There are countless financial gurus that have learned the art of mastering money—and David Bach is certainly one of them. Bach hit the nail on the head when he said this, “You can’t get rich watching and wondering. You have to take action.”
Mastering money takes consistency, control and time. If you are not 100% in it, you are bound to fail. There are many reasons why many people, like yourself, have a hard time gaining and staying in control of their money. Although few would admit it, this is generally due to the “keeping up with the Joneses” effect.
Most people know, deep down, how much they can spend, but the moment they see one of the Joneses purchasing a new car, enjoying an exciting vacation or updating their home, they feel the overwhelming need to make a similar purchase—no matter what the cost is.
They live off the idea of impulse buying, which is difficult to control since it is so easy to swipe a credit card to purchase things.
This is very similar to how, historically, the federal government does things—they spend money first and worry later regarding how they are going to pay for it. This way, both the government and you end up with the same result — way over budget and under a lot of stress about how the debt will be paid.
It is a big first step to remember that you can always find ways to save money, gain control and not get caught up in the moment—in other words master your money.
Just hearing those words causes many people to panic, but you don’t want to do that. What you want to do is change the way you think about managing money. In the next few paragraphs, you’ll realize it’s much simpler and easier to do than you’ve ever imagined.
For example, what if you are shopping at your favorite store and find a sweater that fits you perfectly? And, even better, it comes in multiple colors, and you love them all! You think to yourself, ‘This is great! I’ve been looking for a sweater like this for years. I might not be able to find it again. I’ll go ahead and get a bunch of colors now, so I don’t have to worry about it.’
You think you are being wise, as well as saving time because you’ll have this problem solved for years. But you’re not. You’re just making a common financial blunder that people make repeatedly that unnecessarily drags them down financially. What should you do? Only buy one or two—there is no need to buy three or four of the same sweater! Realistically, you will probably never wear all of the sweaters that much anyway.
Pausing and taking a step back before every purchase can save you thousands in the long run. If possible, delay the decision for a day or two and let your emotions cool off. If you make this habit a part of your normal purchasing process, you may save tens of thousands of dollars, or more, over your lifetime.
Allowing yourself to give into impulse purchases means that you will give money the power to control you. It is impossible to learn the art of mastering money if you don’t grab the reins and control your money.
I know that money can be a daunting thought, so, for one moment, let’s think of something a little more enjoyable—puppies. When you take your dog for a walk, it is easier when you are in control of the dog—when the dog is by your side and behaving. Money is the same way, it is easier to control it the closer you keep it to you. Don’t let your money turn into a runaway dog.
By letting your money turn into a runaway dog, or purchasing items impulsively, you are letting your money control you. In this instance, you will be living paycheck to paycheck, which means that you won’t be able to save money for emergencies and the future.
Life is full of surprises, and they all normally cost money. This is when someone who is frugal has higher odds of successfully mastering money than the spendthrift because the frugal person always has reserves to cover those surprises.
All of this money talk may make it seem impossible to gain control of your money, but it is possible. It just takes some small action steps and you will be on your way to successfully mastering money.
Understand Where You Are Spending Your Money
Information is powerful. The more facts you have, the stronger you’ll be and the better decisions you’ll make. That’s why one of the first steps in mastering your money is to figure out where exactly your money is going. This is when you compile all of your bank statements, credit card bills, receipts and anything else you may have that tells you what you have purchased for the last few months and put it all together.
Personally, I find this incredibly annoying and depressing to even think about doing. But the good news is that you can actually get someone else to do this for you, if absolutely necessary—just like getting someone else to file your taxes. Regardless, you need to find a way to get it done if you are going to get in charge and really master your money.
The idea is to create a list of exactly where your money is going—this can be in an Excel spreadsheet or just using paper and pen—which ever way works best for you. Once you have this list, then you are able to see exactly where you’d like to make changes.
Some categories to help get you started are supermarket, clothing, dining out, recurring expenses (electric, mortgage, car payment, insurance, etc), entertainment (live shows, movies, sports games, etc) and medical expenses. These are just general categories, but there are countless others that may include expenses that you have. The key with this is to make it your’s—don’t worry about how the Joneses are keeping track of their expenses.
Develop a Budget
After you have figured out where your money is being spent, it is time to create a budget. I know that most people groan at the word “budget” (and I was one of them!), but learning how and where to spend your money is extremely important when it comes to mastering money.
A budget is simply a type of protection. Imagine visiting the Grand Canyon. There are barriers to keep you from accidentally falling. Your budget protects you from overspending and falling into debt in the same way the barriers protect you from falling into the canyon. By using a budget, you will alleviate financial stress, which is great for both you and your bank account.
This is a great place to get you started on creating your budget.
Optimize Your Accounts
There are so many different places you can put your money—there are savings accounts, checking accounts, rewards cards, investments and so much more. Think of optimizing your accounts as a game—how can you get the most out of them?
Make it a challenge to get more out of your accounts. Do some research to decide which accounts are best for your specific needs—don’t sign up for a Chase Checking Account just because Mr. Jones did. If it is not going to do anything for you, don’t waste your time.
No matter how much you are making, you should always be putting money away in your savings account—even if you are just putting $5.00 in a month—anything is more than nothing. Before opening a savings account, as always, do your research and make sure you find the best savings account for your needs. This is just a start. Eventually you’ll find places to get better returns.
My son has a friend who has been a bartender his entire life, but he has managed to save $1 million in his savings account. This is certainly an extreme, but it proves that anyone at any income level can save money.
