarking this as a go-to reference! The other thing I’ve observed, through seeing my sister evolve from a passive mindset (“I’ll always be broke; there’s no point trying”) to an empowered one has been quantifying her ‘why.’ She was desperate to travel, and once she remembered that passion and picked a concrete destination with a dollar amount, she was so motivated to get to that goal that she finally ‘saw’ where she could cut some spending, got a tutoring side gig, and in just a few months, was Germany-bound!
Go Jules Go recently posted…My (Un)Funny Little Valentine
Love this! I’ve noticed over the last year, our savings has been more difficult. Lots of “good” reasons for this – new job, first home, moved to a new town. But I realized what the core difficulty was – we did not currently have a pressing “why” for our savings.
We’d paid off our student loans, saved for our first home, but retirement is still a ways off. Finding some more short and medium term “whys” has been incredibly helpful!
The middle ground between “whoa, financial independence is so rad” and “yay, we’re retired” is a tough one! We humans aren’t wired for long, far-off goals like that, which is why I think automation is so (SO) important. Then we can get back to our why, whatever that might be. I’ll write more about that in the next post, which you totally are onto… BTW, hope the new digs are treating you well!
Yes to quantification for specific goals! I should have mentioned that. Your idea is excellent enough that I’m stealing it to include in this post. Errr borrowing? HOLY BANANAS, who cares!
Good read and something I’ll point folks to, especially the younger folks! I like that you talk about attacking the high interest debt first. It’s simple math. I really don’t like the “attack the lowest balance first regardless of interest rate” approach unless one really has to free up a card that can be paid off every month. Lots of great tips!
I think there’s a place for paying off lower interest rate debt, but only if you’re going to pay it off and free up that cash flow in less than a few months. Otherwise, let logic and math be thy guide and focus on high interest rates for surrrre!
Appreciate the “If the money never hits your checking account, you’ll never miss it.” point of view when automating finances. Jenni just finished up her latest post on her automation process so I was browsing around other personal finance gurus for their tips.
The idea is to kind of “hiding” the money from yourself seems smart.
Sort of like sticking the box of cookies in the back of the pantry so you’re not tempted every time you take a look!
Chris@TTL recently posted…How to Automate Your Personal Finances