Over the years, I've developed a series of money habits that have served me well. I thought I'd write about them in the hopes that someone else would benefit from them.
Don't Use Credit Cards - Ever!
Studies have found that people who use credit cards spend more money than people who pay cash or use a debit card. I've found that when you use a credit card, it's very easy to lose track of how much you are spending. Before you know it, you end up getting a massive bill at the end of the month. This massive bill causes stress as you worry about how to pay it every month. Do you have enough money to cover the bill this month along with all your other bills? After a while, you end up with a situation where you don't pay off the balance every month and the balance just gets bigger and bigger. Eventually you reach a point where you can't pay it off. This leads to more stress, and in some cases, bankruptcy.
But, Rick, I have bills. I have to use the credit card to cover my expenses. No you don't. If you have to use a credit card to cover your bills, you have too many bills. Put yourself on a budget. Cut your expenses. There are always things you can eliminate to reduce your bills. Cut back on eating out. Cut back on buying expensive clothes. Cut back on buying books, CD, etc. If it isn't a necessity, then it can be eliminated. Let's face it, most stuff in life is not a necessity. You don't need that cell phone. You don't need the pay channels on your cable TV. You don't need to get a large coffee at Starbucks every morning. You need food, clothing, shelter and transportation. The rest is optional. Do you need to have that nice sports car for your 5 mile commute to work? Um, no. A cheap, decent car will do the trick. There are always options for trimming your expenses.
What should you do instead? Use cash or use a debit card. That way, when you buy something, you own it, free and clear. There's no big bill coming every month. You don't get screwed by the credit card companies that charge 30% interest (or more) annually. Plus, by using a debit card or cash, you are forced to be a lot more careful about how much you spend because the money immediately comes out of your bank account. This will cause you to spend less and hence save more.
I have no credit cards. I owe nothing to any credit card companies. Everything I own, I own (except my house). I've lived this way for over a year now with no problems. Try it. You'll like it.
Give Yourself a Paycut
I've found over the years, that I like to spend money. The problem is, I spend too much of it. With a habit like that, it's easy to get out of control and get yourself deeply in debt. The solution I found to this was to give myself a 'paycut'. What do I mean by that? What I did was open a separate bank account in a different bank. I then set up my direct deposit with my employer to deposit a certain amount of every paycheck into this separate bank account. The rest of the salary goes into my main bank account. I then pay all my bills and expenses through the main bank account and 'forget' that the other bank account exists. That money doesn't get touched. It's only for emergencies. The reason I put it in an account at a different bank is so that I won't be tempted to transfer money from that account to my main account. It forces me to pay more attention to my spending since I don't have easy access to that money. Over time you will learn to live on less. As you learn to live on lessm you can also start increasing the amount you put in this other account, so your savings will gradually increase and your expenses will gradually decrease.
Pay Only with Paper Money
Whenever you buy something, use only paper money. Pocket the change and drop it into a jar at home. After a year or so you'll have a couple hundred bucks in change. Take it to the bank and cash the change in and you have some 'free' spending money!
Invest in a Roth IRA
A Roth IRA is a relatively new form of retirement account. You can put up to $5,000 of after tax dollars into it every year. While the contributions are not tax-deductable, the earnings are! If you put $5,000 into a Roth IRA every year from age 30 to age 70, you'd have well over $1 million dollars, tax free! Plus, the earnings on a Roth IRA are much more than the total of the contributions that you put into it. This means that while you lose the short term tax advantages, in the long term you save a LOT more money. This is a fantastic deal! Do it now!
Put 15% of Your Salary in Retirement
Calculate what 15% of your yearly salary would be (salary * 0.15), subtract $5,000/year for the Roth IRA (see above) and then put the rest into a 401K plan with your employer. Do this every paycheck from your first job out of college until you retire. Combine this with your Roth IRA earnings and you will retire wealthy.
Buy a Car and Drive it To Death
Cars are a terrible investment. They always go down in value. Instead of buying a car, paying it off and then trading it in for another new car with new payments over and over again for the rest of your life, just buy a car, pay it off and drive it to death. The car you buy should be a used car about 2 years old. By buying a used car, you end up with a cheaper car and you lose less in depreciation. You can easily buy a car, pay it off, and drive it for years after that. Think about that. Several years of no car payments. If your car payment was $500/month and you didn't have any car payments for four years that's $24,000 you just saved. You could buy a car, save up that $500/year for 4 years and then buy a $24,000 car with cash! Then you take that car you just bought and drive it to death. Over the next several years that you drive that, you continue to make those $500 car payments to yourself. Then, when you are ready to buy a car, sell your old car, and add in that $500/month 'car payment' money you've been saving and buy another car cashe. You'd never have to have car payments again if you do this! How cool is that?
Pay Off Your House as Fast as You Can
When you buy a home, only get a 15 year loan that is no more than 25% of your take home pay. Then turn around and pay as much extra as you can every month. Pay off the house in less then the 15 (or at worse 30) years of the mortgage. Then continue to make 'house payments' to yourself once you get it paid off. You will have so much money in the bank you won't know what to do with it.
Over the years, I've found that these tricks lead to much less stress in your life. You never have to worry about paying the car payment, the mortgage or the credit cards ever again. Try them, you'll like them!