How to get started saving and investing for your future • Part III
Can you have it all? Yes, but it’s a matter of when you want it and how much you want.
As I write more and more about our financial and startup business journey, I am getting lots of great questions about how to get started. First, I am NOT a financial advisor and I strongly recommend you consult with one before making any major financial decisions. Second, I absolutely love these questions. Knowledge is power and I strongly believe in the power of education to create change. I hope that by sharing the lessons I’ve learned along the way, I can inspire a more approachable and accessible financial future for others. I enjoy coaching people on shifting their mindset toward achieving financial freedom.
The simple fact you’re even thinking about your financial future is a huge step in the right direction. It starts with awareness, then a shift in your mindset, then taking action. And before you know it, things are moving toward a better outcome.
So the very short answer to wondering if you can really have it all is: Yes! You can have it all but it’s just a matter of when and how much, which is really about prioritizing your goals. The prioritizing is the hard part, of course! Because everything feels equally as important all of the time.
Here are some of the initial questions I ask and advice I share for people looking to get started.
What are your goals?
Always start from thinking about your goals when making financial decisions and how saving more and paying off your debt can help you reach those goals. Without a clear goal in mind, you have no decision making power in your spending or saving habits.
the cost of not reaching your goal…is more painful to you and not worth the short-lived reward you want to replace it with.
When you can’t see what you are working so hard for or how much farther you need to go, it can lead to splurging or suddenly spending a lot—or all—of your savings (and I’m not talking about emergencies here) because you may feel like you have been working so hard and have earned a big spend. The difference when you are working toward a goal is you do not feel the need to feed other impulses because you know that it comes at the cost of not reaching your goal, which is more painful to you and not worth the short-lived reward you want to replace it with.
If you’re feeling unmotivated or unsure of your goals, go back and read Part I of this series:
How to discover your life’s purpose and have a healthier relationship with money • Soul Searching…
Stop thinking of ways to make money and spend more time getting to know yourself
What tolerance do you have for risk?
How much money do you need to keep in your savings to feel safe and secure? Find out what that number is, realistically, so you can strive to keep that much in the bank or set that number as your first savings goal. It will reduce your anxiety and fear around money and allow you to make riskier decisions that have higher rewards later (such as buying a house or starting a business.)
My advice on how to think about this: if shit were to hit the fan tomorrow (oh hello COVID!) with your job/income, what would you need in your savings account to feel financially secure for at least 3 months? 6 months? 1 year? Think about your need-to-have number vs a nice-to-have number.
And lastly, what is your “F*ck It Fund” number? This is the really-nice-to-have number, where if you had to say “F*ck it!” to your job and your current situation, what would you need in the bank to feel safe to make this decision to leave. You may surprise yourself you are closer to that number than you think. And sometimes that knowledge alone is so empowering, making it easier to own your worth at work and have a healthier work life balance.
Having this range of numbers in mind will allow you to see when you need to focus on saving and when you are comfortable enough to take higher risks with investing without dipping into your safety net.
Lower your monthly expenses and save 20% of your income (or more).
If you’re really serious about getting started saving and investing in your future, there will have to be some sacrifices and compromises to make about your life choices and your lifestyle. It’s a shift in your mindset (and both partners in a household need to be all in ) that will get you the farthest.
Here’s one way to go about this:
- Write down a list of your core values (e.g. commitment, loyalty, honesty, service to others, environmentalism, adventure, security, etc.)
- Write down a list of things that currently bring you joy in life (e.g. family, community, house/home, work, school, exercise, travel, etc.)
- Rank each list on a scale of 1–10 for what you value most and what brings you the most joy.
- Now compare these with your partner (and if you are flying solo on this journey then it just got that much easier!)
- Discuss where you both align and where your lists deviate. Understand where you are willing to make compromises (e.g. If “community” is a top core value, how can you ensure your budget allows you to still have an engaging social life but without eating out at expensive group meals every weekend.) Identify your deal-breakers (these are typically your top 5 on both lists.) Travel was in my top 5 of things that bring me joy, so I make sure we have a budget to travel every year which fills my soul deeply and keeps me motivated.
- Identify the areas where you can save in your life (shopping/clothing, social life, entertainment/media, activities, etc.) and set budgets for each area that will allow you to save 20% overall.
