Money is the number one stressor for Americans. Is this true for you? Money can’t buy you happiness, but having a secure financial situation will reduce your stress and give you options. That said, it’s surprisingly hard to plan for your future self. We just aren’t wired that way! Whether you want to reach FI in five years or 40 years, now is always the best time to get started. Read more to find out 5 hacks to jump start your way to FI!
1. Tap into your competitive spirit
You may be naturally competitive. Were you always striving to be top of your class, the best athlete on the team, the one that got into the ivy league university?
If this resonates with you, then I would suggest harnessing that inner fire to crush your personal finances. One way to determine where you fall on the bell curve is using the Millionaire Next Door Calculation for Net Worth. You’ll get a raw look at how you’ve managed the money you made in your life.
Basically, it works like this:
Expected Net Worth = (Age * Taxable Income)/10 – inherited wealth
For example, a 35-year-old with an earned income of $90,000 plus $5,000 investment income, would have an expected net worth of $332,500 ($95,000 X 35 divided by 10). If her net worth is actually lower than this, she is considered an under accumulator of wealth (UAW); if higher, then she is a prodigious accumulator of wealth (PAW).
So, where do you sit? Have you been wise with your money and are a PAW or on your way to becoming one? Not quite? Compete with yourself to see just how much money you can save!
2. Embrace the nerd in you
For some, spreadsheets are a love language. They want to see all the data and in every which way, slicing and dicing to their hearts’ content. If that’s you, then good news! There is ample data to organize and track, and projections to explore. Here’s where you can start.
Build your montage of spreadsheets. The main bits to track are your income and expenses (income statement), and your assets and liabilities (balance sheet). You can use tools online to easily gather the data (I like Mint for this as you can import all of your accounts) and find template spreadsheets. I suggest getting some ideas from others’ templates and then building your own. After all, if it’s your creation you’re more apt to actually use it!
Once you have gathered the last few months of data (6 months to a year is best) you can start to run the numbers. What are your average monthly expenses? How much is “left over” at the end of each month and where is that money going? If this piques your interest but you still don’t know where to start, let’s set up an FI coaching session and I’ll walk you through it in detail!
3. Don’t let go of those hard-won dollars
Studies show that the pain of losing something is twice that of the pleasure of gaining something. We can leverage this tendency to set up our future selves for a stable financial life by considering the power of compounding interest. This is especially important for those bigger expenses, like rent, a car, or an expensive vacation. What is the true cost of your decision?
One of my biggest financial regrets is buying a BMW in my early twenties. It was used, but still $10,000 more than another reasonable alternative, a VW Golf. I fell for that sleek black color, heated leather seats, and the allure of luxury to the tune of $20,000. A short two years laters, I ended up selling the BMW for $12,000 after tiring of the stress of owning a nice car. I was always worried about it getting “damaged” (ever parked in the back of the lot to avoid other careless drivers dinging your doors?) and loathed the expensive repairs and maintenance.
Now, had I bought the Golf instead and invested the $10,000 difference what would that money be today, 12 years later? Well, at 8% growth it would now be $25,000 and in another 10 years it’s $54,000. A handy rule of thumb to do this math is that when invested, on average, your money will double every 10 years. Do the math upfront for bigger purchases and decide if it’s worth it! That BMW sure wasn’t for me.
4. Put it on the chopping block
We all want to be happy. And sometimes we believe that buying stuff will get us there. Maybe it does temporarily give you a dopamine hit that leaves you feeling great. But I’ll bet that moment passes pretty quickly and you’re soon looking for what’s next.
I’ve certainly been there. For me it was impulsively buying a cheap shirt from H&M. I rode feelings of elation at the incredible deal all the way to the counter… and then soon after getting home and hanging my new prize alongside my other shirts in my overstuffed closet, I became deflated and wondered why I just spent hard earned money on low-quality stuff that I didn’t really need. Never mind the ethical implications of fast fashion.
One way to address this impulsivity is to spend time thinking about the money you have spent that has truly made your life better. Is it a trip to a new city? That gym membership where you kicked your butt into shape? Drinks out on Friday night with friends? Are there things in your life where you can happily say, “Oh, I would gladly pay double for that if that’s what it costs!” because it’s just that important to you?
Spend your money there and ruthlessly cut the rest. You’ll be happier and wealthier for it.
5. Keep your eye on the prize
Having a singular focus can be an incredibly powerful accelerant. Imagine if you were to make every decision based on the answer to “does this bring me closer to my FI number?” If you were to truly adhere to that, I bet you would shorten your journey to FI by years, if not decades.
While that’s a pretty extreme method, it’s a useful thought experiment. And though you may take the choice that won’t bring you closer to FI, running decisions through this lens gives you more awareness and improves your decision-making on the whole. Which brings us to…
The common denominator
All of these approaches will build awareness around your financial life. And awareness is almost always the first step towards positive change! Which of these resonates with your personality? Have you found other hacks to be successful in jump starting your way to FI? Let us know in the comments below!
