We have discussed and will continue to discuss the role of your personality and what matters to you and how that relates to your financial decisions.  Know thyself!  This is extremely important if you want to create real change in your financial life.

We have discussed all the recommendations on what you need to do to have a positive financial future. In addition to knowing yourself, you need a starting point – your Current Assessment. Then you need to develop a budget and create goals, preferably which extend beyond yourself. We have to acknowledge that willpower is a muscle and if you are not used to exercising it, you’re going to have some setbacks as you initially try to implement your budget and goals.

We have also discussed the Social Contract, which starts by you telling your friends and family your goals, but what we are really asking for is their support and to help hold us accountable.  We will dive deeper into this theory when we tackle addiction and its impact on our financial health, but once you have created a budget and goals and exercised your will power function, what next?

Before we can begin saving, we need to pay off our debts.  Everything except a home and car payment needs to be paid off.  So if you have credit card debt like most Americans, this is where the money goes first.  Unfortunately, for many people, this is going to be the biggest test of willpower because you are going to be forced to deal with the repercussion of your prior decisions, all those purchases you made on your credit cards.  However, when you get them eliminated, the burden that you will feel come off your shoulders will be incredible and hopefully the lesson will prevent you from going down the path of credit card debt in the future. 

The reason we are paying off credit cards first is that we don’t want to be fooling ourselves into believing we are saving and investing when we still owe.  When I met my wife she had about $5,000 in student loan debt and about $20,000 in savings.  She told me she liked the feeling of having the savings available despite knowing that the student loan debt was costing her interest each year.  I have a saying, “There is no interest on zero”.  It has a few meanings, like, if you have no investments you can’t make any money off them, but it also applies to debt.  If you owe, and are paying high interest rates, don’t fool yourself into believing you can put the same amount money into investments, and they will pay you more.  In some rare instances that may be true, but your investment is subject to risk and may not create a return and could lose value but that interest expense you are paying is guaranteed.  So pay off your credit cards first and then you can get onto saving and investing.

How do we create a system that allows us to begin saving and investing?

If you’re in it for the long term --which I hope you are-- then as part of your goals, the Reason, which is hopefully bigger than yourself always needs to be in front of you.  As we have discussed, spending is easy, staying disciplined is more difficult, and more rewarding, but can take us while to get in the habit and not treat any extra money as money that needs to be spent immediately.  We live in a society of instant gratification and the muscle of delayed gratification, just like the muscle of willpower, has atrophied and needs to be exercised a lot to bring it back to life.  I like to think of saving as a Bill.  Just like your phone and utility bill, this is a bill from your future self, who knows that as you get older you won’t have as much energy and won’t want to have to work as much as you can today.  I think of it as paying that bill today for an easier life, one that doesn’t require as much work (call it retirement if you like, I like to think of it as giving me options to do what I’m interested in) in the future.  So I’m paying myself.  Paying myself is easier to get behind and stay motivated about then just “saving”, which doesn’t really have the same impact on my brain.  Paying myself help keeps me content against the pull of instant gratification.

When you reach the place where you are meeting your goals and your credit cards are paid off and you have your reason to keep you motivated and you have your social contract to continue to get help from your community and you now you have the extra money in your bank account, now what do you do?

1.     Keep it Simple – you don’t need 10 different accounts or need to make saving and investing complicated.  Keeping it simple will help you stay the course.

2.     Move the money out immediately.  Remember, it’s a bill to your future self, so you set up an auto withdraw same as you would pay your other bills.

3.     If you have the option, increase your contribution into your company retirement plan.  This is the easiest option to get your money put away.

4.     If you don’t have the company retirement plan option, or you have maxed out your 401k contribution, open an account with Vanguard.  There are plenty of others, but Vanguard is the leader in lowering fee costs, which is how your investments get eaten.  They are the masters of the low cost index funds, and that’s what you want.

