A Super Basic Approach to Reaching Your 2019 Personal Finance Goals
I love talking about money so much. We all have money. We all need money. We all want more financial peace of mind. None of us feel like we really have a handle on our money 100% of the time. We spend more time in school learning about photosynthesis than we do learning about the time value of money, compound interest and basic financial wellness. It’s such a broken system:
From the beginning it’s a private topic, parents don’t talk to kids about money so kids grow up in a household where money is an off-limits topic
Then the education system overlooks financial literacy as a critical part of our growth and learning
Then we’re asked to sign away tens or even hundreds of thousands of dollars in student loans as teenagers with no concept of how loans or interest works (it’s criminal what the government and the education system does to the personal finances of those who they’re tasked with educating)
Then we date or even marry people without talking about their income, debt, savings, investments, financial mindset and goals
Then we keep our personal financial details a secret from our friends and family and sometimes even spouses…and our kids. And the cycle starts all over again.
Okay, rant over.
I’ve been talking to my friends over the past few weeks about their personal financial goals for 2019. We’re very open and honest with each other about our financial situations, goals, wins and losses. I’m really proud of my friend group for their openness, honesty and how we support and uplift each other. You should see the text chains when someone gets a raise or promotion, hits a net worth goal or pays off a credit card. We’re such champions and cheerleaders for each other. Why? Because money matters. It affects your peace of mind, anxiety, sleep, where you live, what you eat, what you wear, the healthcare you receive…. It matters.
A few consistent goals that have come up in our conversations:
1) Pay off debt
2) Save more
3) Start investing or invest more
The funny thing about personal finances is, unless you own businesses or have a lot of other fancy things going on, sorting out your finances is actually pretty simple. So here’s a NON financial expert’s advice for achieving these three goals.
Pay Off Debt: Loan payments are easily the biggest financial stressor for everyone I know. Whether it’s student loans or high interest credit card loans, it feels scary and never-ending and like you’ll never get out of it. First of all, it’s time to take back the power and energy you’ve given that debt. It’s just numbers on paper. It’s not your heart. It’s not your soul. It’s not your kindness. Here’s your plan for paying off debt in 2019.
Get real about it: do your homework and make a list of every loan you owe and the interest rate you’re paying on it. I’m shocked how often people tell me they have loans and when my first questions is about the interest they’re paying on it, they can’t answer. The interest matters significantly. So make a list of your debts and the interest rates for each (don’t include car payments or mortgages, we consider those regular monthly expenses, not debts). Now, order them from top to bottom with the highest interest one listed at the top and the lowest interest at the bottom. Notice I didn’t say highest AMOUNT at the top. We’re going by interest rate here.
Now see if you can lower the interest rates on any of the loans. First call their customer service number and just ask. You’d be surprised how that works. Then look at options like opening a 0% interest card and transferring the balance. Or take out a loan at a lower percentage interest and move your higher interest debt to that. Your goal is to pay the lowest interest possible because interest payments are just your punishment for using money you didn’t already have. You want to lessen the punishment as much as possible.
Now figure out the minimum monthly payments for each loan and write those next to each one
So now you know the minimum you need to budget each month go stay on top of your loans, so you have a starting point. But we both know you’ll never get out of debt with this plan of paying minimums. So here’s what you do next.
Look just at that top loan. The one with the highest interest rate. How much ABOVE your budget of minimum payments can you throw towards that one? $100, $200, $500/month? Whatever it is, commit to that. So you’ll pay the minimum on all other loans and you’ll pay as much as you possibly can towards that highest interest loan.
As soon as that one’s paid off, you’ll move to the next highest interest loan and pay what you were spending on that previously highest interest loan towards it and pay that one off.
Basically think of this like a reverse snowball. You just pay the minimums on the lower interest loans and throw big money at the highest interest loan until you’re just left with one loan, the lowest interest one, and paying it off is a breeze.
It’s all about paying down the highest interest in order of highest to lowest and keeping the TOTAL monthly pay down amount the same until they’re all paid off. So if you start with 4 loans (3 credit cards and 1 student loan), and you start by paying the minimums on 3 of them and you pay as much as you can on the highest interest one and your total monthly loan payments is $800. Then as you get down to 3 loans, 2 loans, 1 loan, you’re still paying $800/mo. Get it? You’ll pay them down so much faster this way.
It’s a big pill to swallow, but you got yourself into this debt, you need to get yourself out. Take a part time job, get a raise, babysit on the side, do whatever you have to do to pay it down. This is the fastest, truest plan to get there. If you get financial windfalls, throw them at the debt. Remember keeping the money in the bank will make you 0-1% interest, but paying down 18% interest is a smarter financial choice than keeping the money in the bank. Sucks to spend money on something that doesn’t feel like you’re getting anything in return, but you can do it.
Oh, and during all of this, you don’t go into more debt. Sounds obvious, but seriously. Stop spending more than you make. Want more? Make more. It’s a big, bold world out there and it’s never been easier to make more money and reach for your goals. Go do it.
