Whether you’ve set your sights on launching a business, taking a trip, or buying a house, you can’t achieve it without having enough cash. Even if your dream is to spend more time with family, what will free up that time is having the financial security to not need to spend those precious hours working. If you’ve set your financial resolutions (learn how to make ones that stick here), use some of these 10 quick, easy ways to build your wealth so you can achieve them this year.
1. Seal The Leaks
Take a look at your monthly and annual recurring expenses: gym membership, phone, cable, Internet, Netflix and Spotify subscription, Amazon Prime, bank fees, credit card annual fee, car insurance, homeowner’s/renter’s insurance, etc. Which of these do you no longer use much? If you’ve got an $8/month Netflix streaming subscription but have only actually watched movies on it five times in the last year, then you’ve just paid $96 to watch five movies — about $19 per film. Cut the subscription. Take a look at your phone usage: Are you paying for 5,000 texts a month but using only 500? Drop to a lower plan. Get some new quotes for your insurance to see if you can get the same coverage for a lower price. If you realize you’re paying $120 a year just to have a checking account, get yourself a free one. (Learn what to look for in a bank account here, and how to switch banks here.) Scrutinize every monthly expense this way — against usage and value — and cut or lower any that you’re not using or that aren’t providing you your money’s worth. For more ideas on how to cut costs, get inspiration from Mr. Money Mustache, who retired before age 30, and these roommates, who spent a full year buying nothing.
2. Get A Budget You Can Stick To
If you find it hard to stay on track with your budget, keep it simple. Start with your take-home pay, which should already be reduced by the amount of your retirement contributions to your 401(k) or other employer-sponsored account (more on that below). Subtract housing, transportation, utilities and groceries (force yourself to stick to a figure you know you can hit every month). Ideally, they should total no more than 50% of your monthly take-home. Then take at least 20% of that amount to allocate for debt, savings and IRA retirement contributions. This is your financial goals money. With the remaining amount (which should be no more than 30% of your monthly paycheck), divide that by 4.33 to get your weekly allowance. This amount is what you have to spend on everything else: clothing, dining out, entertainment, classes, household supplies, toiletries, books, etc. Take it out in cash weekly, spend it down until it’s gone and then get creative until the next week. Or, if you’d like to use credit or debit to track your expenses, create a spreadsheet that states your weekly allowance and subtracts your expenses as you enter them. Such a spreadsheet will allow you to plan ahead: when you schedule an event, mark down the projected cost so that you know, when you enter the week, you have that much less to work with. I used just this kind of spreadsheet to pay down debt and build enough savings to quit my full-time job, and I continue to use it to stay within my budget. Here’s a more detailed explanation of how to set up a budget.
3. Make A Plan To Get Out Of Debt
Whether you’ve got 10 mad grad school debt or a $10,000 balance on your credit cards, don’t feel overwhelmed. As long as you stick to a budget that keeps you from going further in the red and follow a plan to pay down your debt, all it will take is time until you’ve paid it off. To get started now, make a list of all your debts by interest rate, ordered highest to lowest, plus their minimum monthly payments. From now on, take your financial goals money and apportion it toward the debt, paying minimums on all your debt except the highest interest-rate one, which gets the rest of the money. After you pay that debt off, move your second-highest interest-rate debt into the top spot and repeat.
4. Earn More Money
To get out of debt faster, make more money any way you can. Come up with a plan for requesting a raise, and then ensure your success by avoiding these mistakes. If you’re a freelancer, here’s how to increase rates with your clients. Also, pick up a side job and shovel the extra income toward your debt: Pick up freelance work, start generating passive income, declutter and sell your discards such as electronics or designer items, do odd jobs on Craigslist, TaskRabbit or Fiverr, look into mystery shopping, babysit, tutor, and do whatever else you can to earn an extra buck. Then — and this is the crucial last step — take what you earn and ship it off to your creditors.
