Fear. Doubt. Insecurity. Sleepless nights.
A neverending sea of “what ifs”…
I’m not alone in saying that the amount of hours I’ve spent worrying about my personal finances is in the triple digits.
- Can I support a family?
- Will I always be in debt?
- Will I have enough to retire?
- Can I live the lifestyle I want to live without pinching every…single… penny…?
These emotions, these questions, just a few short years ago, were all at the forefront of my mind almost every single day.
But fast forward to now, and essentially all of that worry is gone.
Nothing but the implementation of a very simple plan.
I’m not really a numbers person.
I got through my MBA with B’s and C’s in the higher level accounting and finance courses.
And I very rarely do any kind of calculations without a spreadsheet or smart phone.
So how is it that I was able to put together a financial plan that will carry me into retirement in my 50s?
- One– because I figured out that personal finance math doesn’t require anything more than a high school education
- Two– because technology in today’s world handles 90% of the work for you. It even handles many elements of controlling your behavior, which, let’s be honest, is often times the primary reason we succeed or fail.
All you have to do is figure out your initial plan, and set up a system to make sure you follow through.
Here’s how I did that to eliminate all of my financial worry, and how you can do exactly the same thing.
Crushing Your Limiting Beliefs
At first, I had a pretty big limiting belief that only “numbers people” could be wealthy.
In my mind, these people had a natural and deep understanding of things like earnings ratios, compound interest calculations, and complex accounting formulas.
Math just came naturally to them, and they would live wealthy lives because of it.
For years after college, I didn’t even try to invest or grow my money.
But as I got older and started to experiment and dig into what it actually takes to grow money over time, I discovered that it’s much more about human behavior and making simple choices than it is about being a math whiz.
- I discovered that I didn’t need a budget. I just needed to make all of my savings and investments first, then the rest I could do what I wanted with
- I discovered that rather than try to predict the future, I could just use a simple rulefor savings that will allow me to retire with plenty of money that will never run out
- And I discovered that I could use technology to automate every single aspectof this system.
Eventually I got past all of my limiting beliefs, figured out how to set up a simple financial plan that pretty much runs itself, and have accumulated a $300,000 net worth which helps me sleep very well at night.
If you have the same feelings I had which I mentioned at the beginning of this article, then you’re probably wondering how to create this simplified plan for yourself.
How to Create Your Simple Financial Plan
It’s important you understand when I say simple, I mean really simple.
I’m not going to go into extreme detail explaining how you need to chart out every single expense, create a budget down to the penny, and spend dozens of hours managing this system every month (many people do this, and wonder where their time goes).
Because, let’s be honest, you won’t do that, and neither would I.
That’s the very reason I simplified this whole thing.
- I’m not much of a long-term planner
- I shiver at the idea of budgeting
- I cannot stand micromanaging details
- Complex math annoys me
- And I absolutely love life hacks
If I can do the 80/20 and get almost the same results in 1/3 of the effort as the next person, I’ll do it every time.
Now before I get into the plan, I want to make it clear that the execution of this system is based on the proven psychology of decision elimination and behavior automation.
The hardest part of accomplishing any goal is making the decision to do what it takes every day. This system uses technology to automate almost every single aspect of your personal finances. It takes the behavior piece almost completely out of the equation.
All you have to do is have a steady stream of income. The system does the rest.
Imagine for a second if you could do that with your other goals. Imagine if you could put your workouts on auto-pilot so you never had to think about doing them. Imagine if you could put your eating on auto-pilot so every meal you had was the perfect combination of nutrition.
How easy would being in great shape be?
That’s what you’ll be doing here. The only decisions to make are up front. We front load the work so you don’t have to do any of it later.
It’s incredibly efficient and effective.
Here are the steps to set up your plan.
Optimize Your Spending and Establish a Cash Flow Surplus
If you’re going to pay off your debt, save for large expenses, make investments, and put back a nest egg for retirement, then you’re going to need to be earning more money than you are spending.
For some reason, many people fail to understand this. They continue to get further and further into debt every month and think that they can sustain a financially sound life.
Don’t let that be you. The simplest way to establish a cash flow surplus is to optimize a few key areas of spending.
- Reduce your monthly recurring subscription services as much as possible
- Reduce your impulse buying as much as possible (set a rule for yourself that you’ll think about a purchase for 3 days before you buy it)
- Eliminate your car payment altogether
- Downsize your house if you still haven’t established a surplus
These optimizations alone can result in several thousand dollars each year.
Once you’ve done that, seek to continually increase your income. You can do this by getting salary increases, making money on the side, or by getting a new job entirely.
Always seek to increase your income year over year.
Next, set up auto-pay for all of your remaining bills so you never have to think about paying them. You’ve established they’re important already, so you shouldn’t have to worry about those.
This will help you make sure you’re not missing payments and racking up late-fee and interest charges. It’ll also save you a ton of time.
Eliminate Existing Short-Term Debt
Next, pay off all debt with interest over 6%.
This includes credit cards, student loans, vehicles, or any other toys you’re paying high interest debt on. Put all of your extra money towards this until it’s gone. Even go out and make extra money on the side to pay it off.
Learn how to use eBay, Craigslist and other sites to sell things you don’t need to pay your debt down quicker.
