Money makes the world go round, so the saying goes. Indeed, you can’t do much without money. I know this better than most.
After three years living in Australia and New Zealand and traveling in Southeast Asia, I’d gone from a position of financial strength to one of weakness. When I was living in Barcelona, teaching English, my savings were whittled down to almost nothing. Even though I built my finances back up after working back in the UK for a few months, that soon went when I moved again.
My situation got so bad I only had a few pounds to my name in my bank account at one point. Before I left home in 2012 to go to Australia, I had more than five figures in the bank. Five years later, despite working for the majority of that time, my finances had turned to dust.
Why am I telling you this? Well, because this was all avoidable. It doesn’t take a rocket scientist to work out that I had no idea how to manage my finances. My money went into my bank account and stayed there — no savings account, no investments in the stock market. Just straight into the account, and that was it.
Had I taken the time to understand how to manage my finances earlier, I wouldn’t have had to see the painfully low figures staring back at me from the screen and wonder where all my money had gone.
Money can be a taboo subject, but it doesn’t have to be. If you shy away from becoming financially literate, you’ll end up in the situation I found myself in, panicking about how little money you have.
These tips won’t turn you into Warren Buffett, but they will set you on the right path and help you put the building blocks of a sound financial strategy in place.
Save more and spend less
This is the tip that’s the easiest to understand. The more you save, the more money you’ll have. Whereas, the more you spend, the less money you’ll have in reserve.
I’m not advocating you count every single penny you spend, just that you make a general decision to save more than you spend. If you do this, you’ll find the path to financial freedom becomes much easier.
Earn more money
Another super simple tip to understand. If you want to secure your financial freedom, the more money you earn, the easier this will be. There are many ways you can do this. Work in a well-paying job, work two jobs or set up a side hustle.
All of us have the opportunity to earn more; most of us just don’t realize it. If you feel like you’re not earning enough, look at ways of rectifying this.
Maybe you can talk to your manager at work and negotiate a pay rise. Look at job adverts for a better-paid job. Or set up a hustle on the side. The less money you earn today, the more you’ll need to earn more in the future to be financially secure.
If you can start earning more now, that means you’ll have more time, later on, to enjoy your life however you see fit.
Limit your liabilities
A liability is anything that costs you money over the long-term. It’s the opposite of an asset which increases in value over time. Typical liabilities are cars, gadgets such as phones and clothes.
Again, I’m not saying that you can’t buy any of this or that you need to shop at the thrift store. Rather I’m advocating that when you do buy one of these products, you’re conscious of what you’re doing.
Buy clothes that will last for years, instead of ones that reflect the current fashion trends. Buy a car second-hand, instead of a brand new one, which loses value as soon as you drive it out of the showroom.
Limiting your liabilities is all about being financially savvy. By doing this, you free up more of your money to invest that will pay off over the long-term.
Diversify, diversify, diversify
The financial world is volatile. Go and watch The Big Short, which depicts the shitstorm that was the 2008 financial crash, to see what I mean.
A lot of people lost their savings in the crash because they didn’t diversify. If you stick all your money in one barrel, you better hope it doesn’t get blown up.
Instead, make sure you spread it out liberally. Keep some money in your ordinary account for day-to-day purchases. Set up a savings account, put some money into a pension and invest in the stock market.
Diversification is essential to protect you from Black Swan events and ensure your finances don’t collapse like a house of cards when the next crisis hits.
Splurge on what you love, cut back on what you don’t
This is a lesson I learned from reading Ramit Sethi’s brilliant book, I Will Teach You To Be Rich. The concept is simple to understand, you cut back your spending on things you don’t enjoy, so you can spend more on the things you do.
When it comes to saving money, the temptation can be to save every last penny you can. Don’t bother. It’s not worth the hassle.
Once you start doing this, you’ll slowly start to spiral further and further until you’re questioning every purchase you make. I found myself in this state when I was short of money in Barcelona.
It’s not a place you want to be. Be careful with your money, but you don’t need to count every single penny.
Live below your means
This is the best way to save money and increase your finances. If you’re earning $5,000 a month and spending $5,000 a month, you’re going to be in all kinds of trouble.
The same is true if you don’t earn that much, but you spend a lot. My friend has an expression for this, ‘champagne lifestyle, lemonade wage.’ Whatever you do, don’t spend more than you earn; that’s a hole you’ll struggle to get yourself out of.
If you make good money, it can be tempting to splash the cash. But do you need to drop $100 on fancy champagne at the bar? Or would you rather rein in your spending a bit and save that money for something more worthwhile down the line?
You can’t put a price on your health, but if you live in a country without universal healthcare, you’ll find it does come with one. In the UK, we have a fantastic healthcare system that is free at the point of use.
If I get ill and require hospital treatment, I know that I’m not coming out with a huge bill. If you live in a country like the United States and don’t have health insurance, you might not be so lucky.
I’m not going to get into the pros and cons of healthcare systems, but I’m grateful I don’t have to worry about my health destroying my finances.
That said, I still make an effort to eat the right foods and exercise a lot.
Health is wealth, as they say. The longer you stay healthy, the better quality of life you can lead.
After all, what’s the point in building up a pot of money if you’re not healthy enough to make use of it?
