This past summer Adventure Dad led a group of scouts on a hike. One scout had a lot of energy at the beginning of the hike and was hopping up on rocks and tree stumps and zig-zagging up the path. Adventure Dad knew that the hike they were on was a long one and decided to impart some wisdom to the young scout. He pointed out a nearby stream and talked with the scout about how water takes the easiest path, the one of least resistance, so that it can continue down the mountain. Then Adventure Dad told the scout that he should be like water and choose the easiest path in order to conserve energy, be able to hike longer, and reach their destination.
What does this have to do with finances?
Well, here in the Ignite Adventure household we take a very similar philosophy to finances as we do with hiking. Keep it simple, follow the right path, and be consistent and you are bound to reach your destination. So follow along with me and we will break down finances into as simple of steps as we can.
Adventurer’s Path to Treasure
1. Track Your Money
You have to track your money or you won’t have any idea where it is or where it’s going. And technology today has made it so easy. Just sign up with a FREE online budgeting tool and they do most of the work for you. I personally use Mint but I also recommend Personal Capital. It takes a bit of effort to get everything set up with these sites because you have to add in each of your financial accounts (bank accounts, credit cards, investment accounts, etc.). But once everything is in, the site pretty much takes care of itself. You can spend 5 minutes a week more accurately labelling your transactions, but you don’t even have to do that if you don’t want to. And you’ll be able to see everything: where your money is going (in pie chart form), how much your investments are making, your net worth, etc. Did I mention it’s free? It’s pretty amazing and makes a numbers nerd like myself geek out.
2. Spend Less Than You Earn & Invest The Difference
You all knew it was coming. In order to build wealth, you have to spend less than you earn. But not only do you have to spend less than you earn but you have to invest the difference. If you are setting aside your savings in a checking or savings account, you are actually losing money. Inflation grows an average of 3% per year and most checking and savings accounts grow your money at less than 2%. So, don’t just save money but invest it (we’ll talk more about investing later).
Tips for spending less? I don’t actually have a lot of these. I like to keep it simple. Every time you go to make a purchase, carefully evaluate the purchase to see if the value it will bring makes up for the costs ($, time, space, upkeep, etc.). And then see if there is a cheaper option that is just as effective. Also, waiting 24 hours to a week before buying something can really help you to see if you really want it. And you can always check out minimalism.
3. Pay Off Any High-Interest Debt (Like Credit Cards)
If you have any high-interest debt (anything with greater than 7% interest), you have an emergency. And you need to get rid of it as quickly as possible. Stop eating out, stop investing, stop going to the movies, and stop buying yourself something nice. Throw any money you can at the debt and get rid of it as quickly as possible. That debt is stealing your dreams…enough said.
4. Max Out Your 401K
This step doesn’t apply to everyone but it does apply to most. If you actually pay taxes, investing in your 401K saves you money. Plus, many companies offer a company match when you invest which means that by not investing, you’re turning down free money. In 2019 you can invest up to $19,000 per person, or $38,000 per household. And make sure to check your 401K to see what it is invested in. If you can, make sure it is invested in an S&P or Total Stock Index Fund (more info on these later). But seriously, if you pay taxes at all, you should be investing in your 401K. Not only will your money be building wealth but you’ll be keeping more of your money instead of giving it to the government.
5. Pay Off Other Debts ≥ 5% (Car/Student Loans)
Now that you’re on your way to building wealth, it’s time to get rid of more of that debt. Now it’s time to pay off anything that has an interest rate greater than or equal to 5%.
6. Invest in Index Funds
Time to build more wealth. Take any extra money you have and throw it all at stock market index funds. Index funds are amazing investment vehicles that allow you to invest in a huge amount of companies (spreading around your risk) without paying a fund manager to do it for you. Plus, they have extremely low costs, which is why they are so effective. They are the easiest, most effective way to invest your money…period.
Some index funds that I recommend are:
- Vanguard Total Stock Market Index Fund (Investor: VTSMX / ETF: VTI / Admiral: VTSAX)
- Vanguard 500 Index Fund (Investor: VFINX / ETF: VOO / Admiral: VFIAX)
- Fidelity Spartan 500 Index Fund (Investor: FUSEX)
- Schwab S&P 500 Index Fund (Investor: SWPPX)
- iShares S&P 500 Index Fund (Investor: BSPSX / ETF: IVV)
So, how do you start investing in index funds? You’ll need to create an account at an online investing brokerage firm, transfer money from your bank account, and begin investing. It really isn’t as hard as it sounds. The brokerage firms that I recommend are Vanguard or Fidelity (I have an account with Vanguard), but there are lots of them out there. You could also try out the Robinhood App if you want to invest purely by using your phone. I created an account with them and it’s really easy.
7. Pay Off Your House
If you want to simplify your life even more, you can pay off your house. Money-wise this doesn’t make sense since you are likely to earn more money by investing in index funds (7% average) than by paying down your 3-5% mortgage. But sometimes it just feels nice to own your own home.
Money really doesn’t have to be that hard. You can win at money with minimal effort if you keep it simple, follow the right path, and be consistent. Put in a little effort in the right way and you’ll end up at the place where you want to be.
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