Dealing with the financial circle of our lives can sometimes feel overwhelming. Whether we’re looking to invest in the stock market (and what does it have to do with Game Stop?) or interrogating our spending habits so that we can reach a savings goal, there can be a lot of conflicting advice out there.
But as Keller and Papasan discussed recently on the Think Like A CEO podcast, providing sound advice doesn’t have to be complicated.
In fact, some of the insights may sound familiar. As Gary says, “It’s not going to sound like, ‘Oh, my gosh, I’d never heard of that or never thought of that.’ They’re very practical, but they’re very essential to think this way.”
“The reality is a lot of people don’t follow [these rules] either because they’re unaware of them or, sometimes, it’s not easy, right. But if we know what we’re supposed to do, it’s not complicated. We can do it,” says Jay Papasan.
These tried-and-true tips should help you build a solid foundation for your finances and set you on a path to financial freedom.
- Keep a score card
The first thing that you need to do as you focus on your finances is track your net worth. Your net worth is a measure of wealth. Put simply it’s the dollar amount you get when you add up everything of value you own and subtract everything you currently owe.
This process is not dissimilar to what a bank would ask you to do if you applied for a loan. List all of your income and your expenses. Then, list all of your assets and liabilities. Next, subtract the liabilities from the assets – that will give you your net worth is. Ultimately, what they want to see is what your cash flow, and they want to understand what your net worth is.
You can think of your net worth as your personal P&L. It is a way of looking at how all of your actions surrounding your finances work together. And, over time, you’ll be able to see how you can improve your net worth by trying new things or changing old habits.
- Pay cash – avoid using credit
The benefits of paying for purchases with cash or cash equivalents are twofold. First, you avoid paying any interest and second, by actively having to manage your money, you get a more accurate idea of how much you have or owe at any moment.
As Jay recalls, “Wendy and I, when we got married, this is something we learned. I kind of knew how to live within my needs for myself. But suddenly, there were two people that had access to the same bank account that hadn’t yet learned to communicate. And part of our journey is we went from Visa cards to ATMs. The first time you go to the line at Target, and your card doesn’t run through, and you have to pull out your cart and count up everything in there—you don’t make that mistake too many times.
You start really learning how to communicate and pay. But for us, it was cash or cash equivalent for probably two years until we internalized what things cost and what we had.”
If you use a credit card, try to pay it off on a monthly basis. At the end of the month, remember you owe 100% of the money you’ve borrowed on credit. Paying it back in full will allow you to avoid paying unnecessary interest.
- Purchase protection
Which could you afford? A sudden medical procedure that costs $10,000 or a monthly medical insurance payment of $150? When people are uninsured or are improperly insured, and something unexpected happens—these are the kind of things that can knock you out of the game for a very long time.
You should purchase protection in five categories: disability, life, health, home, and property and car. This way, you’ll be protected from any unexpected major costs.
- Follow a budget
Much like making the journey from E to P, you want to be spending money in a structured way. Creating a budget—one that includes a plan for saving money as well as spending it—will help create good financial habits and curb impulse buys.
Creating an accurate budget means understanding your spending habits. Sit down and review several months’ worth of expenses – what are you spending your money on? Average out what you spend for rent, utilities, insurance, debt, food, and other expenses. Remove that cost from your monthly income and calculate what you’ll have left over. If you have a savings goal and can’t make it with what’s leftover – rethink your spending habits. Maybe cut down on your outings with friends or movie nights to twice a month. That way, that extra cash is going to the goal you want to achieve.
- Save an emergency fund
In a crisis, cash is king. As you build your budget, make sure that you’re stashing away funds for future emergencies. Most financial experts recommend having at least three months of expenses saved.
Jay remembers his journey to building his savings, “It was a big landmark when we had one month’s expenses. And then, we said, ‘Okay, can we get to three?’ And above six, I didn’t ever feel the need. I’m kind of a scaredy cat. A lot of people say three. We did six. I really felt I can sleep better at night knowing, if everything goes apart, we have like a half year before things really go bad. It’s peace of mind is what that is. That’s that investment.”
- Save up, then buy
For large purchases, Gary and Jay recommend saving up the cost over time and then purchasing the item. This advice is similar to paying cash rather than using credit, but it adds a layer of purpose.
If you’re saving up to purchase a new car, for example, you can set the amount you’re willing to spend and then use the time you’re saving to research which vehicle you want to buy.
In addition, research indicates that if you save for a period, the anticipation will make you more likely to make large purchases in the future.
- Buy based on “needs” first—avoid a “wants” based spending lifestyle
Having a certain level of financial freedom is required before committing to a major wants lifestyle, Gary says. This advice emphasizes the importance of being intentional with your money and aligning your actions with your values and priorities.
In our earlier example, when you’re saving up for your new vehicle—you could also realize that maybe you don’t need a new car just yet, and your ol’ beater can make it another year or two.
Taking a moment to reflect on whether a purchase is really driven by a need or a want can help you make more purposeful decisions.
- Think repair first, replace second, and new last
Sometimes thrift is the name of the game.
“If something breaks, you have to figure out how much it will cost to fix it,” Gary advises, “Repair first, replace later, but fix it with something used, don’t buy new.”
If you’re not able to find a suitable used replacement, only at that point should you purchase an entirely new item (for the full price tag).
- Pay yourself first, not last
Living below your means is an excellent habit for building up money for investing compound interest app and building your wealth. By following this habit you’ll actually end up living on less and less of your income as your finances become stronger over time.
You cannot live within your means if you live on twenty or thirty percent less than your means and become a student of investing money.
It will not happen because your means will keep increasing, and your spending will not increase at the same rate as your net worth and income grow.”
Gary says, “So, what will happen if you do that is it’ll just get lower, and lower, and lower to the point of you’re living off twenty percent, fifteen percent, ten percent of your spendable dollars.”
This last step is not a necessarily a religious concept, but a spiritual one. Find things outside of yourself that matter to you. And either tithe your time or tithe your money.
Gary says, “I want you to consider a lifetime of giving and not only five years. I want you to think about being an adult for 50 years, 60 years, Spirituality does not always have to be associated with religion.or more, and the amount of giving you intend to do. So, today is the day you give. Time is money.
Your time is money when you volunteer it. If you don’t volunteer it, that charity or group has to hire somebody and hand over the check. So, don’t think it’s worthless. Your time is money.”