While a bit more drastic, my husband and I ultimately decided that living in the San Francisco Bay Area was not going to allow us to maintain our core values and continue doing the things that bring us joy in life (such as travel and adventure) so we decided to sell our home and leave for somewhere with a more affordable cost of living for us and our adventurous lifestyle. This gave us wiggle room in our budget to have things like a travel budget and also allowed us to save more of our income at the same time. This is probably why we are seeing so many people move into tiny-homes and downsize their lifestyle. Tiny homes aren’t for everyone though, especially if you highly value your space (and privacy!) and your things (no that doesn’t make you materialistic.)
Prioritizing your core values and things that bring you joy will help you shift your mindset so you can stay on track with your financial goals . However you make it happen, if you can lower your overhead and your living expenses, save more, and start investing, you can reach your dreams that much faster.
What does your debt situation look like?
How much debt do you currently have? Truly understanding your debt—and not letting it fill you with dread or shame, ultimately escaping from knowing how to resolve it—is the first step toward achieving a healthier financial future.
Go through all of your debt accounts (think credit cards, student loans, car payments) and make three columns:
- Total amount owed
- Minimum monthly payment
- Interest rate
Keep in mind if you own a house: your mortgage is actually not considered a liability or debt. It’s an asset because you can sell your home and in today’s real estate market especially in major metropolitan areas you can typically sell your home for a significant amount more than you paid for it, especially if you make the decision to leave the area for somewhere more affordable. So here, when we’re talking about debt, we’re talking about liabilities — a car is the perfect example of that because it only loses value and gains in interest (ugh!)
In general, it’s never a bad idea to pay off your debt sooner.
If your debt is keeping you from investing or building equity (such as buying a home) then consider focusing on paying off your debt sooner than later.
There are debt payoff calculators where you can try out different scenarios and see the financial outcome or impact it might have for paying off now vs later. As an analyzer and data gatherer, I find it helpful to answer questions like: “What would it look like to pay it off now/six months/1 year from now/etc.?” Even if that timing is not realistic for you, it’s helpful to see the numbers.
Then do the same thing with an investment interest calculator, how much money would I earn if I invested $xx now vs $yy now or a year from now (instead of putting more money into paying off debt). Then you can compare the difference in the cost of interest you would owe vs the amount of interest you would gain between the different scenarios.
Ellevest, a robo-advisory service designed with the goal of closing gender money gap, suggests that “a reasonable, conservative benchmark to draw the line between these two [interest paid on debt vs interest earned on investing] is around 5%. So that’s why we usually recommend that if the interest rate is more than 5%, pay it off. If it’s less, stick to the minimum payments and invest the extra instead.”
So go back to that list of debt you made earlier, and highlight any accounts that have an interest rate higher than 5% and focus your efforts there.
Start with the goal of saving $5000 in one year to open an intelligent investment advising portfolio.
Schwab’s robo-advising platform requires a $5000 minimum, but other platform’s like Ellevest do not require a minimum balance to get started, however $5000 is a great benchmark for getting started and setting up your investment portfolio for the most success.
Saving $5000 in one year is saving just under $400/month.
That’s $100 a week.
That’s whatever it looks like to you.
Think back to your risk tolerance. Understand how much money you need to always have in your savings account to feel secure. I would not recommend putting your entire savings into an investment account because the money is not liquid, meaning you can’t easily spend that money in a pinch or an emergency. It is not a checking or even a savings account with a debit card for easy use or access. It can take up to five business days—if not longer—to withdraw your money. And worse, if the markets are having a bad day you don’t want to up and sell everything ultimately taking a loss on your investment. Investing only works over time.
You can read more about our experience with investing over time here (jump to Fact #1: Time is on our side.)
How we live in the Seattle area for $500 a month in this beautiful eco-friendly backyard cottage
Our financial journey that brought this project to life.
You can always change your mind.
Not doing anything with your money at all and choosing to not educate yourself in order to improve your financial future is just giving away your power.
Let’s say you make the decision to take most of the money you would normally save every month and start aggressively paying off your debt instead, if it ever at any point starts feeling uncomfortable or tight, because life and change happens, you can always stop doing that and switch gears again to saving it.
The most important thing to remember is that you have the power to choose. But not doing anything with your money at all and choosing to not educate yourself in order to improve your financial future is just giving away your power.