How to manage your money yourself, like a fucking grownup: Part 3
Figure out what your most important money goals are
Just landed here? You might want to start with part 1. Part 2 is here.
In this section, you’re going to:
- Follow a simple decision tree to work out what money game you’re playing
- Figure out what your focus goal amount is, and how many months away you are from achieving it right now
Money management feels hard because it feels like there are a million competing priorities. Having just one focus helps. Also, remember what we said in part 1 about how money is actually pretty simple? There are only two things you can do to have more money: keep more of it, and make it grow faster. We’ll get to keeping more in part 5, but first let’s talk about interest rates and growing your money more cleverly.
Let’s say you’ve got some debt, but you also have a 2 year old and you want to save for them to go to private school one day, and you’d also like to take a holiday next year to see the awesome mud palaces in Timbuktu. Oh, and you’d also quite like to spend your retirement travelling the world with your eight parakeets, not starving to death in a poorhouse. What should you save for first? Well, it turns out that if you have consumer debt, the best thing to do is probably always to get rid of your debt first, no matter what your other priorities are.
As an illustration, here is how fast your debt could be growing (and remember, this is COMPOUNDED like a terrifying snowball of death):
- Credit card: 19%
- Store loan (e.g. Edgars cards): 21%
- Overdraft: 23%
- Short-term microloan: 89%
(Home loans / mortgages and car loans we’ll talk about later).
Versus how much interest you can normally expect on savings and investments:
- Savings: 6%
- Well-performing share portfolio: 12%
(thanks, Georgina Armstrong, for these averages)
This means that figuring out where your spare money should go is actually pretty simple, with the one MAJOR DISCLAIMER #1 SUPER IMPORTANTO at the bottom. Follow this decision tree to figure out what your major priority should be:
Question 1 and 2: Is your Spend Ratio over 100%, or do you have any consumer debt?
Consumer debt means credit card debt (beyond the 55 days where you don’t pay interest), store loans, overdrafts, payday loans, and (if you’re being really honest with yourself), car loans and study loans. You can exclude your home loan, if you have one.
Or, is your Spend Ratio (that number we worked out in the worksheet in part 1) more than 100%?
If the answer to either of these questions is yes, you’re playing the Get the Fuck Out of Debt game. Normally, you got here because you’re losing the Spend Less than You Earn game, but the outcome is the same. Get the Fuck Out of Debt is a crappy game, because all your spare money is going towards paying for stuff you’ve already bought in the past, not stuff that’s going to make life better for Future You. It traps you. It snowballs astonishingly quickly. It reduces your options. Consider it an emergency. Kill it with fire. Make it your priority to beat this game as quickly as you can.
But don’t feel bad about it. Almost everyone in the world starts off playing this game. The whole financial services industry (and advertising industry) is set up to trap you in debt forever. Just get out of it so the fun stuff can start, k?
How you win this game: cut down your expenses as much as you can and pay off your debt, fast, until the debt balances on all of your debt accounts reaches a nice round sexy zero. Do not just pay off the minimum amounts on your debts. Don’t just pay the amount they tell you is “due”. Pay in as much as you possibly can. Get rid of that shit. It’s dragging you down.
Question 3: Do you have an emergency fund?
If you’re sure you’re not playing the Get the Fuck Out of Debt game (yay!), your next question is: do you have at least 6 months of living expenses in east-to-access savings? If the answer is no, you’re playing the Build a Fuck Off Fund game (credit to Paulette Perhach for this idea).
This is a fun game, because it’s the moment you stop being a slave to your monthly salary. This game builds you a safety net and gives you options. Some people say you need 12 months worth of expenses in here. That’s rad, but 6 is a good place to start. Other people say you should skip this game and just move onto the Freedom game. I’ve tried that and ended up back in debt because emergencies happen and geysers burst and cars break down, so I do not recommend skipping this game.
How you win this game: you cut your expenses and save until you have a savings account that has 6 x your monthly expenses in it, that you never use to buy stuff out of unless it’s an actual capital E emergency. Like something that means you absolutely can’t get to work in the morning or if your home is flooded. Very cheap plane tickets to Brazil does not constitute an emergency.
Question 4: Have you already won the first two games?
If you’re playing neither of those two games, congratulations! You’re playing the Freedom game. This is the best game. It’s the game we all want to be playing. It’s the game about getting closer to the day you never have to work for money again.
Even if you never actually reach this target, every bit of extra savings you have here is freedom to choose to do anything: take a sabbatical, start a business, travel the world, go get that PhD in Interpretive Dance, build the world’s greatest Lego sculpture… whatever your dream is. You win this game just by playing.
How you win this game: calculate how much you need in your Freedom Fund. Look at the number on the bottom-right of that table: that’s your goal. That number will look impossibly huge. That’s okay — reach for the stars and all that. Even if you never reach this number, every extra bit you save is more freedom. Cut your expenses. Downgrade your lifestyle, if you can. When your net worth has reached that number, you’ve won this game.
There are other games past this game, like the Leave a Legacy or the Become a Wealthy Motherfucker game, but if you’re playing them, this blog post has nothing to teach you. Also, I hate you. Also, please send me money.
MAJOR DISCLAIMER #1 SUPER IMPORTANTO:
You’re always playing the Don’t Be Old and Poor game. You’re playing this game from the very first paycheque you get until your very last one. Even if you’re in debt, the very first thing you need to do is set up some kind of tax-optimised retirement fund and figure out how much you need to put into it every month. No matter what other game you’re playing, you should not neglect this game. Being old and poor is not fun.
So, go back to that worksheet we made in part 2. On the last tab (“Money Goals”) I’ve done some rough calculations for you about what your targets might be. But it’s worth doing a bit more work to get a target number that you really understand, and that means something to you. Work through these calculators (or one of the many others available online) to replace those targets with your own.
- Emergency fund calculator
- Freedom number calculator
- Retirement calculator
Your target for debt is, of course, zero.
Okay, I said we’d talk about home loans and car loans.
If you’ve got a home loan (or loans), or car loans, in this mix, you’ll need to decide whether you’re going to treat them as part of your debt goal or as regular expenses (i.e. part of your spending). This is a slightly more complex decision and is a bit more personal, because it depends on how much interest you’re paying on those debts versus how much you could be earning in an investment. This calculator can help you to decide.
Your home itself is an investment, but it’s hard to predict how fast its value is going to grow, or how much it would cost you to buy a new house to live in if you did sell it, so you might want to just leave that out of your calculations for now. I don’t know. I don’t own a house, so I’ve got no advice for you here.
If you decide to treat these as part of your debt goal, add them to your target on the worksheet (and include your payments into them as “keep” money when you get to section 5). If not, leave them off the target, and just consider it spending.
Okay!
Goal targets set. You’re halfway there. Let’s start actually moving some money around. Are you excited? I’m excited.
