Financial Planning, Millennials

Back to the Basics: Achieving Guilt-Free Spending

Most people struggle with the basics when it comes to their goals. We all know that person who says year after year they are going to get in shape. The first thing they’ll do is go out and buy every supplement known to man, but then can never get themselves to follow through on the basics of going to the gym and eating healthy. Think about some of the most successful in the world. All of them have worked hard to first master the basics in order to excel at what they do. Kobe Bryant is the perfect example of this. Trainers used to say they would get bored watching his workouts because of how much time he spent studying and perfecting the basics. When asked about this, Kobe said “Why do you think I’m the best player in the world? Because I never ever get bored with the basics.” 

In terms of personal finance, one of the most important basics to master is cash management. It’s one of the things we all know we should work at to get better, but oftentimes don’t. Let me tell you why so many people struggle with cash management. It is because people do not have a set system or method for handling their own finances. 

I want to teach you the system I use to manage my own finances and how we help our clients at RLS do the same. By using this structure for cash management I am able to save the amount I need while also spending guilt-free! I mean, who wouldn’t love to take the guilt out of spending? 

How Most People Manage Their Money 

Most people follow the pattern in the chart above. They see their paycheck hit their checking account, and the first thing they do is pay for their needs and wants. A lot of times people don’t even acknowledge that there is a difference between needs and wants. They just spend. Then, if there is money leftover after paying for needs and wants, they may make some extra payment towards any debt they have. Lastly, after all that, if there is anything left in their checking account at the end of the month, that amount is what they save. The problem is, most of the time by the time the end of the month rolls around their checking account is drained. Time and time again, this structure leads to people under-saving and not planning for the future. 

How I Manage My Finances 

The chart above shows the method I personally use to manage my finances and how I teach my clients to manage their finances. While there is no perfect cash management strategy, I have seen this method lead to great success. If you already have a method that works for you, stick with it. But, if you don’t, give this a try for 6 months to a year and see if it works well for you.  

5 Steps Toward Guilt-Free Spending:

  1. I start out by automatically sending 20% of my income to my high yield savings account at Ally. The key here is that I automate this step. Every month when I am paid, the savings are pulled right away on the same day I receive my paycheck. This helps keep me accountable and ensures I save every month. 
  2. Next, I cover my needs. My needs include  rent, utilities, groceries, ect. Every person and family’s need are going to be slightly different, so take the time to map out what your monthly expenses are. I automate any expenses I can, but many of them don’t allow for automation. 
  3. Personally, I have not taken on any debt. If you have any debt, you should next cover any extra debt payments over the minimum, especially if the debt comes with a high interest rate. 
  4. Then, I send out the portion of money that I am investing for my long term goals. Again, automate this step to ensure you get it done and do not change your monthly contributions based on what you think the market is going to do. Just keep investing. 
  5. Finally, because I took care of everything important, I spend what is left on whatever I want. These are your wants. Think about it, you have already paid yourself and planned for the future, why would you not just spend the rest and have fun. The goal here is to splurge on the things you truly value in life. If you are a vacation person, spend it on that. If you like going out to nice meals like I do, then do that! Do what makes you happy and don’t feel guilty about spending your leftovers, because you already have prepared for the future. 

If you are someone that successfully uses the first method, then keep doing it. But, if you are someone that is struggling to save, try using my method where you automate as much as you can, pay yourself first by saving and covering your needs, and then spend what’s left on what you truly value. Having a set system can go a long way. You’ve got to perfect the basics in order to live the life you want!

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