Let’s discuss: What is one important financial lesson you learned that changed how you manage your money today?
My number 1: When establishing a budget, set up automatic deposits into savings or investment accounts every payday so savings aren’t an afterthought. Pay yourself first.
A painful lesson I narrowly escaped:
When moving, I knew I was likely to loose a bill, and made a spreadsheet of my recurring expenses. Soon after the market for energy resellers opened up and I switched to one of the new energy providers. They had issues getting started up and I noticed right away I was missing bills, and set aside the amount I expected it to be. When the catch-up bill came months later, I had the money. I had a friend that made the same provider switch and didn’t have my spreadsheet, and he was caught unawares, he’d spent the “extra” money he’d found in his accounts after doing the bills.
Even if you don’t “budget” you do need to know your recurring expenses and track missing bills.
I don’t know if I have a trigger event that made me change anything, but two things I’ve always done that gets you further faster:
- Buy vehicles and drive them a long time. I’m close to 11 years on my current car.
- Anytime you get a compensation (salary, RSU’s, bonus, etc) increase…save/invest the net gain and don’t increase your corresponding spending. Pay off debt if you have it depending on your interest rate and/or personal preference for holding debt.
That is probably the biggest thing for me. I split my paycheck when I get paid so part goes directly into a savings account and have automatic transfers set up for investments. If you don’t “see” the money, you don’t think about it being available to spend.
Always make the maximum IRS allowed contribution to 401(k) when I was an employee, and to my SEP since I became an independent contractor, and to my IRA every year, get it done early all at once, before filing tax return. I missed several years, when I first switched from that full time to contractor, which probably significantly hurt the size of my retirement funds, as the old 401(k) with no more contributions continues to significantly outgrow the SEP and IRA even with their yearly contributions.
Being crushed by debt is an experience I never wanted. It takes 2 people committed to the same goals so rather than a financial mistake it was choosing the right partner.
Eliminate cash use (as much as possible) and automate bill payment. Less risk and hassle, easier tracking.
I do this for the most part, and it has made keeping track of spending much more present. I do carry cash, but when I pull it out, it pulls from my misc. budget so it is accounted for as spending.
This triggered a thought on another practice… If you plan to retire early, dial your 401k contributions back to just get the match. Divert the contribution you would have contributed to your 401k above and beyond the match to your taxable investments account(s) instead.
You will need your taxable investment bucket to bridge your cash needs until you can tap into your retirement accounts (assuming you want to avoid tax penalties).
If retiring early, be sure to calculate the very substantial effects of future inflation across possible remaining life span, so may not want to divert TOO much or else retirement savings could fall short way into future. And consider a new “career” after early retirement, as data is well established that shows people who do not continue working - or at least stay active on a “passion project”/hobby that requires significant mental and/or physical work - are highly likely to live a much shorter less healthy less satisfying life than people who work as long as physically/mentally able. A couple decades ago I dreamed of retiring early; now responsible for elders in my family tree, I can not imagine not working regularly for the rest of my life, but I am in charge of my work now. If retirement dreams include travel, remember digital tech gives the opportunity to take work anywhere you want. My tax advisor also suggested consider making the full retirement contributions - but then distribute to Roth IRA which does not carry the same income limits as directly funding a Roth. I just turned 60, so check with your tax advisor about whether this strategy applies if you are younger than 59 and a half.
In addition to all of the good counsel shared:
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No financial professional will care as much about your financial situation and journey as you do (so you better care about it!)
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Don’t invest in any product/service you don’t completely understand (do your homework!)
Saving as much as I could early in life and investing it (for kids’ college, retirement, etc.) and not upgrading my lifestyle with each raise made all the difference over 20 years…AND that data is king. The more you know exactly how much you’re spending each month vs. saving, how much having that AC unit at 75 vs 78 costs each month and more has also allowed for wealth accumulation. Hard to make good financial decisions when you don’t know the numbers.
Please someone pin this to the top, that’s it. Numbers tell the truth!
Absolutely agree. We did the same, and the “magic of compound interest” is true. We contributed to our retirement accounts long before our child was born, opened the 529 college fund the same month she was born, and didn’t change our lifestyle significantly as our income grew. Obviously, that’s easier said than done these days.
Max out your retirement accounts yesterday. I’m kicking myself for not maxing out my 401k and opening up a Roth IRAs years too late. Now I’m trying to play catch up but each dollar I could have put in 10 years ago would be at least be double now.