Is personal finance complicated or simple? In one sense, the “personal” aspect means the topic can be as complex as your life. But the basics can be boiled down to a nine-word sentence:
You may have noticed that this summary contains three distinct components:
- Spending Less (Frugality)
- Earning More (Income Generation)
- Investing the Difference (Investing)
The first two are a complementary pair. You can create a surplus to invest either by spending less, earning more, or both.
Let’s take a closer look at each component:
Spend Less (Frugality)
Frugality is important because controlling your spending reminds you there is more to life than consumerism. It forces you to be realistic and respect the boundaries and constraints of your current situation. It also protects you from risk, since a cheaper lifestyle is easier to fund.
One of the most important reasons to build your frugality muscles is to keep the goalposts from shifting. If your spending always rises to match your income level, you’ll never get ahead financially, but you’ll also never get ahead psychologically. You’ll feel just as stuck making and spending $60,000 a year as you did making and spending $50,000 a year.
There are two areas to focus on when it comes to frugality: Quick wins and big wins. If your frugality strategy is difficult, it better save a bunch of money. If it doesn’t save a bunch of money, it better be quick and easy. Otherwise its probably best to just focus on making more money.
The best way to land quick wins is to take an inventory of all the bills you regularly pay (phone, internet, car insurance, etc.) and brainstorm how to make them cheaper.
This could be by switching to a competitor, downgrading, negotiating, or even cancelling the service altogether.
You won’t get rich with this strategy alone, but it can be done in a weekend. You only need to shave $84 a month off your bills to save $1,000 a year.
Related Post: Quick Wins The Simple Way: The Fast Path to Frugality
Big wins involve more planning and effort, but make a bigger difference. In general, big wins involve efforts to keep your biggest expenses under control. For most people their biggest expenses are:
Of course, I have a family of five and live in a very inexpensive house, so food is by far my biggest expense, but I’m pretty unusual.
Housing and transportation mostly involve making a few key decisions up front, and then you don’t really have to think about them for a while. This makes it critical to be smart with these decisions. Living below your means when it comes to housing and transportation is the key to effortlessly keeping your budget under control.
Food is the expense that keeps coming up that you have the most opportunities to save. It’s important to remember that the savings in this arena usually seem small, but they can add up over time because you eat a lot.
Think about this: you probably eat close to 1,000 meals a year. If you lower the average cost of a meal by $1, you’ll save $1,000 over the course of a year. By the way, that’s per person in your family. If you have five people in your family and on average you pay $6 per person per meal, you can save $5,000 ($1,000 x 5) by lowering the average cost of a meal from $6 to $5 per person.
Main Post: Frugality The Simple Way
Earn More (Income Generation)
Learning how to make more money is an important life skill. Growing your income gives you confidence in your ability to provide value. As you grow your income, you’ll find that you pick up useful skills along the way that makes it easier to keep scaling your income in the future.
After you’ve mastered the art of big wins and quick wins in the realm of frugality, it’s time to switch gears and focus on growing your income.
The reason is cutting costs is subject to diminishing returns and has a natural cap, but income generation can lead to exponential gains and has essentially unlimited potential. Think about it this way: you can only cut your spending by 100%, but you can grow it by 100%, 200%, or even 10,000% (or more). It may not be easy to grow your income 100%, but I guarantee it’s easier than cutting your spending by 100%.
So how do you do it?
The Traditional Route
Show up and work hard every day. Climb the corporate ladder. Apply for promotions inside and outside your company. You’ve heard all this before.
Personally, I think the best and most chronically underused strategy is to just set up a meeting with your boss and ask what it would take to deserve a raise or promotion. Bonus points if you come prepared with ideas and proposals for how you can improve the department. Make sure you send a summary email afterwards as a record of the conversation. Also remember to schedule a follow-up where you can discuss progress.
The Non-Traditional Route
We live in a strange time. Kids don’t want to be doctors and lawyers and professionals anymore, they want to be YouTubers and influencers and internet famous.
Everyone is talking about their “side hustle” or making “passive income” or escaping their day job.
