For many people, personal finance is about as appealing as a trip to the DMV or a COVID-19 nasal swab.
I was once a member of that group. Saddled with student loan debt and no idea of when I would pay it off, I avoided thinking about my finances. Was I saving any money? How much was I spending? Was I worse off than other people my age?
I didn’t have the answers to these questions, and quite frankly, I was avoiding them altogether. When it came to my own finances, I was like an ostrich with his head in the sand.
That is until one day I picked up “The Automatic Millionaire” by David Bach. To be clear, I didn’t initially set out to read it. The audacious title simply caught my eye so I figured I’d give it a read, if for no other reason to poke holes in the fantasy the book’s title was selling.
“This is so ridiculous. No one becomes a millionaire automatically,” I remember telling my girlfriend.
But soon after I began reading the book, the topic that had long been overwhelming and intimidating started to feel approachable. Before even finishing the book, I felt a shift in the way I thought about my own finances. Suddenly I was energized and ready to learn more.
I’ve learned a lot in the two years since picking up “The Automatic Millionaire,” and while that education is far from complete, I’m confident in the lessons I’ve learned and want to pass them on to others who have a similar dysfunctional relationship with their finances.
Since first reading Bach’s book, I’ve paid off my student loans, established a six-month emergency fund, and hired a financial advisor to help me get the most out of my investments. For the first time, I feel confident in my financial outlook.
Here are four critical lessons that will help you reshape your relationship with money:
Find your ‘why’
It’s a simple, but important question to ask yourself and it can make all the difference in getting your finances in order: what’s your why?
In other words, what do you want?
Chances are the answer to that question is something tangible that will require money. Sure, everybody wants happiness, but what does happiness look like to you?
Having an attainable goal in mind is vital to getting serious about your finances. Identifying a financial objective – whether it’s purchasing your first home, saving for your child’s college education, or even taking a special vacation – can jumpstart your pursuit of financial literacy.
Having a “why” is what will keep you motivated and inspired.
Understand your expenses
A realistic and actionable budget is the foundation that future success with money is laid upon.
But you can’t begin to design a practical budget without having a clear understanding of two critical components of your finances: how much you make and how much you spend.
You likely know how much you earn on an annual basis, but perhaps a more important number is how much you take home each month. This number is vital.
Now, how much do you spend? This is a far trickier question, it’s likely the one keeping you from taking your finances seriously. Keeping track of your spending requires discipline and can feel burdensome, but it’s important to understand how much money is going out each month.
Next, you’ll need to figure out what are your fixed expenses and what are your variable expenses.
Fixed expenses are expenditures that are consistent and generally the same each month. Your rent or mortgage payment is a fixed expense. Your car payment is a fixed expense. These are expenditures that you plan for every month and know how much they will be.
A variable expense, on the other hand, is more fluid. They’re often tied to lifestyle and your interests, but they can also be related to emergencies or medical care.
A successful budget can be designed only when you have a clear understanding of your fixed expenses and how much is left over for everything else.
Treat your savings like your rent
A key component of the “everything else” is the big S-word: savings.
If you’re like me and have a set annual salary, set a realistic savings goal every month and treat it like it’s a fixed expense.
For instance, if your rent is $1,200 a month, you know you need to set aside that much money at the beginning of every month. Well, now just do the same with your monthly savings.
Treat your monthly contributions to savings accounts with the same urgency and importance as you do with your rent or car payment. Think of your savings like a fixed expense; build it into your budget and then let your variable expenses fall where they may.
Automate your savings
I mentioned earlier that “The Automatic Millionaire” was the first personal finance book I read and it’s what got me motivated to take control of my money.
The author, David Bach, teaches you the importance of automating your contributions to retirement and savings accounts by setting up direct deposits. By having predetermined places for your money to immediately go when you get paid – other than your checking account – you reduce the chance that you’ll spend that money.
Each time I get paid, a percentage of my pay is routed into two savings accounts and a pair of checking accounts. I use one of the checking accounts to pay bills and the other for variable expenses and spending money.
If I had to manually move money into my savings accounts every month, I’d surely forget to do it sometimes – or worse, rationalize why I didn’t need to do it at all.
Automating your savings removes the unreliable middleman: you.
Patrick Villanova 