A couple of weeks ago, Adam Chudy (from adamchudy.com) reached out to me to let me know about a project he’s working on called the Index Card Challenge. Essentially, he reached out to a lot of personal finance bloggers and asked them to distill their best financial advice down so that it fit on an index card.
It’s a really cool idea and I was happy to be included in the project. You can read more about it here.
The picture for this post was my submission. There’s no groundbreaking revelations here, but different people emphasize different aspects of personal finance. Here is my advice for each line of the card (warning: this post is pretty long).
Time > Money
This is the driving force behind financial independence for a lot of people. You can always trade time for money, but there is nothing you can trade for more time. That being said, you can purchase your future time just like your employer does. If you have all the money you need for the rest of your life, you no longer have to trade your time away. People who are striving for FI are buying back their time one dollar at a time.
Flexibility. Being your own boss. Focusing on your hobbies. These are all different phrasings of the concept that you have control over how you spend your time. It’s the ultimate status symbol.
It’s easy to focus on the dollars and cents when you are trying to hit financial independence. But, really, it’s all about freeing up your time, not the number of zeroes in your bank account.
Track Your Money and Spend Less Than You Earn
Spend less than you earn. This is the single most fundamental piece of financial advice there is. If you are spending more than you earn, you are not getting ahead financially. And how do you know if you are spending more or less than you earn? You track your spending of course!
It’s a well-documented phenomenon that the things you focus on are the things that change in your life. If you want to make financial progress, you should be keeping track of your income and spending. The gap between income and spending is called your savings rate, and it is a HUGE deal when it comes to how quickly you will reach your financial goals.
If you aren’t tracking your spending you should try it. I think you will be surprised at what you spend your money on every month. We use the wonderful (and FREE) service Personal Capital to track our income and spending, which makes it super easy.
The indomitable Mr. Money Mustache has an excellent post that gives the relationship between savings rate and how long it will take you to retire. It’s worth a read if you are new to the idea of financial independence or early retirement.
Invest in Low-Cost Index Funds (and be aggressive if you’re under fifty)
A lot of people are intimidated by investing. They want to know what the BEST strategy is. In short, the best strategy is just to invest in index funds. An index fund is a low-fee mutual fund that is managed by a computer rather than an active human manager. The reason a computer can run the fund is that it is designed to mimic the returns of the broader index.
If you don’t know much about investing, you can think of an index fund as just a way to invest in ALL of the stock market at once. You won’t beat the returns of the market, but you shouldn’t get less than the market either.
And since 82% of mutual funds in the past decade have failed to beat the market, you might as well just take the market returns for a low cost. In sports, this is similar to the idea of taking what the defense gives you, rather than trying for a huge play and ending up with a disaster.
Also, it’s very well-documented that stocks will give you the greatest return if you’re investing long term. So if you’re younger than 50, you should have a big portion of your investment in stocks, rather than more conservative investments like bonds or cash.
For more information about stocks and index funds, I highly recommend Jim Collins’ stock series.
Max Out Your Tax-Advantaged Accounts
A staggeringly low percentage of people take advantage of their companies 401(k) plans. A lot of people don’t even participate enough to get their employer match! That is terrible news. If you are lucky enough to work for a company that offers an employer match in your 401(k) (or 403(b) for you non-profit folks) you should absolutely begin contributing enough to get the match. Like, right now go to HR’s website and figure out what forms you need to fill out and take care of it tomorrow at work.
Now that that’s out of the way, if you have room in your budget, you should definitely max out your retirement accounts. Many people just don’t understand exactly how beneficial they are, which is a shame. This post is already long enough without getting into the math, but this post from the MadFIentist and my post here both do a nice job of illustrating the benefits.
This goes for IRAs (and 457 accounts) too! It’s rare that Uncle Sam cuts us a break on taxes, so you’ve got to jump on these opportunities when you get them!
