There is a tendency on personal finance websites, in personal finance books and personal finance magazines, to get into great detail about the specifics of various personal finance decisions and strategies. You’ll find long articles about specific tax loopholes (like “backdoor Roths” and so on). You’ll find long calculations that seem to indicate that one move is strictly better than another one. You’ll find lots and lots of arcane writing about taxes.
For someone who just wants to achieve some level of financial security in life, it can be simply overwhelming. Even something as simple as putting money in a savings account can turn into pages and pages of details and information that can cause most people’s eyes to glaze over.
If that sounds like you, my advice is really straightforward: don’t sweat all the details and just keep things super simple. Most of that advice isn’t particularly useful anyway.
Let me get into why I say that.
For starters, what matters more than anything for long term financial success is that you’re consistently spending a lot less than you earn. What you actually do with it is pretty secondary. You have far more positive impact on your future, especially at first, by simply spending less or getting a raise at work and then doing something – anything – worthwhile with that money.
Let me be absolutely clear: compared to the simple decision to spend less and to put more money aside for the future, the difference between paying off a debt or putting the money in savings or investing it is trivial in terms of the long term impact on your life, especially when you don’t have a whole lot of money to your name.
Now, when you have achieved some wealth, there ends up being a bigger and bigger difference between those options, but when you’re first trying to turn things around or when you’re dealing with a small income or a small amount of savings, you have far more impact in simply making good daily choices than you do in sweating about investment decisions.
Furthermore, the choice of the “right” investment decision is almost always based on predictions about the future. If you predict that the US economy is going to keep growing like gangbusters for the next decade, one choice is the best, but if you predict we’re heading into a recession, another choice is best. The truth? No one knows for sure.
Instead, stick to the things you do know for sure.
Having money in the bank is good, and the more, the better. Money in the bank means that you have a cushion against unexpected events in your life. That’s a net positive. Yes, there are specialized accounts for specific purposes – a Roth IRA and a 401(k) for retirement, a 529 for college savings, and so on – but the most important thing isn’t the account type, but the money you’re able to put in there, particularly at first. If you’re not sure, stick to a more general and flexible account type, like an ordinary savings account at a bank, and then figure out the different options at your own pace. What matters is that you’re putting money aside; getting it in the right account is important, but it can wait.
Having less debt is good. There are almost no situations in which an individual paying off debt isn’t a good move. Again, one can make arguments about which debt should be paid off first in the perfectly optimal way, or whether you’re better off investing or paying off a low interest debt, but it is essentially never a bad move to pay off debt. If you have enough money in the bank to handle something like your car breaking down, then paying off debt is almost always a really good choice. If you want a really simple rule to follow to decide which one to pay off first with extra payments, just choose the one with the highest interest rate and pay it off first. Again, that’s a simple rule that will almost never guide you wrong.
Struggling to pay your bills is bad; failing to pay them is even worse. It seems obvious, but in reality, almost 80% of Americans live paycheck to paycheck, meaning they’re right on the verge of beginning to struggle to pay their bills. Failing to pay bills damages your credit, meaning it kills other opportunities down the road. Furthermore, you often have to end up paying them anyway with additional interest owed.
Don’t hamstring yourself with big bills that will be difficult to pay. Don’t take out a loan to get the expensive car. Drive cars into the ground and then replace them with a used car that you can ideally pay cash for. Live in inexpensive housing, less expensive than what you could afford if you squeezed out every dime. Don’t get a huge unlimited cellular plan, especially when you’re not really using it that much – cut it back to the minimum. None of this is complicated. Just make choices that result in small monthly bills so that you have money to put aside.
The less you spend on foolish things each month, the easier it is to pay the bills, pay down your debts, not accumulate more debts, and put some money in the bank. Stop spending so much money on vices, hobbies, and entertainment. Find free things or cheap things to do to entertain yourself and fill your time. One big way to save money is to start making inexpensive meals at home – make a sandwich at home instead of eating at a fast food restaurant. Buy everything in store brand form. Those kinds of moves won’t change everything, but they can definitely help move the needle.
The vast, vast majority of people don’t even handle these basics very well. The biggest part of the reason that people struggle to get ahead financially is that they overspend, and when you lock yourself into more bills than you can easily pay, everything gets hard. It gets even harder when you spend a lot of money on foolish stuff.
It is very easy for personal finance websites and books and magazines to walk away from these basics and get lost in the nuance of Roth IRAs and 401(k)s and so on when the reality is that for most Americans and most people in the Western world, the real issue is that they don’t have the basics down pat. Worrying about what account to use when you have a bunch of debts, very little in the bank, and are struggling to keep your bills paid is like putting the cart before the horse.
Keep it simple. Cut back on your spending, starting with your big bills like housing and your car and insurance. Keep an eye on your foolish spending, too; look through old credit card statements and see where you’re spending money that you completely forget about, as that’s forgettable and utterly wasteful. Start by putting some money in savings just to create an emergency cushion; move on from there to making sure that you’re caught up on your bills and then start eliminating your debts. Make all of that consistent – this needs to be your life going forward, and it can be quite a lot of fun and pretty low stress.
It’s only at that point, when you’re able to consistently spend less than you earn and you’ve got your bills under control and you’re wiping out debt and you’ve got some money in the bank for emergencies and now you’re wondering what’s next, that you should start worrying about the next steps of investing. Amazingly, the vast majority of Americans aren’t at that point yet.
Focus on the basics. Don’t worry about those other details, at least not until you have these basics completely under control with your actions. Don’t make things more complicated then that.
Keep it simple. Spend less than you earn. Do something smart with what’s left.