Start an Emergency Fund & Fund Your Retirement Account
As we have just discussed, saving money is an extremely important step in mastering money. Two of the main reasons you should want to save money are for emergencies and for the future.
Open a savings account specifically for emergencies and put between $20 and $50 or more in there every time you get paid. Emergencies are never enjoyable. But, if you have the money to cover them, you won’t feel as much pain as someone who has to use their credit card or has to scrape by to cover the expense. Fortunately, emergencies don’t happen every day and you should have time to accumulate and maintain money in that account if you are regularly contributing to it.
In order to fund your retirement, take advantage of any employer-matched opportunities, such as a 401(k) or Roth IRA. It doesn’t matter how old you are, you should be thinking about your retirement as early as possible.
In The Automatic Millionaire, David Bach writes that the single biggest investment mistake you can make is not using your retirement plan and not maxing it out—Bach is also a huge proponent of Roth IRA’s.
Take the time to sit down and plan for both emergencies and your retirement, you can thank yourself later.
Automating Your Finances Almost Guarantees Your Success
Automating your finances may seem like the most mundane part of mastering money, but once it is set up, you don’t have to think about it. This gives you more time to maintain your budget, keep track of your savings and grab dinner with friends (within budget of course).
You can automate almost any part of your finances:
- Credit card bill payments
- Insurance payments
- Mortgage payments
- Transfers from checking to savings accounts
- Electrical payments
- Phone bill payments
Think of automating your finances like Netflix automates their subscription services. Every month Netflix automatically takes their service fee out from their users’ form of payment and the user probably doesn’t even realize that the service fee is being taken out every month. Your finances have the power to work the same way—if it works for companies it can work for you, too!
Earn Extra Money & Save It
This may seem like something someone in High School would do, but this works for anyone at any age. You can earn extra money by selling some of your belongings, taking on a freelance gig or adding a second job to your resume.
No matter which way you choose to make some extra money, keep in mind that the extra money you accumulate is more likely to be saved than spent. This is because you aren’t budgeting for that money, so you shouldn’t need to use it right away.
Smart, financial people tell you it’s not what you make, it’s what you save. So, put the extra money that you make straight into a savings account and let it grow.
I came from a working class family who would spend their paycheck right away, which, in turn, made me into someone who would save all my cash so that I could pay for things outright. When I bought a $1,000 sofa at the age of 26, I purchased it in cash—without even realizing that I could have bought a less expensive sofa and put the rest of the money in the bank to let it accumulate. I thought I was really being a smart money manager when actually it was just the opposite. I needed a sofa, but I didn’t need that much of a sofa. Cash in the bank would have been a much smarter move.
Keep Track Of Your Credit Score
A credit score is something that banks came up with to give them some kind of assurance that you’ll be able to pay their loan back. Banks and other financial institutions will use this to determine how much you can borrow, how much interest you’ll be charged and how many lines of credit (number of credit cards, car loans and/or mortgages) you can have open.
The better your credit score, the better loans and credit cards you’ll be able to get. Your credit score may even be used by landlords to determine whether or not you can rent an apartment.
You don’t just have one credit score, you have several. There are three major credit agencies that banks and other financial institutions will use to measure your credit score. By law, you are able to request your credit score from one of the three agencies once every twelve months without it affecting your credit score.
When you first start out, you won’t have a credit score, which can make it difficult to get new credit. If you’ve been with a bank for a while, you may be able to get a credit card with a low limit—this will help you start to build your credit and then you can apply for larger credit cards.
You can also have someone with good credit co-sign on a credit card application, car loan application or for an apartment rental. Keep in mind that, while this will help your credit, if you miss payments, it will mess up your co-signer’s credit score.
On the other hand, when someone asks you to sign for them, the best move is to politely decline. It will save you a lot of grief later. It will be smarter to just give them some money rather than put your name as a guarantee for them.
For most credit agencies, a score around 700 is considered a good score. Be sure to always know what you score is—you never want to be ready to buy a car and find out that your credit score is too low and you can’t get a loan.
Mastering Money Is All About the Image In Your Mind and How Bad You Want to Make It Come True
If you’ve failed before at mastering money, know that the quicker you get the image in your mind of where you want to be, the quicker you will be able to master your money.
Past failures can work perfectly to your advantage because they can make you much more determined and disciplined as you move forward through the rest of your life. Everyone has failed in some way financially. But you want to be one of the smart ones who learns from those failures and uses it to your advantage to create financial successes.
In the beginning of my career, I just had the mentality that I should be working like a dog. I never sat back and thought about what type of lifestyle I was working for. Once I got past the survival stage, I took a new approach. I decided if I was going to work hard, I wanted to make sure that the work paid off and gave me the life that I wanted.
Think about it: there are countless stories of lottery winners going broke within 5 or 6 years of winning the lottery. This is because they didn’t have an image in their mind depicting what they wanted to do with the money.
Get the picture in your mind of the life you want and work towards it every day. Managing your money is a big part of making that happen.
How Do You Start?
Before you start to figure out where your money is going, be sure to surround yourself with a positive network of friends. If you are surrounding yourself with people that spend impulsively and don’t worry about how they will pay for things, you may want to rethink how close you are to them.
Now, start to compile all of your credit card bills, receipts, bank statements, etc from the last few months so that you can start mastering your money.
As you move through the steps, what are you finding is the hardest part of mastering money?