Automate Your Savings
A lot of people underestimate the power of making your savings automatic. If you never see the money hit your account I promise you won’t miss it! Almost every bank out there makes it really easy to set up an automatic recurring transfer from your checking to savings and/or an investment account. Do yourself a favor and sign up immediately.
Plenty of people say they’ll remember to do it every month, and some actually do remember. However, you are way better off making it automatic. You can thank me later.
Plan For Emergencies
They happen to everyone. It’s pretty well established that human beings tend to think in terms of the best case scenario. That’s why your friends are always running late. They calculate how long it will take them to get where they’re going in perfect traffic conditions. So when the conditions inevitably aren’t ideal, they don’t have a cushion built in to their plans.
It’s the same concept with finance. No one plans on getting in a car wreck, or having an appendectomy, or their house flooding, but these exact things happen to people every. single. day. You can take a lot of the stress out of those emergencies by having a cash cushion to deal with these types of things as they come up.
Most experts recommend 3-6 months of living expenses. However, to the average joe that might seem like an impossible task. If you don’t already have an emergency fund try to save up $1000, then just let it sit there. Only use it if you encounter a genuine emergency.
Debt Is A Last Resort, Not The Go-To Option
Waaaaaay too many people just accept that debt is a part of life. Sure, if you want to own a house before you turn 40 you will probably have to take on some debt. But literally every other common purchase can (and should) be made with cash. Don’t finance a new car. Save up a couple of thousand bucks and buy a reliable used vehicle. Wanting to “look cool” is not a good reason to go thousands of dollars into debt.
Also, everyone these days takes out massive amounts of student loans. How about working while you attend school? Earning scholarships? Going to a cheaper school? A little bit of student debt is OK, but you’ve got to try to limit it where you can.
In short, you should be racking your brain for ways to NOT go into debt. Never just accept that debt is the answer. Always look for another way to meet your needs.
Improve Yourself: The Money You Can Earn Is Limitless
I’m a big fan of cutting your expenses as a means of getting ahead but, let’s be honest, it’s a lot easier to get ahead if you are making $60,000 rather than $30,000. There is always room to improve your skillset. Become bilingual, learn to code, figure out how to do that hard thing at work that no one likes doing, get a new certification in your field.
The more you learn the more valuable you become. You should never stop learning. Never stop improving yourself. Not only is it personally satisfying, but you’ll find that your opportunities and income will naturally increase.
Forget The Joneses. Spend Money On What YOU Care About
Learn to let go of the image that people have for you and embrace the image you have for yourself. It’s OK not to want a big house. It’s OK if you don’t want to travel. It’s OK if you don’t care that much about new cars. Unless you are obscenely rich, you cannot have everything. That means you need to take stock of what makes you personally happy and just focus on those things.
Let your neighbors buy a new truck while you save for retirement. Let your family eat out every night of the week while enjoy bottles of your favorite wine at home with friends. Let your friends take expensive vacations while you splurge on the complete works of your favorite author.
The point isn’t to save every dime possible. The point is to spend your money where you’ll get the most bang for your buck. If you want international vacations, fine. Just skip the new car. If you want the new car, fine. Just skip all the going out to eat.
You can’t have everything, so decide what’s really important. Get it. Forget the rest.
Take Care Of Your Health
No one else will do it for you. You may think this isn’t really a financial issue, but it most definitely is. Americans spend an obscene amount of money on healthcare for preventable diseases every year. It’s crazy. Exercise and eating right makes you feel good, prolongs your life, and saves you money!!!
Don’t be lazy. Everyone knows how to be healthy. Just do it!
Strive For Balance
You only get one life. Don’t forget to enjoy it. Money is only a tool. It’s the means, not the end. Don’t miss the forest for the trees, and a million other colloquial sayings.
The point here is that money won’t make you happy. Only a full and balanced life can do that. Money will help, but it won’t solve all your problems.
While you travel along your financial path don’t forget to carefully tend the other aspects of your life. Friendship. Family. Your sense of self.
Thus ends my manifesto. Go forth and prosper!