My Financial Journey: Part 5 - Now
This is part five in a series of posts describing my Financial Journey. Part one can be found here. Inspiration for this series came from the Road to Financial Armageddon series over at The Simple Dollar.
In the previous post I described how during the beginning of my post-college life I began a strong financial foundation but that I also faltered by spending a lot of my discretionary income. Nowadays I am more conscious about every dollar and cent I spend than I ever was before. How did I change from living paycheck to paycheck and having a negative net worth right out of college to being debt free and able to purchase anything I need? It all started with tracking my expenses.
A few months into my first job a spent a couple of my lunch breaks building a spreadsheet simply named “Budget”. I went line by line through my bank account and credit card statements to input all of the money I had spent. Each item was categorized into groupings such as Housing, Food, Transportation, etc. The groupings were then sub-categorized into Rent, Utilities, Groceries, Dining Out, and more. Tracking all of my expenses held me accountable to the money I had spent Not only did I have to make the decision to spend my money, I would later have to add it to my budget, thus making my expenses higher for the month. This step alone changed how I view money.
After I gained the habit of tracking all of my spending I began to track my net worth. By looking at what I had in assets (cash, savings, investments, car, etc.) versus my liabilities (credit card, student loans, other debt) I could see how much I was worth financially. It was ten months after I started my first job when I first looked at my net worth. By then it was positive, but if I would have tracked it throughout college or in the beginning of my adult life it most definitely would have been negative. Seeing that you have a negative or low net worth can be the eye opener that you need to focus on your financial well being. Having tracked my net worth now for over a year and a half I can see how much progress I have made with all of the savings I have worked for.
I wouldn’t have accumulated my current net worth without setting goals for my savings. I set aggressive targets towards what I wanted to save money towards. At first I just choose one debt to put all my savings towards: my student loans. Since the interest and payments were in forbearance due to my enrollment in graduate school I determined how much of each paycheck had to go into savings for me to be able to pay them off when they became due. Next, I did the most important thing you can do to meet a savings goal. I made it automatic. The amount I wanted to save came directly out of my paycheck and into a separate savings account that I never allowed myself to touch until it was time to pay the loans. I also invested the money into Certificates of Deposit so that it earned more interest and I was less likely to use the money for something else. I successfully saved up enough to pay off my $17,000 in loans in 18 months using these tactics.
Now debt free, I focused my savings elsewhere. Using ING Direct as my primary bank I created five different savings areas that I wanted to build up; such as a down payment, emergency fund, wedding savings, graduate school payback and a fun account. (For an explanation for how this works go here). I determined how much of each paycheck to put into the accounts and now I just wait for them to grow automatically. Without ever seeing the money in my checking account I live my life based on a smaller income, but I am able to save for the big things in life.
The automatic piece of my savings plan is also used in my retirement savings. Without any work I contribute 10% of my pretax income to my 401k and $192.30 bi-weekly post tax to my Roth IRA through Vanguard (This equates to just under the $5,000 limit for the year). I never have this money firsthand so it makes it harder to miss! I then simply invest in low cost index and target retirement funds.
Another area of my current financial maturity is to pursue side income opportunities using other skills such as website design. By working on the side I am able to boost my savings and net worth. I also save the extra money I make working overtime instead of squandering it away like I used to. Reading books on personal development, productivity and career advice also leads to increased efficiency at my job. Lastly, I focus on advancing my career by volunteering for additional assignments and work to proactively seek promotion.
Finally, I practice the art of frugality in my everyday life. Focusing on being frugal is the key to achieving other financial goals. I avoid being cheap by only purchasing items that will last and that add value to my life. An example of this would be my car. I purchased a reliable used car with good gas mileage. I have already driven this car from 70,000 miles to 115,000 in just over two and half years with no problems. It is not a sporty car and it won’t fit a family of eight, but it gets me to work and doesn’t break down. If I wasn’t frugal I would be driving a Lotus Elise. If I was cheap I would drive a $500 car that also needed maintenance done on it.
Another way I practice frugality is by using a 30 day rule. If there is something that I want to buy that is over fifty dollar limit I set, then I wait for thirty days to see if I still want it. I just make an entry on my calendar for thirty days from the day I was initially interested in the purchase and if I still want it in a month I can make the purchase guilt free. This rule keeps me from making large impulse purchases and takes a great deal of self control, but it is well worth implementing.
There are many more tips and tricks that I follow in my personal finance journey that I will describe in upcoming posts, but this outlines how I currently handle my finances.
Where are you at right now on your financial journey? Are you just getting started? Do you know where you are headed? Feel free to comment below.