Not only will you save a ton of money and be able to live much more freely, but you’ll also feel like a boulder has been lifted off of your back.
Use what I call “quick wins” to do this.
Choose your debt account with the lowest balance and automate your payments as high as you possibly can towards paying it off. You’ll pay it off in no time and get a very quick win. This can be very motivating to do.
Do this over and over until your debt is fully paid off, and make sure not to take on any more debt in the process.
Make sure this happens automatically to avoid the temptation to spend this income surplus.
Start Saving for Large Purchases
There’s a saying in personal finance that goes something like this – “You can have anything you want. You just can’t have everything you want.”
You can have nice things without getting into debt. Just save for them and pay them off all at once, and prioritize what is most important to you to spend money on. Otherwise you’ll be paying interest and will be in debt your entire life.
Set up recurring automatic deposits into a bank located away from your main account. This makes the money you’re saving harder to access, which gives you a higher likelihood of using it for what you want to use it for.
Only spend this money when you’ve got enough for your large purchase. Your goal here is to stay out of debt.
Start Investing for The Future
Don’t underestimate this part of the plan. Not thinking about retirement until it’s time to retire is how you end up working until you’re 70, or worse, dying having never retired.
If there’s a “most important” point of this plan, it’s this – You have to make retirement savings a non-negotiable.
Don’t let it be what is left over after everything else. Save this money first so you know without a doubt that your future is covered. This is what will help you sleep well at night.
- If you think social security will cover you, you’re wrong
- If you think you’ll win the lottery you’re wrong
- If you think you can start saving at 45 and be fine, you’re wrong
Start saving for retirement as soon as humanly possible, and I’ll say it again, make this your absolute first non-negotiable.
If you don’t have a retirement plan with your employer, open an IRA for now and invest in a simple Vanguard growth fund, and think about seeking out a position with a 401k, 403b, or some other type of plan that is immediately vested in your name.
It’s also a good idea to start a brokerage account for investing. With IRAs and 401ks, you cannot access your money until you are 59 1/2 without a penalty. If you need money earlier than this, a brokerage account will allow this.
You can also invest using an automated service like Betterment, which I love for it’s simplicity and highly recommend. Your money grows at a solid rate and is always available to you when you need it.
If I had to give a simple answer to the question, “where should I put my extra money,” Betterment would be my response.
Again, make sure anything you save for retirement is automatically deposited before you can even touch it. This is the best way to make sure your deposits happen month over month.
So… How Much Do You Need to Invest?
There are many many ways to go about figuring out how much you need to retire comfortably. Entire books have been written on the subject, but for most people getting started, they’re pretty overwhelming.
The easiest way to get started saving for retirement is to begin by allocating a set percentage of your gross income to retirement savings (income before taxes).
- If you’re starting in your 20s, this can be 10 – 12%
- If you’re in your 30s, this may need to be more like 15 – 20%
- If you’re in your 40s and don’t have anything saved, you may want to think about figuring out how to get to a 25% savings rate or more.
For example, if you make $50,000 a year and you’re trying to save 10% for retirement, you would allocate $5,000 to retirement savings each year.
That might sound like a lot, but remember, this is a non-negotiable. You should live like you’re making $45,000 with that first $5,000 going straight towards retirement.
This is, by far, the simplest way to figure out how much you need to retire, and it’s supported very widely by the financial community as a starting point.
If you want a more lavish retirement lifestyle, have larger expenses planned like world travel, etc, or have a lump sum that you know you’ll need for something like a retirement home, simply increase your percentage allocation.
Just don’t adjust down. It’s always good to have a cushion.
Your goal will be to get your retirement savings to the number that allows you to safely withdraw money year over year as income without dwindling your savings, while adjusting for inflation. In simple terms, this comes to around a 4 -5% withdraw rate per year.
If this were the case every year, you could theoretically do this forever and be pretty well off.
But markets do fluctuate. Your expenses will fluctuate, and things won’t always be the same.
To minimize your risk, think about things like:
- Having a cushion a little larger than you’ll need
- Paying off your mortgage before you stop working
- Keep your retirement age expenses as low as possible
- Guard against the possibility of financial ruin (this means plan for insurance and learn to keep your money safe).
Don’t obsess too much over this while starting out. Many people make figuring out an exact number a mental barrier. Remember that you can always adjust over time and there are more sophisticated ways to figure out the number you need.
The important thing right now is to just keep it simple and get started.
Review and Wrap-up
Ok – So there’s your plan, all laid out. If you can execute this step-by-step like I did, I can promise you that worrying about your finances will be a thing of the past.
Let’s do a quick review to help you get started.
- Optimize your spending in a few key areas and establish a cash flow surplus
- Set up auto-pay on your remaining accounts to avoid late fees and interest
- Eliminate existing short-term debt by using the quick win strategy
- Start saving for large purchases in a separate bank altogether
- Start investing for the future as a percentage of your income and non-negotiable
- Automate as much as possible to avoid impulsive behavior and make sure you hit your goals
Executing this simple plan has been a life changing experience for me, and I know it will be for you as well.
Now it’s your turn to take action. We’re all at different phases in our financial lives. Let me know in the comments what stage you are in, what questions you have, and how I can help you get your financial plan together.
Photo by Rocky Lubbers