This article is aimed to simply be everything the “average blue-collar” “middle-class” American needs to know about managing money and keeping up with a budget in order to thrive financially. If you’re not sure what to do with your money, bookmark this article and comeback to it when needed. This is a full money management guide.
Now, that’s kind a bold statement so before we get into this, I need to give a couple of disclaimers:
A. This isn’t financial advice. It’s just a guide that you can go to but ultimately you need to put your big boy/girl pants on and make your own decisions.
B. This guide is primarily made for, you guessed it, “average folks” who basically live paycheck to paycheck (most Americans do).
And C. and this might be the most important part, it’s made for people who no longer want to be living paycheck to paycheck.
So as you can see, we’re making some presumptions. In other words, if you’re already a millionaire, this may not mean much to you. OR, if you’re one of those people that has no problem working a 9-5 their entire life, this also may not be for you.
Do you know those people? There’s always that one person in the office that says if they hit the lottery they would still work their job. Most of the time, personally, I think they’re full of shit, but hey that’s just me.
Granted there are those individuals who have jobs that they are passionate about. You know “dream jobs”. Like being a doctor, or maybe an architect..or an astronaut or something.
But that’s probably not you.
Most people work jobs that they don’t want to work, at least to some extent, because they have to in order to pay the bills. If that’s you then you’ve came to the right place.
Who am I kidding, this is for everyone. Nobody likes giving other people money for nothing.
Let’s get into it.
Money Management 101
Here are some key guidelines to live by:
- Keep a budget (and don’t break it)
- Make more than you spend (sounds simple but people tend to not do this)
- Avoid high-interest debt
- Invest in assets
- Have/start your own business
- Don’t waste money on things you don’t need
- Only spend money on things that can increase in value or make you more money
- Leverage debt to make money
- Have good credit
- Know your net worth
- Have a safety net (3-6 months of savings)
- Understand Time is Money
If you master these things, your life can be completely different in 5-10 years. If you don’t you’ll be in the exact same situation you’re in now, living paycheck to paycheck. It’s that simple.
Let’s break these down.
Keep a Budget
This is such a simple thing to do. And most people keep a budget to some extent, but don’t slack off here.
Make sure you have a complete budget that tracks everything you spend money on and even goes months in advance.
This is so crucial, especially if your income fluctuates. You need to be ahead of the game and even keep a set amount for “unexpected expenses”.
If you’re keeping a budget and the math isn’t working out, then you know you need to either cut expenses, or make more money.
Pretty basic.
As for what budget you can use, there are plenty of apps that you can track your budget with. Mint and YNAB are a couple of popular choices, and there are many others.
Or you can just track it with an excel sheet or something similar. Personally, this is what I like doing because I feel it gives you a more complete picture.
Fortunately, if you don’t want to create your own, there are plenty already created, and I even have one I specifically created for people living paycheck to paycheck. You can get that on Etsy.
Make More Than You Spend
What is your debt-to-income ratio? Do you even know this? And specifically I’m not talking about the metrics that banks use, as they go by gross income.
I’m talking about your debt-to-income ratio using your net pay, aka whatever you actually bring home after taxes, 401k, insurance, etc.
If you’re living paycheck to paycheck, then there is a chance that you may actually be close to 100%.
Meaning, if you look at just all of the things that you have to pay every month like a mortgage, car payment, credit card payment, groceries, gas, etc.
All the fixed costs. That number could be maxed out. In other words, your net income is 5k a month, but your required bills plus groceries and gas etc. totals 5k.
You have nothing left.
It’s kind of absurd to live this way, but yet many people do. It’s actually quite insane if you think about it.
So if you’re maxed out, what do you do?
Well, you either need to increase your income, or lower your bills (redundant, I know).
But what numbers should you strive to be at?
Check out this video, I thought there was some good information here:
Now, you don’t have to watch this whole video or anything. The reason I’m posting it is because it gives some good information in regards to this just in the first 8 minutes (5-8 to be specific).
But he says you need to know your ratio of some key categories and here are his suggestions:
Fixed costs: 50-60%
Savings: 5-10%
Investments: 5-10%
Guilt-free spending: 20-35%
First off all, I don’t see most people having many issues with the “guilt-free spending” category. Most people are already doing this. OR, that number is knocked down because their fixed costs are too high and they have no extra funds for saving and investments.
This is a problem.
I think these ratios are great numbers to strive for. (The budget I listed above will track this for you by the way).
