Four Actionable Financial Tools
When I was a senior in high school, I had two jobs. During the week, after the school day ended, I worked in midtown Manhattan for a real estate investment firm making copies and running errands. On Saturdays, I worked for a couple helping them to renovate their brownstone. I was pretty well-employed for a high-school senior but I never seemed to have much money. I spent it as I earned it.
There was a woman, named Susan (for protection of the innocent) who worked at the real estate firm and her husband was a jeweler. She had mentioned to me that if I ever wanted to buy any jewelry, she could get me a discount and flexible payment terms. Right before graduation, I purchased a gold chain for myself for a couple hundred dollars. Shortly after taking possession of he jewelry and agreeing to a payment plan, I left for college.
Within a few weeks, I was engrossed in a new world and my attention has been commandeered by a new social, environmental and academic scene. I had no income, no savings and no way of paying Susan back. After being up at school for a few weeks, I received a message on the answering machine in my dorm room. Somehow, Susan had obtained my college phone number and was calling to ask about the whereabouts of her payment. She would call several more times before I worked up the nerve to answer the call and tell her I did not have the money and didn’t know when I could repay her. I remember vividly how it felt to receive those voicemail messages and the judgement in her voice when I spoke to her. Several months would pass before, on a scheduled break, I returned the gold chain to Susan, aware that there was no way I’d be able to pay her back.
In hindsight, this was the first debt I’d ever created and it obviously didn’t go well. When I reflect on this traumatic experience, I don’t feel a ton of shame. I was really young and just wasn’t equipped for this transaction. If my parents knew about it, they would have never allowed me to engage in it in the first place. However, I’m grateful for the experience. This was a time of my life when, as I mentioned, I had no savings whatsoever and after starting college, I also had no income. There are a handful of tools I believe in strongly now, when I’m in a much better financial position. These same tools would have helped me back then. These tools are simple, but they pack a ton of power.
Weekly Credit Card Payments
I haven’t created new credit card debt since I left college. However, it took me years to pay off the credit card debt that I created in college. Many people have credit card debt and have an intense desire to be free of it. I’ve been there and I empathize. However, there is something ANYONE can do RIGHT NOW, which will change your financial life FOREVER!
Stop creating new credit card debt! The way to do this is by committing to pay for anything you charge on your credit card the same week in which you charged it. The same goes for any type of consumer debt. If you don’t have the money in your checking account to pay for it, don’t buy it! You can read more about this tool here.
Free Money Accounts
The same behavior that involved me buying a gold chain I couldn’t afford followed me during college, which was how I ended up graduating with thousands of dollars of credit card debt (on top of my student loans). When I started college, I didn’t have any spending money and yet, I still wanted things. The credit card companies were on campus before the first exams of the semester and they were happy to offer me credit. Before long, I got a job but I still didn’t have a system for determining what I could freely spend and what I needed to set aside for necessary expenses (i.e. laundry). Years later, when I was earning a substantial salary in a corporate job, I learned that my historical propensity to spend it as I earned it was still alive and kicking. Frankly, the more I earned, the more surprised I was to see how quickly I could spend money. Over the years, I developed my favorite financial tool: Free Money Accounts.
Free Money Accounts are separate checking and credit card accounts that are purely for the purpose of discretionary spending. I deposit funds that have been budgeted for discretionary spending in the Free Money Checking Account. I can do whatever I want with the money once it is in the FREE Money Checking Account. There’s only one rule: Once the Free Money Checking Account is empty, stop spending!
You care read more about this tool here, but there is one important caveat that makes this tool even more powerful. Be sure to treat “eating out” (whether eating in restaurants or eating “take-out” at home) and Uber or Lyft rides as discretionary. Even though you have a food budget and likely, a transportation budget, eating out and Ubers are often the more expensive ways to eat and travel. As such, use your Free Money Checking Account to source these discretionary expenditures.
Wealth Accounts
The first two tools described above will help you curb your spending immediately. Those two tools would have protected me with respect to the gold chain catastrophe. I wouldn’t have created new debt to purchase the chain. Perhaps I would have saved some of my income from my high school job in my Free Money Checking Account. In that case, if I really wanted it, I would have paid cash for it. Because these two tools enable us to spend less than our income and still enjoy ourselves, we end up with funds in excess of our spending. Those funds are the seeds of our wealth. In each and every time period when we spend less than our income, we create at least a little wealth.
I have found it highly beneficial to store that wealth separately so that I can see not only the fruit of my labor, but also the results of the “system” I’ve created to manage my finances. When I started college, I had no sense that not only could I save for a rainy day, but I could also accumulate wealth over time and that wealth would give me more options. Since then, I’ve become a big believer in designating and regularly contributing to specific “wealth accounts,” so that I have a very clear sense of the results of my behavior over the long-term. You can read more about the tool of “wealth accounts” here.
Pick a Goal
When you avoid creating credit card debt and use Free Money Accounts to have a clear sense of what you have available to spend, you spend < income and create wealth, which can be deposited into your wealth accounts. These tools are not only useful today, but they would have served me well when I was just starting college. These tools make creating wealth so doable, that it is worth setting some clear goals so that you can stay motivated to keep using the tools! You can read more about goal setting here. You can pick whatever goals will bring you satisfaction, but here are four suggestions from which to choose.
Pay for all credit card charges within the same week they were incurred.
Eliminate credit card debt each month (and ultimately all consumer debt). This goal is valuable because consumer debt is expensive due to high interest rates. Once the debt is eliminated, there will be more money available with which to do what you like. Suggestion: To make this a short-term readily-achievable goal, plan to pay off a certain amount each week. You won’t be creating new debt so you can use any available funds to pay off the old debt.
Add to Rainy Day Fund -If you haven’t fully-funded a high-yield-savings account for a rainy day, set a specific goal of an amount to contribute to the account. Having funds set-aside for emergencies and eventualities is the foundation of financial peace. You can read more about rainy day savings here.
Wealth Contribution - Set a specific goal to contribute a certain amount to your wealth each week or each month. Make sure the amount is readily-achievable and within your control. You can always increase the goal later once you get the hang of it.
Toolbox in Action
These four tools are immediately actionable. None of them requires that you get your financial house in order first. Using these tools will actually go a long way to building a sturdy and grand financial house. In addition to being useful, these tools are practical and easy-to-use.
Happy building,
wellbeingGrant