In step #4 we talked about tracking your money, remember?
If you don’t know where your money goes, if you don’t have ANY mechanism (call it budget, call it a money tracker, call it whatever) – you don’t have control over your money. Money controls you!
You may feel that you have to make more and more money to live.
What if you could spend less so you won’t need to work more to make more?
And if you feel that you’ve already trimmed your budget to the bare minimum, then it’s possible that it’s time to look for an additional source of income.
Ok, that was a quick reminder of key #4 – Track Your Money
Now the next, step #5, is to Pay Yourself First.
There’re THREE Aspects in this step:
1. Pay Yourself First
So, once you figure out how you can better control your optional spending, your unnecessary expenses (your “wants”), the next important money habit to develop is to pay yourself before you pay anyone else!
For many people, a good way to start saving regularly is to have a small amount transferred automatically from paycheck to a savings account.
In other words, have some savings automatically set aside!
If you don’t see it, you don’t miss it.
How much can you set aside?
The common suggestion is between 5 and 10 percent of your gross annual income.
Of course, this can be much harder than it sounds.
So, if you’re currently living paycheck to paycheck without clear opportunity to increase your income in the near future, begin by paying yourself with WHAT YOU CAN now. It could be one percent of your income, or $20, $50, $100.
ANYTHING is better than nothing. Train yourself to allocate consistent contributions toward your savings. That’s the goal here.
The next question: what is the purpose of these savings?
Here are a couple of suggestions:
2. Maintain an Emergency or “Peace of Mind Fund”
Before you commit your newfound savings to ANY investments (ALL investments involve risk), make sure you have at least three to six months’ worth of your lifestyle expenses saved in an emergency (aka peace of mind) fund.
Life happens to all of us; cars need repairs, houses need maintenance, medical emergencies, or other unforeseen circumstances.
Keeping your emergency fund liquid will ensure that you don’t have to panic and sell your investments when their prices are down, and guarantees that you can always get to your money quickly.
If you have trouble deciding how much you need to keep on hand, begin by considering the standard expenses you have in a month.
If you have dependents (e.g. kids, parents, etc.), you’ll want to keep more money in your emergency fund to offset the greater risk.
Once you fill your emergency fund, you can redirect money to your investments.
3. Give yourself an allowance
Here’s the fun part. Once you get to the point that your basic expenses and savings needs are met, you can decide how much money you want to spend guilt-free on anything you want (like shopping, eating out or entertainment).
You and your spouse can have that amount in cash each month but when the money runs out, it’s gone until the following month.
Anything you don’t spend can be carried over.
This may add some fun and money flexibility into your relationship because neither of you can question how the other spends their allowance.
Leave a comment and let me know what resonated with you and what you want to implement into your life right away.
To your Health, Wealth, and Freedom!