Save More: Once you’ve paid off your debt (goal #1 because you need to stop paying interest on money), you can start saving more. I spent so many years doing this dumb thing where I had my checking and savings in the same account so I just moved money back and forth every week depending on how much was in my checking account. I could never figure out why my savings never got bigger, but it was because I was adding money to it, then freaking out and moving that money back into checking. Ridiculous. So 2 years ago, I moved my savings to Capital One 360 online savings accounts. I love these for a few reasons:
They aren’t in the same bank as my checking, so if I do want to move money from savings to checking, it takes about 3-4 days for the transfer to happen. This immediately stopped me from moving the money back and forth.
I can set up various online savings accounts within Capital One 360 and they each have their own purpose and goals. I have one called “Freedom and Options” and that’s my big savings account. I call it Freedom and Options because money means Freedom to me. Money is options. That’s the one I want for a big life moment like a big move or launching a business. I have a number in mind that I want that account to reach and as soon as it does, I’ll stop funding it. I don’t want to have too much in savings because it earns minimal interest, but I want this money accessible and low risk for shorter term access. My rule, if I want the money within 5 years, it’s in savings. More than 5 years, it goes into investments. I also have a savings account set up in Capital One 360 called “Travel Goals” and I put money each week into that. That’s not for quick weekend trips, but more for a big trip opportunity. I don’t want to have to turn down an African Safari because I don’t have the money for it. Travel is a core value so I intentionally save money for it. Capital One 360 savings accounts earn a bit of interest, which is nice too.
The KEY to savings is automation. You can set up an Automatic Savings Plan for each savings account within Capital One 360 to transfer a certain amount each week or month (or twice a month, whatever) from your checking to the savings accounts. I transfer a pretty aggressive amount weekly to my Freedom and Options account because I have big goals with that one. I transfer a smaller amount weekly to my Travel Goals account. Last year when I was saving for my breast reduction, I had an account for that and on surgery day it felt so good to pay for that in full. The magic of automatically funding your savings accounts weekly is you set it and forget it and magically, you have these beautiful financial babies growing big and strong and you have peace of mind knowing you’re setting yourself up for the things you value like buying a home, traveling, buying a new car, etc.
Start Investing or Invest More: Most people I know are scared of investing. They don’t know where to start. It feels like gambling - “playing” the stock market. They think they need a degree in finance to do it. They heard the market is going down so they think it’s a bad time to get in on the game (WRONG!). Again, I’m not at all a financial expert but here’s my advice:
401K: if you work for a company that offers a 401K plan, then get in on it. A 401K is money taken out of your paycheck and invested in the stock market, so it makes you a ton of money over time thanks to the magic of compound interest. The money is taken out before you get your check so you can’t touch it. If you contribute to your 401K at work, you are officially an investor! Many employers offer a 401K match as a benefit. This is FREE MONEY and you need to take it all, my loves. So for instance, my company will match 4% of my income if I contribute 6% to my 401K. So you bet I’ll never contribute less than 6%. And I actually do 10%. I started contributing 10% of my income to retirement in my late 20’s so it’s a number I’m used to and I just work around it. There is a government cap each year on how much you can contribute to your 401K, so find out that number. For instance in NYC I think it’s $18,500/year. So I contribute that much. It sounds like a lot of money and it is, but again I’ve done this for so long that I’m used to it and I have so much peace of mind knowing I’ll have millions in retirement. I’m going to be so hot and rich as an old lady. Just you wait.
If you don’t have a 401K and you want to invest (or if you’ve maxed out your 401K and you want to invest more), then I really like Betterment. There’s no investing minimum, you choose your level of risk (do more risk if you’re younger and a bit less risk if you’re older). I set it up for automatic contributions like my savings accounts so it just grows and grows. I don’t even “feel” it in my daily income or life and over the past 18 months since setting it up, my Betterment account is already up to $14K. Just sitting there making money for me like a boss. The market earns about 6-8% on average over time and with the magic of compound interest, a small amount invested will become a very large amount one day.
Oh and that thing about the market about to go down, that’s a GOOD thing for you. Think of it this way, stock prices are about to go on sale. Scoop them up when they’re cheap and you’ll get to sell them years from now when they’re much more expensive. During this downturn, I’m upping my investments. I want to buy more things on sale. I have the gift of time for the prices to rebound and you do, too.
Why do this? Why not just get all your money and spend your money today? Tomorrow isn’t promised. You’re absolutely right. There is a chance you could die early. But there’s a better chance that you’ll live a long, long life. If you’re reading this you’re smart, you care about your health and wellness, you make good life choices and the odds are you’ll live a gorgeous, long life. Invest now or work until you die. It’s totally your choice. When I picture myself at 70 (hot and rich, remember?), I don’t picture myself working. I see myself on a boat, eating pizza in Italy, sipping Chardonnay in my backyard with my husband and my Goldendoodles. I’m investing now so I can stop working one day and still live a good life. I plan on living a gorgeous, long life. So I invest now.
There you go. I hope you got one or more nuggets from this. For more advice, I really love Ramit Sethi and his Book, “I’ll Teach You to be Rich.”
You can do this. I’m your #1 fan and champion. Let me know how it goes. xx