Set up automatic savings
This is another tip I learned from Ramit’s book, and it’s one that will save you a lot of time and effort. Instead of manually paying some of your monthly wages into a savings account, you can set up an automatic payment every month.
Automating the process stops you from forgetting to do it yourself and frees up your time for more important matters. You need to take an active interest in your finances, but it pays to be smart.
This is a simple trick that will allow your savings to grow in the background while you crack on with your life.
Take advantage of government schemes
Here in the UK, the government offers something called a LISA, short for lifetime individual savings account. The maximum you can pay in a year is £4,000, which doesn’t sound like much.
But, the government will give you a bonus of £1,000 if you do so. This may not be the greatest financial scheme in the world, but if the government is offering you free money, you should take it.
Check if your country offers a similar scheme. I know the USA has the Roth 401, but if the government is offering you free money, you should take them up on it.
The sooner you start, the more you’ll earn in the long-run, especially when interest kicks in as the years go by.
Start tracking your net worth
I wish I had done this earlier. I didn’t start tracking my net worth until midway through last year. Before that, I had no idea how much all my assets were worth.
This meant I was unable to get a true grasp on my financial position. It was harder to set goals and plan for the future. Once I rectified this, it became clearer where I was, and I could start working towards goals with clarity.
It may not seem like much, even a little vain, but tracking your net worth is essential if you want to take your finances seriously. I mean, if you don’t know how much you’re worth, how can you say you’re in control of your finances?
Have multiple income streams
A side hustle is a brilliant way to increase your income that anyone can do. My travel blog earned money while I was working in an office job, which supplemented my income.
It could be anything, selling homemade jewellery online, a blog, or even writing here on Medium. The more money you have coming in from different sources, the better. This is going to become more critical in the coming years.
Automation and technological advances are going to change the economy in several ways. Jobs are no longer as secure as they were thirty years ago.
If you’re relying on one source of income, you’re at a higher risk than someone who has multiple streams. Diversification is the name of the game in the coming years.
Pay yourself first
Another tip that I learned from Ramit’s book is to pay yourself first. The premise is that you set aside money for savings and investments before you pay your bills.
Because you almost always know how much your bills will be month to month, you can take a portion of your pay out of the equation.
If you’re automating your finances, this will be taken care of, as the money will be diverted as soon as it enters your account.
Have a safety net
The world is crazy, and things can and do go wrong. A pillar of financial strategy must be to have some money set aside for a rainy day.
Set aside three months’ worth of money to use if you find yourself in an emergency. If the worst-case scenario does happen, you’ll thank yourself for putting this measure in place.
Investing is arguably the best way to grow your wealth. It’s how Warren Buffett accumulated his wealth. When you invest, you’re betting on the future fortunes of a company. If they go up in value, so does the value of your shares.
As the stock markets trend upwards over the long-term, you’re losing out if you’re not investing. The money compounds over time with interest, so what was a $1,000 investment could turn into a $10,000 or even $50,000 in the future.
I was put off investing because I thought it was hard. I had no idea what to do and no idea how to get started. With the advent of apps such as Robin Hood, it’s never been easier to start investing.
Commodities such as gold are stores of value that persist for years to come. It’s highly unlikely that gold will never stop being valuable. The same applies to silver and platinum. You could also chuck Bitcoin into that camp, although it’s more volatile than the others.
Simply put, commodities are a safe place to store your money as their long-term value is almost guaranteed. Make sure commodities are part of your long-term investing strategy.
Understand the power of compound interest
Compound interest is a concept many of us don’t fully understand. It’s tempting to look at the interest you receive on your savings or the gains in your portfolio and think it’s not what it’s cracked up to be.
That outlook couldn’t be more wrong!
Compound interest is very, very powerful. Like Jedi Knight powerful! If you invested $1,000 a month from the age of 25 to 35 and then stopped saving altogether, with a 7% interest on that investment account, you would end up with $1,444,969 by the time you were 65!
The earlier you start, the more money you will gain in interest over time. Think of the curves we have seen for the coronavirus this year, where the cases shoot up out of nowhere.
This is exponentiality in action. Compound interest works the same way, you might not think you’re getting much back, but as the year’s progress, those investments will start to pay off — big time.
Don’t try and time the market
One of the biggest mistakes many newbies, and seasoned, investors make is trying to time the market. I understand the temptation, but you’re never going to predict volatile financial markets. Unless you’re the dude from The Big Short who loves to drum to death metal, don’t bother.
Invest in index funds and companies you trust and leave it at that.
Never stop learning
Not only should you invest your money, but you should invest in yourself. Learning doesn’t stop the minute you school; it’s a lifelong pursuit.
The world is volatile. 2020 has shown us how volatile it can be. With technological advancements and change common, those who don’t invest in their own education will be left behind.
Read as much as you can, take courses that will further your career. Some of this might cost a lot of money, but this is an investment in your future.
This is perhaps the most important tip on the list. Building financial security takes time. Unless you win the lottery, you’re not going to see an influx of money all at once.
It’s a long game. Be patient. Keep investing and saving every month. Save more than you spend, but don’t be afraid to splurge on the things that bring you joy.
Patience is necessary when it comes to your finances. But if you’re patient and stick with your plan, the reward will be great!