5. Automate Your Savings
If you don’t have debt, take that financial goals chunk of your take-home pay, and put it toward savings and retirement. (Depending on your debt vs. savings vs. retirement savings and timeline, you may also want to work toward two or all three goals simultaneously.) After subtracting the amount to contribute to retirement (more below), decide how much you can allot to your savings goals. The calculation will be based partly on how much those items cost, your timeline, and however much you can spare of the 20%, whether it’s the full amount or just a portion of it.
6. Remind Yourself What You’re Saving For
Sometimes, delayed gratification is a drag. To stave off spontaneous purchases not aligned with your goals, put visual reminders of what you’re saving for in places where you’ll see them: a photo of Patagonia on your desk, a shot of your dream house on your fridge, the logo of your new venture inside your wallet. Whatever you’re dreaming of, get an irresistible image of it, and put it in places you frequently see so you don’t forget the reason for all these budget rules.
7. If You Can, Max Out Your Contributions
Your company may offer you free money in the form of a matching 401(k) contribution. It’s usually some kind of match, such as, 3% of your salary for every 6% you contribute to your 401(k), or, if you’re lucky, it’s 1:1 matching. Whatever the deal is, make sure to get that money. If it’s a 1:1 match for 5% of your salary, then you’ll sock away 10% of your salary but only have to shell out 5%. This will take money out of your paycheck, resulting in the take-home pay figure we’ve been using above. If you fall within the income limits for a Roth IRA (see “Roth IRA phase-outs”), allocate some portion of your financial goals money to max out your Roth contribution for the year — $5,500 for 2015, which works out to $105.77 a week or $458.33 a month. For those 50 and older, contributions can total $6,500 a year, or $125 a week or $541.67 a month. If you have room in your budget for further contributions to your 401(k), then max that out, and if you still have additional funds, put it in a taxable account.
If you earn too much for a Roth IRA, then prioritize maxing out the 401(k) first before maxing out your traditional IRA, and put any remaining funds for retirement in a taxable account.
8. Set Up A Regular Transfer And Purchase Of Investments
To automate your savings, set up weekly, biweekly or monthly transfers into your IRA (and, if you have one, taxable account), and then also be sure to set up a regular purchase of the investments you’ve chosen for your account so your transfers don’t sit in cash but get invested right away. As for how to invest, follow three main rules: keep your costs low, diversify with investments like index funds, exchange-traded funds or target-date funds, and be as tax-efficient as possible. (Find out here the 10 tricks that will help you outperform most investors.)
If you’re looking for ideas on how to invest your money, check out the 7Twelve Portfolio, the offerings at so-called “robo-advisors” like Betterment, Wealthfront and FutureAdvisor, and the Horizon portfolios offered by Motif Investing.
9. Set Up A Foolproof System For Paying Your Bills
As you’re building your wealth and working toward your goals, you’ll want to maintain good credit so that you can use your savings to accomplish a big goal, like buying a house. Since an important part of your credit score is your history of on-time vs. late payments, make sure you don’t miss any due dates. Set up automatic bill pay in your checking account, or use a service like Mint Bills (formerly Check) to remind you of upcoming bills, and also put the due dates for your recurring bills in your calendar so you have multiple reminders to get your payment in on time.
10. Schedule Regular Check-Ins To Get Your Free Credit Report
To protect against the horror of identity theft, check your credit score often. The three major credit bureaus are each required to offer consumers one free credit report a year, all of which can be obtained at AnnualCreditReport.com. To keep tabs on your identity as often as possible without having to pay, pull one from each of the credit agencies every four months — i.e. TransUnion in January, Experian in May, and Equifax in September. (You can also get free credit scores on Credit Karma.)
Building wealth often comes down to fairly mundane habits like the ones listed above. If you can follow through on all the above tips for the rest of the year, come December, you’ll be looking at a higher net worth figure, appreciating your progress toward your goals or savoring the joy of achieving them.