7 Steps to Balance Life and Money
Balancing It All
Keep it simple. Money matters can be stressful, but they don't have to be. It really comes down to one simple equation to figure out how well you're doing at building wealth. You may be surprised but for the average person, your wealth has very little to do with your return and everything to do with how much you are investing. Making good money decisions is actually quite simple in theory, but hard in practice.
Step 1: Get Out Of Debt
If you have debt outside of a mortgage, get rid of it. That should be your number 1 priority. Match your employers 401k money to get that free money if you have the option. Beyond that, your focus should be to get out of debt. If you're struggling to figure out how, here is a post I wrote about how to eliminate debt ASAP.
Step 2: Invest What You Used to Pay Towards Debt
Now that you're out of debt, invest what you were paying in debt. What to invest in can feel overwhelming but it is actually pretty easy. People like to make a big deal out of what they invest in, but frankly now days there are so many robo-advisors that do a great job of managing your money in basic low cost index funds that it's hard to go wrong. Companies like Wealthfront, Wealthsimple, and Betterment make it easier than ever to invest. If you're looking to get rich quick, yeah that's not going to be simple. None of these companies are going to find you the next Netflix or Amazon breakout stock, but they'll invest your money responsibly and do it in a fairly cheap and easy to understand way.
Investing in the market is not a get rich scheme, it's a way to preserve wealth, not build it. Focus on building wealth outside of the market and you'll be way better off than gambling on a random company that happens to shoot through the roof. It's okay to hedge your bets a little and put some money into a couple high risk stocks, but I never put more than 10% in a given company, especially not a high risk/high reward stock.
Step 3: Focus On Your Savings Rate More Than Your Returns
Your savings rate is the fuel to your financial engine. People tend to make finances hard. It can be hard to change your behavior, but finance is easy. It's just math. Your success depends on the percent you can save vs what you make and invest the difference. Talk about simple.
How do you calculate your savings? Take your gross savings each month including retirement, after tax savings, HSA, Kids college funds, and any other savings and divide that by your gross income each month. That is your profit margin as a household or individual. Shoot for the highest profit margin possible. Most business would like to see 20%, but ideally you can work your way up to 50% or more. It might sound crazy, but building wealth has more to do with time and discipline than it does anything else.
Step 4: Define Success
Success in finance and in life is your ability to allocate your resources to what matters most. Whether it’s a decision of what you put into your body or what you’ll do with each dollar that flows into your bank account. You are allocating resources. You get to choose what you do with your time.
"Net worth and a high self worth aren’t gained by wasting your resources, you have to invest in things that benefit you in the long term - in the short term."
These are the activities that will increase your overall happiness.
Step 5: Focus On Growth - And We're Not Just Talking About Money
The end goal isn’t a pile of money, it's living the life of your dreams. It's living a life with adventure. So the real focus of all this discussion is to plan your life in a way that money isn’t something that hinders your happiness, it helps you achieve it. You have the freedom to do what you want when you want, but you don’t have to have complete financial independence to achieve it. Arguably, that is not the right goal. You’re chasing a unicorn that even if you do find it, you’ll be disappointed because life is about the journey, not the destination. The real reward is growth, challenges, and improving your life and living with intention. Growth brings happiness. Your finances are one thing you can work towards growing, but make sure it's not the only thing.
Step 7: Uh Whoops, I Did It! - Now What?
When you are focused on your goals and achieve them, sometimes you can feel left without a purpose. But when you keep the big picture in mind while chasing your dreams you hopefully have focused on finding your passion and living it while investing in yourself and your future. Now its time to enjoy it! Spend it on things that matter the most to you. Help your children through college. Pay cash for cars or other items you need. Remembering, money won't bring you happiness. The act of pursuing what you love brings happiness. Enjoy the feeling of financial independence. Give back to people in need. Volunteer your time.
If you follow these steps you'll amass a lot of wealth. And not just with money. That's what life is all about anyways isn't it?