But let’s just say you’re currently at 85% debt to income for your net pay vs fixed costs, and you have to have some fun!
So the additional 15% is pretty much gone, and this isn’t even including unexpected bills that pop up.
This is not a good situation to be in (trust me I know).
So again, is there a way you can make more money?? Can you get a higher paying job? Can you work 2 jobs at least temporarily to pay off debt and lower your fixed costs? Can you start a side hustle?
Or, an easy way change this ratio immediately is to just get rid of unnecessary bills. Cancel that gym membership you never use. Or do you really need Netflix when there are free options where you just have to watch ads? Things like this.
The bottom line is that you don’t have to avoid spending money on things you enjoy like going out, or vacation, or golfing, or whatever it is you find enjoyable in your free time, however, if these ratios are off then financially it makes complete sense to fix them first.
Get better ratios, then you can enjoy your hard earned money more. Which brings us to the next category.
Avoid High-Interest Debt
Paying loans or credit cards that carry high interest rates is just stupid. There is really no other way to put it. You’re simply giving other people your hard earned money every month.
If you have high-interest debt I’m sure you already know this, but this needs to be a priority in fixing.
First off, write down your payments you’re making every month and write down how much you’re paying in interest with every payment.
Realize this is money that you’re just giving away, every month. Why would you do that?
I’m not saying don’t use credit cards, because having credit cards is actually a great way to build your credit and even earn free money.
But you really need to pay them off in full every month or only be holding credit card debt that has a 0% intro period that you can payoff prior to it expiring.
Whatever you do, get out of paying high interest rates. It’s foolish.
Invest in Assets
If you want to get ahead financially, then instead of spending all of your money every month, or even putting money in savings, investing in assets can help grow your net worth much faster.
Now, there is always risk involved here as there is with just about anything. However, buying assets that can appreciate in value can make sense, especially if it can help you earn monthly revenue.
Here is a breakdown of some assets you can invest in:
- Housing
- Guns and Ammo
- Gold and silver
- Jewelry
- Bonds and CDs
- Stocks
- Cryptocurrency
These are more less listed in order from “safe” investments to “riskier” investments.
At the top of the list you have housing, which, long term, is very likely going to grow and even beat inflation. Guns and ammo are good investments as well because they tend to grow with inflation as well and hold their value as they are physical assets that, if well kept, we be around longer than us.
At the bottom we list stocks and cryptocurrency. For the most part these will be more volatile but you can see greater returns.
With higher return potential there is typically more risk involved. And obviously there are specific stocks etc. that will be much safer investments than others.
At any rate, this is what “rich people” do. They invest in assets that can appreciate while average folks buy depreciating assets that aren’t worth anything in 5-10 years.
Person A: Spends 1k on “fun” things that lasted a weekend.
Person B: Spends 1k on a stock that will triple it’s value in 1-2 years.
This is a huge difference when you collectively do these things repeatedly over time. Person A is broke living paycheck to paycheck. Person B has money at hand that could potentially turn into more money.
But should you invest if you’re already in debt? I wrote an article on that here.
The bottom line is this: if you can make more money investing than what you’re paying in interest, then yes you should.
Again, there is risk involved here, so it really involves keeping a good budget, understanding your invests compared to your total net worth, and have a portfolio that you have conviction in.
Which leads us to the next section.
Have Your Own Business
Nobody gets rich without owning shit. Well, almost never. Typically the people that become millionaires from their “regular jobs” do this after decades when they’re 65 or older. (Unless you’re a top earner).
The math just isn’t there when you work for someone else. They are always going to pay you less than you are worth because that’s how they make money (for the most part).
So, if you want to make the kind of money you deserve you should consider working for yourself.
It either takes time or money or both to do this. Typically the more money you have the easier it is to make money in business, but there are exceptions and you can even start your own business for next to nothing.
The key is to figure out what makes sense for you and make it happen.
Don’t Waste Money on Things You Don’t Need
We really need to talk about this in detail, because it’s something that really holds people back from achieving the things they want to achieve.
One of the huge issues with people getting ahead and being able to start their own business and really become financially free is because of this right here.
In other words, if you took all of the money you had wasted in the past on things you don’t need. Depending your age and spending habits etc. there is probably a very good chance you would have enough money to invest in something that could completely change your life financially.
Now, we’re all human and nobody is perfect and you’re going to buy some “wants” over needs at some point I’m sure. But we really need to understand exactly what this is doing and what the actual cost is by doing this.
We need a hypothetical here to really break this down. So let’s give a made up example (that is actually quite common).
