Finances are one of those things that we all have to work with in our lives. For some people, finances are a joy, for other people their finances are something that they feel indifferent to, and for many people, finances are something that bring up a lot of negative emotions. For those people who feel negatively about their finances, chances are they simply don’t know how to create a streamlined system for financial success. Here are a handful of steps you can take to create financial success with a super simple plan.
First, you need to adopt some sort of macro way to look at your finances. One of the simplest overall plans is called the 60% solution. Basically you aim to live on only 60% of the income that you take in. After that, you have 40% of your income to allocate to the following buckets. You put 10% of your income into a retirement fund, such as a 401(k) or Roth IRA. You put 10% of your income into some sort of long term savings or towards eliminating your debt. You put 10% of your money into shorter term savings for things that pop up periodically and unexpectedly, like car repairs, health issues or other unexpected expenses. Finally, you put the remaining 10% of your income towards fun things that you enjoy, like going out and buying DVDs.
Next you want to automate as much as possible and reduce the flow of financial papers that enter your life. Most good banks will allow you to automatically take money out of your paycheck in the above allocations and put them into their respective accounts. You can set up most bills to pay automatically, or at least you can pay them simply online. The goal is to streamline and automate as much as possible after you know where your money is going.
Some people recommend paying for everything in cash, and to set aside all your cash into different envelopes that correspond to what you’re spending that cash on. This is a good idea, though not one that I practice at the moment. The reason I don’t practice it is because I like to use a debit card so at the end of the month I can see exactly what I spent my money on, and so I have a record of my spending come tax time. Either way works, and depends on your needs and personality. Overall, what’s important is that you are accountable for your spending. The envelope system makes it easier to ensure you only spend your grocery money on groceries; you only spend your movie money on movies, etc. The card system makes it easier to trace every dollar you spend.
Finally, you want to eliminate credit from your life. If you can be responsible with a credit card and pay it off at the end of the month, than it can be useful in the ways a debit card is for tracking your spending, and also provides some benefits such as reward points and extra insurance. However, if you can’t be trusted to use a card responsibly, it’s better to just cut it up.
And there you have it. This is just about the simplest financial system out there. You decide where your money is going, you automate and streamline the process of saving and paying bills, you make your spending accountable, and you stop racking up debt. Follow these steps and you’ll be light years ahead of most other people.