Most people will never actually do any of these things, but they are available to those that dare to try. The internet has forever altered the way we connect and has made it easier and cheaper than ever to create a source of income for yourself from scratch.
I currently have six streams of income from various online ventures such as writing on Medium and posting videos on YouTube. I’m still getting paid for content that I created back in 2016.
Even if content creation isn’t your thing, there are ways to use the internet to find customers and clients for the products and services that you can offer.
After all, the only way to make money is selling.
Main Post: Earning More The Simple Way
Invest the Difference (Investing)
Investing is one of those things that everyone knows they should be doing, but too many aren’t. Usually it’s either because they’re scared of screwing up and losing a bunch of money or they just don’t know how to get started.
The good news is that there’s a simple, powerful, passive approach that should work for most people.
Here it is in one sentence:
During your wealth accumulation phase, invest in low-cost stock market index funds, starting with tax-advantaged accounts.
Let’s break that down piece-by-piece:
Wealth Accumulation Phase
I agree with JL Collins, the author of The Simple Path to Wealth who says that your investing career should be divided into a wealth accumulation phase (when you’re investing) and a wealth preservation stage (when you’re living off your investments and trying to make them last).
The wealth preservation stage is where things can get a bit more complicated, but the wealth accumulation phase can be surprisingly simple.
They say there’s no such thing as a free lunch and that’s certainly true in investing. You want to invest with a company and in a fund that doesn’t charge any fees beyond the fund’s expense ratio. You also want to look for an expense ratio below .05%. The best way to hit this target is to invest in index funds, which we will cover below.
Related Post: The Tyranny of Compounding Costs
There are lots of places you can invest your money:
- Real estate
- Starting a business
- Your own education
- Physical assets like gold
- Digital currencies like bitcoin or etherium
All of these can be great options, but a several of them (real estate, starting a business, education) aren’t passive. Gold and digital currencies have a certain appeal, but their value is entirely speculative.
When you own stock, you own a part of a real business that provides real value to society and earns real income. Historically, stocks have provided outstanding returns over a very long period of time. That doesn’t mean they are guaranteed to be the best investment, but they are a solid investment that most people can fit into their investment strategy.
How can you diversify your investment of stocks without loads of time to research individual stocks (and loads of money to buy up shares)?
The answer is that you can invest in a mutual fund. This is a fund where a bunch of investors put their money in and share mutual ownership of the fund itself. The mutual fund uses the total of all the money invested to buy a variety of stocks.
An index fund is a special kind of mutual fund that tracks an index like the S&P 500 (the 500 largest companies in the US). Personally, I like total stock market index funds which seek to own shares of every publicly traded company in the United States.
Here are the ticker symbols of a few actual total stock market index funds from low-cost providors:
- VTSAX — Vanguard total stock market index fund
- SWTSX — Schwab Total Stock Market Index Fund
- FZROX — Fidelity ZERO Total Market Index Fund
Retirement accounts like a 401(k) (which can be provided by your employer) or an IRA (which you can open at a brokerage like Fidelity or Vanguard) are a great way to save money on taxes. They can let your investments grow tax-free. The traditional versions of these accounts can also save you money on taxes while you put them in. The “Roth” versions of these accounts protect your investments from taxation when you withdraw them.
These accounts have annual limits, but if you want to invest more, you can open a regular brokerage account.
The Perfect Plan
Here’s the thing about the perfect investing plan: it doesn’t exist. None of us know the future and we can’t guarantee that our strategy will have created the best outcome in hindsight. The important thing with investing is to come up with a solid plan that is likely to lead to a good outcome and stick to it.
Main Post: Investing The Simple Way
Where Should You Begin?
While income generation has the potential to be more powerful over the long run, frugality is faster in practice. It takes a while to see the fruits of your money-making endeavors, but you can start saving money today with quick wins.
The best way to do it is to list out all the bills that you pay and get to work looking for savings. It’s a small step, but every journey has to start somewhere.
Get to work on your money and you’ll eventually reach a place where your money works for you.