So for this example we’ll use the Jones’ family as an example.
The Jones family works all year 9-5 and basically lives paycheck to paycheck like everyone else. Let’s just say the dad makes 80k a year and the mom stays home with the kids.
Every year they get a tax return for about 10k.
Every year they use that entire 10k on a big 2 week family vacation. They go to Disneyland or whatever, have a grand old time, and basically work the entire year for these 2 weeks.
They have a credit card debt and other debt as well. Let’s just say 10k in credit card debt, and another 150k in other debt which doesn’t have as a high of rates but maybe averages 7% or so.
Now, in this scenario what is the actual cost of the vacation? Is it 10k? Not if you count what they’re paying other people/businesses every month in interest.
So if we’re just looking at this on face value. The cost is 10k plus whatever interest you’re being charged every month that would have gotten paid off if you paid off high interest debt instead, or even just any interest.
In this hypothetical situation, if that 10k of credit card debt has a high rate, let’s say 20% and they make minimum payments (assume they can’t pay it off), then paying 2% a month at $200 a month means it would take 106 months to pay that off and they’d pay total interest of over 11 grand!
And for this example we used a 2% minimum payment but many times the minimum is only 1%. Yikes.
So their 10k vacation actually cost 21 grand (assuming they don’t eventually decide to take that 10k tax return and pay it off).
And to make things even worse…that 21 grand was just looking at the credit card debt they have and not the other debt…the actual cost of their “10k vacation” in this example is technically even more than that.
But Dad makes 80k a year right? So a 2 week vacation cost him about 1/4 of that when we look at the “actual cost”…so 2 weeks of vacation cost him to work 3 months of his life working.
And everything we’re looking at here is just in regards to getting out of the red and paying off debt. We’re not even talking about investing in a business or anything like that.
We might as throw that in as well though.
Let’s say they’ve paid off their credit card debt and their other debt has relatively low rates. Why not take a vacation?
Above we talked about potentially investing in assets or a business even if you’re in debt because the payoff could be greater than what you’re paying in interest.
So with 10 grand to play with, and working jobs 9-5 currently scheduled for the rest of their life, why not invest that 10k into a business instead?
That 10k could turn into a business that could replace Dad’s 9-5 and earn far more than what he’s earning as a W2 employee.
Then, you can take twice as many vacations and have it cost you less…
Now, none of this is saying you shouldn’t go on vacation, or that you shouldn’t buy things you don’t really need but just want…we’re just saying you should know the actual cost and then decide if it’s worth it or not.
We used an example of a “10k vacation” that basically equated to 3 months of working full-time. Is a 2 week vacation worth 3 months of work?
That’s for you to decide.
Realize that the small things can add up as well and even though they may not seem like much at the time, the repeated process of buying “small things” that you don’t need can turn into thousands of dollars annually.
And just like the 10k example, it’s actually costing you more than that expense. $20 is really $40. $100 is really $200, etc. etc.
Spend your money wisely.
Only Spend Money on Things That Can Increase in Value or Make You More Money
Well that was kind of depressing. All we just went over was simply the true cost of spending money while you’re in the red. But let’s turn this around and think about how you can spend money to make money instead.
We’ll go back to the 10k example. Outside of paying off debt. We could use this money to make us more money, and that’s when things get fun, and repeated over time can make you rich.
So 10k invested and turned into 20k would be a better option right? Or using that money to invest in a business that could change your life in 6-12 months.
We went over that already.
Making habits of buying assets instead of throwing money away will be key in where you’re at financially in the next 5-10 years. Will you be set up where your money is making money for you? Or will you be in the exact same situation you are now working and living paycheck to paycheck?
Your habits will determine that.
Leverage Debt to Make Money
Let’s look here at investing in assets. Most of us are in debt, and many people wonder if they should be paying off debt or buying assets. Well, that depends entirely on various factors.
As we said, it all comes down to whether or not you can make more money than what you’ll be paying in interest.
Let’s look at a couple of examples here.
I gave an example about having 10k in credit card debt and we talked about how holding on to high-interest rate debt is a terrible idea, but technically there can be times where you can even beat those rates.
For example. Instead of paying off 10k in credit card debt you choose to buy $10,000 in cryptocurrency prior to a bull run, and it turns into $100,000. Well, clearly here this would have been far better off than paying off that debt. The return-on-investment (ROI) makes it worth it.
Of course there is plenty of risk there.
But let’s look at what I put as one of the safest investments: housing.
