When it comes to managing your personal finances, Mark Twain may have said it best, “The secret to getting ahead, is getting started.”
But getting started can be intimidating, overwhelming even. It seems so complicated. Where do you begin, and how do you keep track of it all?
Good news. It’s really not that hard. The core secrets to financial success are simplicity and discipline. Establish clear goals, create some easy-to-follow systems and habits to achieve your objectives and stick with the plan year in and year out until you hit the mark.
Budgeting, a cornerstone of financial management, is a great example. Budgets are too often viewed as a jail cell; something that limits our freedom by constantly reminding us about limits and making us feel guilty. Worse, monitoring expenses and regularly updating a budget spreadsheet every time we buy a pack of gum seems like a grinding chore.
But, in fact, a well-done budget is actually the key to the prison of financial worry. If you know how you are actually spending your money, you can make informed decisions (and changes) to ensure it is being used efficiently to meet your needs, and advance your long-term goals. Once you get a good look at your spending you will be stunned at how much money you spend in certain categories – coffee, cable TV, even groceries. Armed with this info, you can decide which expenditures to eliminate and where you should work harder to get more bang for your buck.
(Maybe you shouldn’t be doing all your shopping at Whole Foods.)
Armed with this information, you can lay out a monthly plan for saving and spending that better serves your purposes. That’s called a budget.
If the idea of creating and maintaining a detailed budget makes you hyperventilate, the TSL system is a great way to dip your toe in the water. It couldn’t be easier. You simply live by the following allocation of your gross income.
- Taxes (30%) – Maddening, but true. You must give up almost one-third of your gross income to cover federal and state income taxes and innumerable other government levies we pay, including property taxes. That sound of money swirling down the drain should prompt you to look into how you might be able to lower your tax bite.
- Savings (20%) – This is the minimum you should be saving for retirement and other long-term goals, such as buying a house. Ideally, much of this money will be in your employer-sponsored 401k, where it will grow tax-free until you retire. If you’ve maxed out your 401k and still haven’t reached 20% of your gross income, open a private brokerage account and keep socking away the dough.
- Life (50%) – The above leaves you with one-half your gross income to pay for everything you need and want in life, from food and shelter to car repairs to dinner out to clothes to childcare to Starbucks to that pack of gum. If you make $80,000, you have $40,000 to meet all those needs/wants. Putting an exact number on how much you truly have available to spend this year can really make you re-think some of your spending.
The TSL system is obviously a 50,000-feet approach to budgeting. While I view it as a simple starter system, I have financial planning clients who stay at this level and never implement more detailed budgets. These people are typically financially secure. They have significant income and live well within their means. There is lots of cushion in their “Living” category.
Most Americans, I believe, should take the time and effort to create a more detailed monthly budget. It need not be complicated. You don’t have to spend 45 minutes breaking down your sales receipts and making 20 different budget entries. Start by tracking the big stuff – housing, utilities, food, entertainment, clothes, car costs, et cetera. You can add categories over time. Your budget will become more useful and powerful as you invest more effort.
Yes, the budgeting process does take some time and work. But the payoff in terms of reduced stress and more efficient use of your money is well worth it.
As former Navy SEAL and business consultant Jocko Willenk preaches, “Discipline equals freedom.” Truer words were never spoken when it comes to managing your money.
Disclosure: This information is provided to you as a resource for informational purposes only. It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal. This information is not intended to, and should not, form a primary basis for any investment decision that you may make.
Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.