I once thought of starting a finance blog- I even went so far as installing wordpress for it. Then I realized I have nothing to blog about re: finance. I would have two, maybe three blog posts, and that would be it. The reason: I’m pretty hands off with my finances, and the bulk of my financial advice can be explained in one blog post. So here’s my finance blog boiled down to one post.
photo credit: pavelrybin
Step 1. Get out of debt.
My husband had some credit card debt and got out of it pretty quickly by living well below his means and paying down the credit card in large chunks. Don’t fall for that “you deserve a plasma TV” crap advertising put out by credit card companies. You deserve to not give so much of your money to creditors.
Step 2. Save some money
The trick here is to make yourself believe you are poor. We do this by having automatic withdrawal into savings. We use the “we’re poor” excuse a lot - which isn’t strictly true. We’re not rich, but we’re no where near poor. But, we pay our savings first, and that is non negotiable. So we can honestly say that no, we don’t have the money to go out to dinner right now. We live on about 66% of our income. The big piece of advice I can give here is START SAVING AS EARLY AS POSSIBLE. Never, ever underestimate the power of compound interest.
How can I live on 66% of my income?
So there’s the super simple plan for getting rich. Sounds easy, huh? Well, of course, it’s always more complicated than it sounds. Your mileage may vary.
For one, living on 66% of your income is just not possible for many people. Our financial equation would be vastly different if we had kids or lived somewhere more expensive. Still, there are always things that can be cut. We used to spend $80 on cable a month, and don’t even miss it now. A good Netflix plan can keep you in more video than you should probably watch. We switched to Vonage for phone, which saved us about $30 a month. We live in a “bad” neighborhood (this is by Lincoln standards, it’s not really bad) which means a) our house was cheaper and b) we can walk to work. Probably the main thing we do to save money is live in the Midwest. Depending on your profession, you may be able to maintain a much higher standard of living for far less in Nebraska than on the coasts. Of course there are tradeoffs, and that’s a decision to make. I also decided to go to a cheaper school that’s not highly ranked- I learned that in my profession it doesn’t really matter.
The “live like a pauper for 5 years” plan
If at all possible, it may be worth it to live like a pauper while you are young. To explain why, I’ll lay out a savings plan below.
This sample savings plan is for a married couple who start saving at 28 and save till retirement at age 55. (I like the idea of early retirement). This is assuming an average return of 10%. For the first two years, one partner is in school and they can’t afford (as) much savings. (All figures are very approximate)
| Age |
money added this year |
total |
| 28 |
$10000 |
$10,000.00 |
| 29 |
$10000 |
$22,000.00 |
| 30-34 |
$30000 |
$236,899.52 |
| 35-55 |
$10000/year |
$2,223,766.50 |
So at age 30, the couple is doing better financially (maybe making $70,000 a year combined) but still spend as if they had only $40,000. After that, at age 35, they start putting 10,000 a year away again, so they can buy a nicer house, travel more, maybe cut back on work a little or have kids. Because of that 5 years of living like paupers, there will be a pretty big chunk of change sitting around collecting interest. Actually, if they stopped putting any money in at age 34, they’d have 1,593,741.51 at age 55.
I got this “live like a pauper while young” idea because it’s a lot easier to live cheaply while young. Your health expenses are generally lower. If you don’t have kids yet, that’s one big expense missing. Most young people are used to living cheaply when they get out of school, so it’s not much of a lifestyle change. Many people have started earning decent money by age 30 and tend to blow it on a nice car, etc. But if you can put spending off and pretend you’re still a student for 5 years, you’ll see a huge payoff. I used a married couple as an example because I am married- if you are not married, try having roommates for 5 years to cut down on expenses. There are lots of people you can share expenses with besides a husband or wife.
Variations
The plan above is just an example- my own financial plan involves putting some money in a Roth IRA and some in regular stocks to stagger the money I’ll be able to take out. I also have savings plans to start a business. My point, though, is that saving can be very straightforward. If you pick a diversified index fund with a trusted, insured company, you can probably get away with just having one. If you can put away enough money and plan for an early enough retirement, you don’t have to worry about fluctuations as much because you can always put off retirement for a few years.
How to invest
So how do you invest? Well, I got the book “Investing for Dummies” which actually has a pretty nice overview of the investment market, but it boils down to this:
1. Use a low cost website like vanguard.com. Sign up for an account, hook up your bank account, and away you go.
2. Stick with low cost index funds like the S&P 500 index or the whole stock market index. If you want to diversify more, get some foreign stock index funds too, and maybe some bonds. Or you can go with a formula from a pro.
3. Keep putting money in, don’t touch it FOR AT LEAST 10-15 YEARS.
Also:
If you want to work out a savings plan, use a compound interest calculator to determine how far your money will go.
Always participate in your company’s savings plan if they have one and match funds, and invest that money in an index fund as well. If they don’t match funds, I don’t think you are necessarily better off using your company plan.
Make the entire process as automatic as possible. The less you have to think about saving, the more you’ll save.
The End
So there’s some basic financial advice. This is why I can’t understand the huge number of financial blogs out there. They all pretty much say the same thing, with slight variations. The ones that don’t advise you to do all sorts of different things, when the best bet is just to pick a plan and stick to it. Unless you are prepared to devote a serious amount of time to managing finances (I’m not) you are probably better off just picking an index fund that mirrors the market.
And I said it once but I’ll say it again: NEVER UNDERESTIMATE THE POWER OF COMPOUND SAVINGS.
Also, keep in mind that I am in no way a financial adviser, so take anything I say with a grain of salt. 
PS- before I posted this, I saw a post on lifehacker which links to an article on Warren Buffet basically affirming what I said above about just putting money into index funds.