Leveraging debt to buy housing is pretty much always going to be worth it long term. (Although short term with prices already rising it’s riskier now imo)
But, let’s give an example of using housing as a “good investment”. Then we’ll even use some “great investments”.
A good investment means you bought your house for 200k and didn’t over extend your debt-to-income ratio and were able to pay this down pretty easily for 5 years and your home value went up as well from 200 to 250k.
You paid 40k down so financed 160k, 5 years later still owe 147k…but your home value is 250k. So you have over 100k in equity. This is a “good investment”.
But many people still consider a mortgage a liability and not an asset. Cough-Rich Dad Poor Dad.
I mean you had to keep up on that for 5 years and after all of the expenses you still owe 147k.
However, what if you did the same thing with an investment property?
You spent 250k and had someone else pay the mortgage every month for 5 years. While you’re paying for upkeep, you’re still having someone pay the mortgage every month.
Or better yet, what if you bought this same property and used it as a short term rental where you not only got the mortgage paid every month, but also generated profit? That would be considered a “great investment”.
Granted, doing short term rentals is more hands on, but for the average folks the ROI would be worth it as long as they can make a profit.
So, with this example of a 250k house used as a short term rental.
Let’s say profits average $2,000 a month net after all expenses. In 5 years, assuming you just paid the mortgage every month, you would have that same 147k property with 103k in equity, but you’d also have made $120,000 in additional income.
Now you could of course have paid that towards the mortgage, or you could have used that to start another short term rental that makes you another $24,000 per year in profit (or more, plus equity etc. etc.).
You can see how doing this over and over, rinse and repeat could make you a millionaire, or at the very least replace your 9-5.
And this is what “the rich” do on a larger scale.
That being said, all of these are examples where it makes sense to leverage debt.
Trying to save up to pay cash for a house is moronic, at least historically.
Have Good Credit
How can you really leverage debt if you have bad credit and can’t get decent rates? It’s going to be very hard.
The truth is that having bad credit can cost you tens of thousands if not hundreds of thousands or even millions of dollars throughout your lifetime.
All of the examples we used above about leveraging debt won’t even be possible if you can’t get approved for loans or are going to be paying a boatload in interest.
All you’re doing is making things harder on yourself by having bad credit. Like other categories. You need to write out a plan to improve your credit and follow through.
Know Your Net Worth
At the end of the day, all of this really comes down to building your net worth. And it’s really going to help if you keep track of what your net worth is.
Find something to track your net worth with, or again I created a budget that does that as well.
Knowing what your net worth is helps you understand where to put your money and also helps you focus on doing all of the things mentioned in this article.
In short, rich people know their net worth and grow it, poor people don’t.
Have a Safety Net of 3-6 Months
Here’s the annoying part…building up the rainy day savings. Ugh. What a drag…
I know, you’re supposed to just let money sit there making virtually nothing in a savings account, just in case.
Sounds crazy if you ask me. But you really need to have funds available if you lose your job or whatever.
Now, we spoke about investing in assets above. And if you have assets that you can exchange for cash quickly, then these could fall under this category as well.
What do I mean here?
Well, let’s give an example. A family whose bills are 5k a month would want to have a “rainy day savings” of 15-30k.
I actually talk about using investments as a part of this 3-6 months in savings here.
Basically what this is saying is you could have 15k in saving and 15k in stocks/crypto that you could sell if you needed to.
Or really it depends on your risk level. If you’re someone that doesn’t want much risk here, you could do 20k in savings and 10k in “safer stocks”, whereas someone willing to have more risk could have only 10k in savings and 20k in stocks and maybe a decent percentage of that into “riskier assets” like cryptocurrency.
These assets can be sold into United States dollars and added back into your checking account within a day or two.
Again, this is just a strategy I use because I see just having money sitting in savings earning almost nothing in interest as a waste of money.
You can just use a savings instead here.
Understand Time is Money
There are a couple of different perspectives here. The first being that you need to figure out how to make passive income so that you don’t have to trade your time for money. Once income is passive then this is no longer an issue.
That being said, in the meantime, if you don’t have passive income coming in. Then we need to be a. trying to build passive income, but also understanding that our free time is time that we can use towards this.
We also need to understand what our “free time” is worth.
In other words, it will take time and effort to build that passive income so we really need to place a value on what our free time means.
So again, if we use the vacation concept and you spend 10 grand to go on a 2-week vacation, not only did it actually cost more than 10k when we consider the interest you’re paying other people, but you’re losing out on time that you could have spent building out a business that could provide you passive income.
