“You must acquire the habits and skills of managing a small amount of money before you can have a large amount. Remember, we are creatures of habit, and therefore the habit of managing your money is more important than the amount.”– T. Harv Eker
Before you start investing, you should have a system in place to manage your money. Investments should be made long term, short term investments are usually subject to much speculation. Because of this, it is necessary to manage your money in ways that will allow you to invest for the long term, by keeping sustainable habits.
There are many ways to make your habits around money sustainable. You can have a budget and stick to it. Or you can have a general rule of how you will allocate all of your income. Whatever system you choose that works for you, follow it, just make sure you are spending less than you earn. This budget should allow you to have some money every month to ‘splurge’ on something you want — Go somewhere fancy, do something nice for yourself, etc. You should also have money left over to save. This left over money, your net income for the month, can be used for investing and saving. It will be the money that will, in the long term, give you the freedom you want.
So, the very first step is, decide on a system to manage your money. Personally I like to do the following, recommended by T. Harv Eker on his book “Secrets of a Millionaire Mind”:
- Contribute generously to a retirement plan. A general recommendation is 10% minimum. This is money that will never be touched until retirement. If not to a retirement plan, then to an investments account with money you won’t withdraw until many years later (retirement).
- Try to keep my monthly necessities (food, rent, etc.) to about half of my paycheck (~50-60%) after taxes. This can be challenging, mostly because we want to keep a balance between what we earn and the lifestyle we have with regards to the place where we live, car we drive, etc. It’s just a matter of priorities, would I rather spend the money now and sustain the lifestyle I could have now, or spend less and improve my future lifestyle.
- Take 10% of my paycheck and use it for gifts and charity donations. ‘Give and ye shall receive.’
- Use 10% for savings. This is money for my emergency fund, and once that has been established this 10% will be nice trips, vacations, etc.
- Take 10% to splurge once a month. Go to a spa, stay at a hotel, buy something nice that I don’t “need” but really want.
This is just an example that may or may not work for you depending on your circumstance. What is important, however, is to know that you can make adjustments to spend LESS than what you earn. The difference between what you earn and spend is your net income and increases your net worth.
One simple step everyone can take to start managing their finances and tracking their expenses is the following: sign up for an account at Mint.com. Here are the reasons why:
- This amazing FREE online software keeps track of the money that comes into and out of your accounts, and automatically categorizes them.
- Gives you tips on how to save money by using certain credit cards, opening saving accounts/CDs, etc.
- It also has nice features that will allow you to set up a budget pretty easily and automatically tracks it.
- Allow you to set up your goals, and helps you track the progress towards achieving it.
- Finally, and very important, it lets you easily track your Net Worth (or your Assets minus your debt.)
So now, before you start thinking on how to invest, make money of investments, etc., setup your Mint account, setup your budget, and come up with a reliable plan to start increasing your savings. Then you will be able to start investing without worrying about changes in your investments day to day since you won’t depend on that money to live each day.