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May: Conquer Your Finances

Einstein was a pretty smart man, and he is famously known to have said “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” And well, I’ve neglected this financial marvel for far too long, and this year my husband and I turned our eyes on to our finances. We were inspired by books such as “The Millionaire Next Door” and listening to Dave Ramsey podcasts, and decided it was now or never.

So, with that in mind, we started:

1. Estate planning and writing up our will.
2. Listening to The Total Money Makeover on audio during long car rides (and our kids in the back listen too, learning about the disasters of debt and credit cards from a very young age).
3. Working extra to pay off debt (with the intention of never getting into debt again) and selling off anything we don’t need
4. Investing to make the magic of compound interest work for us (it takes about 30 years to really kick in, but we plan to live to at least 120, so we will need it in 30+ years and don’t want to still be working in our golden years)
5. Teaching our children about money and saving as we go. My older son now writes my checks, and both know to avoid credit cards and to only buy what you can pay for in cash.

financial planning to become millionaire

Step One: Decide To Dump Debt

You can’t become rich if you owe money. The money you earn isn’t yours if you have to hand it over to anyone else (plus interest, plus compound interest on that interest) so debt, credit cards, loans, etc should make you feel as sick as it does me. I’ve borrowed money, and always paid it back as quickly as possible because seeing how much money I was throwing away each month on interest made me ill. Paying $650 in interest on a mortgage made me feel like I was throwing out six hundred dollar bills each month, or burning it, never to have it return.

That is what interest is, it’s just throwing money away that will never return to you, never buy anything for you, and never make you feel secure in savings, earning money for you in interest and then earning more money when you are continuously paid interest on your principal and also the interest you’ve been earning.

Doesn’t that sound so much better?

So starting now, stop borrowing money. Stop charging. Grocery shop with a budget, and don’t buy anything you don’t NEED to live until you are out of debt.

how to save get rich and plan for retirement

Cut back now- with a vengeance- so you can splurge later

Dave Ramsey says that if you live like no one else (ie don’t super-size and charge everything), later you can live like no one else (buy whatever you want, in cash, without any guilt). That is an inspirational idea, and who wouldn’t want to live like that? So hubby worked over-time while I cleared out our clutter and sold everything on eBay. We stopped fun spending and cut back on a great deal in order to get out of debt, and our next step is to save up for an emergency fund. If you don’t know the Total Money Makeover Baby Steps for Financial Freedom, here they are:

Baby Step 1 – $1,000 to start an Emergency Fund
Baby Step 2 – Pay off all debt using the Debt Snowball
Baby Step 3 – 3 to 6 months of expenses in savings
Baby Step 4 – Invest 15% of household income into Roth IRAs and pre-tax retirement
Baby Step 5 – College funding for children
Baby Step 6 – Pay off home early
Baby Step 7 – Build wealth and give!

Get your paperwork in order

We are currently taking care of this, and making sure everything financial or significant has a hard copy somewhere is very important. I bought a view binder and filled it with clear protective sheets, and started to fill it. We put in online bank passwords, our birth certificates and marriage certificate, proof we own our home and cars, etc. If something happens to one of us, the other has access to everything they need for our lives to not fall apart, and to access necessary funds.

I bought a waterproof, fireproof document bag to put it in, so in case of a fire, I take it and go. It has EVERYTHING we would need to start over (I even put some of our wedding photos and pictures of our children, because aside from this bag and our children, I’m not stopping for anything else should a fire happen).

If you haven’t written a will yet, you should. It should not only state what goes to who in the case of your demise, but also who will care for your children, and what your wishes are should you need medical care but not be in a position where you can communicate what you’d like to happen (and you don’t want to leave the pressure of making those choices on your spouse or children- make the decision for them!).

How to you turn $1,000 into $8,000?

Invest! If you start investing today and choose mutual funds that earn 7% interest a year, your money doubles every ten years. That means $1000 today is $2000 in ten years, and $4000 in twenty years, and $8000 in 30 years. If you invest more, or your mutual fund choices garner more, you end up with even more in your later years. That is AMAZING! Even if you earn less, you have to pick a really awful mutual fund to get less than 3% (and if the market is charging ahead and your mutual funds aren’t, dump them for funds that are managed better).

This is the last step (because it’s beyond stupid to invest $5000 into a mutual fund for possibly 7% returns, and pay 18% on a credit card because you are carrying a balance). Don’t start investing until you completely paid off your debts, then get to a system where you are cash-flowing everything (Ramsey’s tip), and then you can start to invest because you owe nothing, and it’s 100% your money making you more and more money. It’s the best way to make what you earn work for you, and you never have to feel like you are throwing money out the window again. It will also make you feel more confident heading into your bonus years, knowing you can have a quality of life you enjoy, and even help your children and causes that are important to you.

Now how fabulous is that? Time to get your finances in order!

More life-changing financial books we love:

Retire Inspired by Chris Hogan
Your Money or Your Life by Joe Dominguez and Vicki Robin
The Simple Path the Wealth by JL Collins