Same concept as before. The logical thing to do would be to build a passive income stream first, then you’ll have time to vacations, etc.
This is something that can be built in a year or so depending on a multitude of factors.
In the meantime…if you’re living paycheck to paycheck and don’t have passive income coming in, then we have to put a price on our free time, or better said, understand the cost of our time.
Let’s break this down on a micro-level scenario so we can try to gauge where our time stands.
What do you make per hour from your job?
That’s the minimum your free time is worth.
First of all, we want to be aspiring to earn more per hour, but we also want to respect this number in the meantime.
Let’s give an example.
Hypothetical situation: You make 75k/year at your job. This equates to about $36/hour assuming you work 40 hours/week.
This means your time is worth a minimum of $36/hour.
Let’s say you drove an hour to buy something that you got a great deal on. The cost of this “thing” was originally $100 and you got it for $20.
So you just saved $80!! Great deal right?
But you drove an hour to get it…so an hour there, and an hour back…which means you lost 2 hours of your valuable time. 2 hours=$72, plus the $20 you bought it for=$92, plus the gas it costed to go over and back…your car gets 20 t0 the gallon and you drove about 120 miles…there’s $8 in gas.
With this example you think you saved $80 but in reality the true net cost of that product was the exact same as if you bought it full price.
Your time is valuable.
Understand this and it can help determine the true cost of something and whether that specific purchase is worth it or not.
This goes for big purchases and small.
Again let’s look at this from another micro example.
Let’s again assume you’re making $36 an hour and that’s our baseline. When you buy a depreciating asset this should be your standard.
Say you a $36 shirt, or a $36 video game, or a $36 whatever…
Is it worth an hour of your life?
Because that’s essentially what it is costing.
Oh, and again that’s not even counting if you have other debt you’re paying interest on…
So as we already learned, if you have high-interest credit card debt that you’re not paying off early, everything you buy actually could be costing twice as much or more…
So how about 2 hours of your life? Is that material object worth it?
Does this sound ridiculous?
Are we being too nitpicky?
You know what I think is ridiculous?
The fact that most people are and will be debt slaves/job slaves their entire life until they’re old and falling apart.
I think that’s ridiculous.
Don’t you?
And that’s the default path everyone is on.
If you don’t get laser focused on finances you will very likely fall on that path.
While we should be reluctant to spend money on things we don’t need, we should be more willing to spend money on appreciating assets.
10 grand spent on an appreciating asset is better than $10 spent on a depreciating asset.
Does that make sense?
We only have so much time on this earth, don’t waste it.
Use your time to build passive income so that this is no longer a factor.
Understand Why All of This is Important
Pretty much everything we’re talking about here may be common sense to some extent, but most people just simply don’t follow these rules. That’s why most people live paycheck to paycheck.
We subconsciously know these things but tend to find a way to block it out.
What we’re really doing though, is setting ourselves up to be a worker bee for the rest of our lives.
That’s just a fact.
Again, most people will work their entire lives until their health is deteriorating and they literally can’t work anymore.
This is the default path.
Think about that for a second.
Long pause.
Sound good?
We either make a conscious effort to change our path and become apart of the small percentage of people who thrive financially or we’re doomed.
Some people actually have their money make money and can live with freedom. Most people don’t.
However, following some of these basic guidelines could change your entire financial future.
Summary
Really what we can summarize all of this up by is whether we’re snowballing our money to build more money by structuring our income and debt to work in our favor, or not.
I really tried to create a complete 101 guide for “average folks” here that can help you do that.
Of course, your path can be different. But most of what we’re talking about here is just basic math and how we can make that work to our advantage.
It’s a science really.
Alright, let’s summarize:
Budget your money to where you’re somewhat around the ratios of 50-60% fixed costs, 5-10% investing, 5-10% savings, and then you can do whatever you want with the remaining 20-35%.
And if you’re not at these ratios then do whatever you can to get to them so that you’re avoiding high-interest rate loans and keeping a high-credit score so that you can leverage debt to your advantage, which in turn can help you own your own business, or at the very least own appreciating assets.
Also, use your time to make passive income which can cost almost nothing.
All of this leads to making more money, and reducing what you spend by potentially tens or hundreds of thousands of dollars in the long run.
And yes, “average folks” can do all of these things. This isn’t limited to the “rich”. Understand this.
What do you think? Is there anything I missed here that should be added?
Do you agree with these ratios? Do you think there is a better way?
Let me know in the comments below!