5.     Keep investing simple – do what Warren Buffet recommends, just buy low cost index funds each month.

If you are increasing your retirement plan contribution this is usually just a form to your HR/Accounting office.  If you are creating a Vanguard account and you are eligible for an IRA, fund that type of account first.  It will grow tax free and the increase in the balance without taxes paid may help keep you motivated to fund it.  Setup the amount you are adding to be withdrawn automatically on the same day(s) you get paid.  Setup the Vanguard account to automatically purchase low cost index funds with the money you are having automatically moved into that account.

That’s it.  Setup is easy.  Now what?

Remember that Reason?  Now that reason needs to include why you are not going to touch this money.  The reason you will say NO to yourself and others when you want to buy something, or others ask you for a loan.  Set boundaries to help you with NO, backed up by your Reason.  Remember, we can rationalize anything, and this is what keeps us broke.

Next, understand what keeps us from saving and continue working on boundaries you need based on your personality.  If you’ve gone through these steps, you have confronted willpower, and you will need to keep exercising your willpower muscle.  We can get thrown off our goals by not knowing ourselves and setting boundaries.  For example, if you an impulse buyer, give yourself a boundary of “thinking about it” for at least one day before you buy something that costs more than $50.  This will give you time to think about beyond the potential endorphin rush that we get from immediate acquisition.

One of the more difficult things we need to get past is our desire to give to ourselves when we exercise willpower.  I saved, exercised my willpower muscle, but now I want to reward myself by spending because, I Deserve It!  This is like eating a lot after exercising, it kills the benefit.  Remember, it is your future self that will get the reward.  You’re also not a child or a dog, you don’t need a reward every time you do the right thing when you’re the beneficiary at the end.  But maybe you are not the beneficiary, maybe you have gone through all of this to save for your child’s education or your family home.  Its human nature to want to reward yourself but do it with something simple so you don’t give away more of your hard earned money.  Give yourself a walk in the woods or a movie, something simple that is within your budget.

Perhaps the greatest pitfall that keeps people broke even as they earn more money is upgrading your lifestyle with every raise.  Now I’ve been there, from broke college student to broke young professional starting out making barely more than minimum wage and struggling to just pay the bills.  And those first few years, when the raises are small and the difference is dramatic to lifestyle, are very difficult not to spend the increases in pay.  But its easy to just keep spending.  There is spending that really does make life better, such as buying better food, which is an investment in your health, both physical and mental, and the opportunity to get to a better neighborhood.  But more spending is a trap that many people fall into.  There are plenty of individuals and families making $100,000 per year and broke, living paycheck to paycheck.  So set a line, a lifestyle that you agree is plenty good enough and that you know living beyond is just excess.  Status purchases will ruin you.  For most people, not owing and having savings is difficult to get to.  Everyone is pretending to be able to afford their status purchases.  I’d rather have less status things, no debt, and savings.  I sleep better at night.

My original number for monthly spending was $5,000.  Once I started making more than that amount, I started putting almost all of it into savings.  I had peers who were buying new cars, fancier houses, luxurious vacations and big wardrobes.  It’s easy to spend more, all the time.  Unless you are a billionaire, everyone can decide to spend more on housing and cars.  You can always get a fancier house, redecorate it at huge expense, hire a chef, fly private or buy a jet or a yacht, drive a Rolls Royce and have a driver, eat at Michelin starred restaurants every night, etc.

The key to growing your wealth is to keep more of what you make, which is why we named the podcast Keep Yours.  We have discussed this many times and it will continue to be a theme. They, the many, many They, who are always to trying to sell you to try and get you to give up your money today for stuff.  And it is hard to say no, which is why the muscles of willpower and discipline are very important.

The last thing I want to leave you with is to remember your Reason one more time.  For all the times when you want to go and take that money from your future self before the real time has come.  There will come times when its easy to tap into your savings and investments because of life’s costs.  Need new tires for the car, take from future self, it is easier than further restricting today’s spending.  Most of us are terrible at assessing long term costs so the easiest thing to do is drain what you have saved.  So remember your reason and remember to talk to your future self who will be saying, “Don’t go taking my money!”.  The same goes for your retirement accounts, don’t touch them until you retire.  Fall back on your Reason and tell yourself and everyone else no, those funds are spoken for!

Don’t forget to listen to the podcast, too!