I'm 27, and I've been out of college for just over 6 years. Throughout that time, I've learned quite a bit about living as an adult and having a full-time job, such as "you can now eat things that aren't Taco Bell and peanut butter jelly sandwiches" (even though I still do sometimes) and "now you have tons of money, but also tons of bills and other living expenses". Fortunately, I've also learned a lot about how to manage my money, which turns out to not be so complicated at the core, but easier said than done.
On a day-to-day basis, where it's more challenging to see the long-term effects of small and seemingly inconsequential purchases you may make, you may not think that what you’re doing at this moment in life will have much of an effect on your life 30 years from now or even 5 months from now. However, it very much will, especially as you form habits that you think critically about less and less over time. The real trick is to become aware of the things that affect you long-term financially, and to gain control over them to prevent your funds from dwindling away. Eventually, after forming good habits (and breaking bad ones), you will find that it's quite easy to think about and keep track of your finances. There are quite a few things that you can do to accomplish this in a step-by-step manner.
Step 1: Put your money out of reach
The most obvious thing to acknowledge, and the toughest habit to be consistent with, is that the best way to save money is to not spend it. The reason this is so tough for people is because most people think they can avoid spending their money out of sheer willpower. That simply isn’t the case, even for very wealthy people. In fact, most wealthy people aren’t even able to directly spend the wealth that they have because it’s tied up in assets and stocks, not sitting in their bank accounts.
The best way to keep your money is to put it elsewhere as soon as you get it. If you work a salaried job, set up a percentage direct deposit for a portion of your money to go to stocks or savings separately from what goes into your checking account. This is also outside of your 401k, which you should be putting in at the very least what your employer matches and ideally above 10%.
Step 2: Keep enough in savings to cover an emergency
This is also known as “de-risking,” and it’s essential. You need to always prepare for the bad times, because there will always be bad times. Whether it’s losing your job, getting a major illness, or getting into a crash with someone who doesn’t have insurance, life has unexpected twists and turns that you need to be prepared for. Don’t think that you’re an exception or a gifted statistic. Even if nothing terrible does happen to you where you may need that money, it’s good to have the peace of mind that you have it.
Step 3: Realize that your spending is interchangeable
Now that you have your pool of “spendable” money, you can decide what to spend it on. Whether you spend $150 on a backup drive for your computer or $150 on a round of drinks for all of your friends during a night out, you’ve still spent $150. And if you do both, that’s of course $300 that you just spent. Know that whatever you choose to spend your money on, it all comes from the same pool. You can try splitting your money up into different “categories” like some banking apps do, but in reality it’s all part of a single amount of money you’ve designated for spending. Whatever you do and whatever you buy, make sure to not get into the trap of “well I spent money on this thing and feel like I didn’t get the joy I wanted out of it, so to justify that purchase I’ll spend an equal or greater amount of money on this other thing that I felt like should have originally spent that money on and will probably regret as well.” It probably seems totally backwards and foolish reading it, but somehow that mindset is more common than you may think.
Step 4: Understand the effect of money on your mental health
I wasn’t totally sure where to put this one, but knew it had to be in here. Depending on how heavily money matters are currently affecting your mental health, you may want to get this one figured out earlier on the list. Money can be a vehicle for joy, but most often it’s a source of stress. Knowing how money affects you mentally can help you to understand how you may need to change your habits around money. You may think that the easiest way to reduce stress related to money is to make more of it, but 1) if you could magically make more money I imagine you’d be doing it right now, and 2) more money means more to manage.
The true way to reduce stress related to money is to change your habits towards money, starting with your mindset and continuing with your practices. Ultimately, thinking about money too much will have many counterproductive effects and will lead you away from the goal of being effective with your money. As much as you can, automate your money. Automate your savings and investments, and keep enough in your checking account to automatically pay your bills. If all of your outgoing money is automated, you can know that whatever is left is what you have to spend.
Step 5: Live below your means
Be honest with yourself, and be humble. If you aren’t living within your means, you already know it and possibly haven’t admitted it to yourself. It’s time to fix that and to forego a few things that aren’t necessary or don't add real value to your life. To be able to have the things you truly want in life long-term, you need to say “no” to some of the things you want right now. That goes much further than money matters, but I’ll leave it there.
Step 6: Whittle at your debt
Over the years, especially if you’ve made big purchases like going to university, buying nice furniture, or getting a loan on a house or car, it’s very likely that you’ve gathered a fair amount of debt along the way. Well I’m not here to tell you to get your debt down to zero. The American economy thrives on debt, and that exemplified in the fact that the US Government is in a ton of debt. The key to debt is to make sure it isn’t hurting you more than you can manage. If you’re in over your head, and even liquidating your entire net worth wouldn’t be enough to pay for your debt, that’s a major problem. It’s also possibly a sign that you’ve been investing your money in liabilities rather than assets.
The way to be in control of your debt is to prioritize your cash flow and emergency funds so that they are able to handle the burden that your debt puts on you.
Step 7: Focus on growth
This is the final step because it's the most important and impactful in the long-term. Financial growth is about incrementally building your wealth and assets, and while progress can seem slow at first, it will have a snowball effect that becomes much larger over time. If you start investing in stocks or real estate today, you will see your money grow exponentially, especially if you use the gains produced to invest in even more stocks and assets to create parallel growth.
There's another trick to this, which is why I worded how debt should be handled so carefully. If the growth of your investments can outpace the burden of your debts, and your allocated cash flow can handle that debt burden, it's generally better to put your money into investments than it is to put it towards debt. Say you have a personal loan debt of $10,000 with a yearly interest rate of 3.5%, and could pay it off instantly with $10,000 cash. You could do that, but if you saw the opportunity to invest in an asset that would give you a growth return rate of 15% over the course of a year, how much would you be losing by paying off your entire loan instantly instead of incrementally paying it off and investing That $10,000? That's a 11.5% difference in interest, so assuming you have the overhead to pay off that loan monthly, you'd be looking at having $11,150 in your pocket at the end of the year instead of $0 for the sake of avoiding that 3.5% interest rate. That doesn't seem like much, but add another 15% compounding interest to that yearly and you see the larger picture of growth.
I hope that this gave some insight and ideas on how to move forward in managing your money. Not everyone’s situation is the same, but taking the basic steps towards gaining control of your money will lead to success both financially and in nearly every other part of life. Consistently applying these things and adopting a healthy mindset and habits towards money will see positive results tenfold over the course of your life.