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Paulitics: Basic Tips for Money Management

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I’m back with my second Paulitics article (the first one is here if you missed it) and today I am talking about finances. Unless you’re new around here, you probably know that I’m all about money management. While I’ve always been interested in money, I’ve taught myself most of it – and I think you can as well. You definitely don’t need a degree in finance or anything like that to be savvy with your $$. But because I know it can be overwhelming and complicated, I thought I’d provide some basic tips that have helped me, especially throughout my twenties and early adulthood. I hope they’re helpful!

TIP ONE: Think about the end game

When you are growing up it seems like almost everybody around you is preaching the importance of saving money. However, almost no one ever explains why. Of course, there is the obvious reason of being able to afford things you need when unexpected things happen, but next on the list is being able to hopefully retire one day by making the money you have accumulated work for you. This concept has always fascinated me and pushed me to investigate the best ways to invest money. So while retirement may be very far off for you, I feel it is important to keep the end goal in mind to preserve the motivation necessary to make the smart decision between instant gratification and long term financial security.

TIP TWO: Know how much you should be spending vs. not spending

A good rule of thumb is 50% of after-tax income should go towards necessities (rent, groceries, utilities), 30% on wants (eating out, entertainment, shopping), and 20% on savings/existing debt. I would suggest trying to spend no more than 25%-30% of your total income on housing (this would include rent/mortgage, property taxes (if you own), and utilities). To take it a step further, I would suggest trying not to spend more than 35% on total debt (which would include housing and other debt such as student loans and car payments). Obviously these numbers may be impossible to hit depending on your circumstances, especially if living in a big city, but this is the goal. If your debt to income ratio gets any higher than this it could negatively affect the cost/your ability to take future loans/debt and/or finance larger purchases.

TIP THREE: Create a budget and break it down

I should probably write an entire article on the budget system we use in our home, so let me know if you’d like that. In the meantime, I suggest taking the time to create a budget with categories that make sense for your life (such as Rent, Utilities, Car/Uber, Insurance, Debt Repayment, Tuition, Gas, Groceries, Restaurants, Pets, Slush Fund/Entertainment, Travel Fund, Shopping, etc.). Don’t forget to use Tip Two to have a general breakdown of where your income should go towards each category.

To do this, estimate your monthly income moving forward and look back at your spending over the last 3-12 months to create a categorized spreadsheet outlining the total you have spent in each category. This will inform you of how you have been spending your money and where (if any) there is a place for you to cut back on. Set your limits for how much you can spend in one area and then for the areas where you need to cut back, sit down and make some hard choices that you can stick to. It’s very important to be realistic here when it comes to changes you can actually implement. For example, when Sivan and I created a family budget, we made a conscious effort to make dinner 6 nights a week since we knew we could – it would just take some adjusting/lack of laziness on our part. We also allocated certain amounts to our own personal wants (like bags and shoes for her) so we could spend money there but within limits.

Once you figure out your daily living categories, create a new “Retirement” category and allocate 10-15% (or more if you can afford it) of your total monthly income there and adjust all the “variable cost” categories (these are categories that you can control and change month to month). A fixed cost would be something that you cannot change (at least not easily), such as rent/lease/insurance/tuition/debt repayment) as necessary to get to that point. As hard as it seems to adjust your spending to account for 10-15% retirement, you should keep 2 things in mind: (i) you are paying this now for more later (at some point this money will be invested and will grow + you will need money when you decide you don’t want to work anymore!); and (ii) however tight your budget, it is almost certain that someone else is living off less in the category you need to cut spending. I would then suggest opening up a separate “Retirement” account and set up automatic transfers to that account each month.

For more advanced planning, I would suggest using a retirement/savings calculator you can find online. Some are more complex than others. Here’s an easy one to start with and you can find a more complex one here.

TIP FOUR: Get a credit card as soon as possible (if used responsibly!)

Everyone should get a credit card as soon as they can if they can responsibly use it. Responsibly using a credit card builds your credit score, which will allow you to qualify for better debt/financing options in the future and earns you rewards. I would suggest using a credit card just as you would a debit card (i.e. paying off the entire balance each month) and only exceeding what you can afford in emergencies. There are plenty of options for first-timers, but one I would recommend is Discover. One thing to note about Discover though is that it is not accepted everywhere (especially internationally). When choosing a credit card, to me, the most important things to look at are – rewards/benefits (do they align with my lifestyle – e.g. how you earn rewards, what kind of rewards (travel points vs cashback), how widely accepted, and NO Foreign Transaction fee (a must if you like/plan to travel). The interest rate is obviously also very important but if you are responsibly using your card and paying off the complete balance each month, it is not AS important.   

TIP FIVE: Do your research

A lot of money mistakes that happen when people are young are due to a lack of knowledge or impulse. While everyone can do research and gain knowledge, impulse is a bit trickier to conquer. When it comes to big purchases, where to create a retirement account, or things like that, I highly suggest doing your research. Often times, depending on the time of year, what’s happening in the economy, who you are working with, etc. things like interest rates can change and end up saving or costing you a lot of money. If you go to buy or lease a car, for example, I wouldn’t suggest walking on the lot and making a deal then and there. I’d go to a dealer to determine exactly the model, trim, and features you want and then email all the dealers in your city to negotiate and talk through different deals or situations before impulsively agreeing to an offer. Also, when possible, you should make sure your credit is in good shape before making any major purchases. This means eliminating/paying down credit card debt and making sure you are up to date on all your bills. 

TIP SIX: Do a monthly sweep of your finances

Set a date each month to do the following: pay any bills that aren’t automatic, pay off your credit card, and look at your accounts. Not only does this keep you accountable for what you are spending and lets you see how much little expenses add up (like takeout lunch or coffee), but it lets you assess any incorrect charges. This is also a good time to make sure any returns you made were correctly put back in your account, etc. It’s like a wellness check for your finances and it’s a habit I’d suggest starting early in life.

Alright, there’s obviously a lot more to talk about but this is a good place to end. Let me know if you guys want to hear more about budgeting, retirement, credit scores, or any other specific money topics and I’m happy to address.

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