The 5 Pillars of Personal Finance, Pillar #4: Spend
Personal finance can be overwhelming. There are so many things to learn; do you have to know it all in order to be financially successful? Luckily you don't. When it comes down to it, there are 5 basic principles to learn, the 5 pillars of personal finance:
Earn
Save and invest
Protect
Spend
Borrow
Today we explore the fourth pillar, spend.
Budget
Many people resist creating a budget; it feels too restrictive. But a budget doesn't prohibit you from spending money. A budget gives you critical information; how much money is coming in, how much is going out, and where is it going? If you can't answer these questions, you will never be financially healthy.
Part of the resistance to budgeting can be the misconception that a budget has to be complex or you have to be super organized or a math whiz to have one. Not true! There are a lot of great budgeting apps, and our favorite is Mint.
Mint is free and easy to use. Connect your financial accounts, and the app does most of the work for you, automatically downloading your financial information and transactions. The app is secure; it's owned by Intuit, the same company that owns Turbo Tax. If it's safe enough to file the sensitive information on tax returns, it's safe enough for budgeting. And you can't transact anything via Mint. Even if someone were to hack your account, the information is read-only.
A great way to keep your budget simple and effective is to use the 50/30/20 method. Budgeting can be trial and error. Sometimes you'll overspend. But keep at it, make the necessary adjustments, and you'll be a long way toward financial health.
Spend Well
It is unrealistic to be frugal in every area of your life, nor is it necessary or fun. You work hard for your money, and you are allowed to spend some of it on things you enjoy. But almost no one can spend unlimited money on everything they want, so we must make choices.
If you really love food and going out to eat, you can. But you have to work it into your budget. That means cutting back on areas that are less important to you; maybe you don't care about having the latest trendy clothes or driving a fancy car.
And you want to get the most enjoyment out of your discretionary spending. It's been found that spending on experiences rather than things makes us happier. And it's true! Think about it. What was the last concert or vacation you went to? What was the last "big" purchase you made? You probably have all kinds of memories from your concert or vacation, but you may hardly use or even still have the last big purchase you made. Even better, many experiences are free or low-cost.
Reduce Expenses
When it comes to reducing expenses, focus on the big things. Yes, you can save money by bringing your own coffee to work every day rather than buying it out (and you should), but there is an old saying, "Penny wise and pound foolish." It means you watch your pennies but not your pounds (UK currency).
Go through your budget and see what your biggest spending categories are. Housing will be #1 for most people, and if you can reduce your housing costs, that's great. But housing is expensive, and keeping it at or below the recommended 30% of your income is not always possible.
If you have high-interest debt, that may be another big expense. The average credit card interest is nearly 21%, and payday loans can have interest rates in the high three figures! After amassing your $1,000 emergency fund, this kind of debt should be your priority. High-interest debt makes it nearly impossible to get ahead and meet your other financial goals.
Two possible ways to tackle high-interest debt are balance transfer credit cards (for credit card debt) and personal loans (for any kind of debt). These options pay off your current high-interest debt. In the case of a balance transfer credit card, your old balances are paid off and moved to the new credit card. You have a 0% interest rate. That means all your payments go towards paying off the principal so you can pay down your balance more quickly. For a personal loan, you will use the money to pay off your old debts, and the new loan has a lower interest rate, again making it faster and less expensive to pay off.
But there is a catch. In order to qualify for a balance transfer credit card or a personal loan with a lower rate of interest than your credit cards have, you need a healthy credit score. You don't need a perfect score of 850; anything over 760 will typically qualify you for the best offers.
That's where Upwardli can help. We were created to help those new to credit or needing to improve their credit do just that. There is no credit check or Social Security number required. Join Upwardli today and start building your financial future now!
In our next article, we'll cover the fifth and final pillar of personal finance; borrow.