One of the most frequent financial struggles that people talk to me or email me about is having trouble being "fiscally responsible". I use quotes because I don't really like that term. The word responsible has a lot of implications - like everything is within your control and if it isn't, you're being irresponsible. Traditional wisdom says save 20%, so if you aren't, are you not being responsible? Sort of.
Many of us have trouble saving when you know you should save, curbing spending on bull shit that we don't need and lack a general understanding of the financial markets and economics. We make weird, irrational decisions because we're emotional creatures that act on our feelings.
So let's start there.
Step 1: Realize You're Not Rational and Trick Yourself
I'm not saying you shouldn't be fiscally responsible. But I am saying, it's a little crazy to think that we walk around thinking we're all rational human beings making rational decisions. Because as much as we want to be, we are so not that. Most of what we do is based on our feelings.
Some of the biggest decisions in our lives - who we marry, whether or not to have children, what career path to follow, grad school or not - aren't based on rationality. It's based on this feeling we have - love, the overwhelming desire to create a legacy, fear of death or being forgotten, the search for meaning in our work. This drives so much of what we do. I'm sure we can use rationality to sweeten the deal and sell ourselves on the choices we may have already made, but to convince yourself that you're a rational decision maker is totally bullshit.
So instead of looking at the things you do as standalone actions, look at them like relationships. You have relationships with things in your life. You have a relationship with your career, with the people in your life, with a process or a project you've been working on. And you have a relationship with your finances. And like all your other relationships, you don't act like a rational person. You act based on feeling and you usually need to trick your mind and body into doing something.
Some examples include, but are not limited to: going for that run in the morning, eating that salad for lunch, putting that bonus into a savings account, actively listening to your sweetheart or staying focused on work when all you really want to do is smoke that ganja and lay around all day.
The people who do all those things, the morning-running, salad-eating, active listeners who are highly productive are either robots or they trick themselves into doing the things they don't feel like doing. They rewire their brains to form habits. Then they tell their feelings to STFU while they handle their to do's.
That's a great approach to being fiscally responsible. If you're earning money and you know can and should be saving, find a guru of your choice (Tony Robbins, Seneca the Stoic, Eckhart Tolle, etc.) to teach you how to get out of your own way and start doing what you need to do. This is simple, but not easy.
But there are large swaths of people who are battling much more then their own feelings. Sometimes circumstances get in the way.
Step 2: Understand Your Circumstances
There are some things you can't change. Or the effort to change said things is just not realistic or worth it. Take height, for example. As far as I know, I will not grow taller than my current height - an impressive 60 inches. That circumstance will govern a lot of what I'm able to do. I usually can't reach the tallest cupboards in a kitchen. I also will probably never dunk a basketball on a regulation-sized hoop, even if I trained and tried and put it on my vision board and hoped it until I turned blue. The rules of the physical world might limit me. And yes, there is leg lengthening surgery, but it's costly, painful and could create more complications. Which further proves my point, that the effort to overcome certain fixed circumstances might not be realistic or worth it.
Understand how your fixed circumstances are going to limit what you can do. If you want to always live in a major, coastal city, that circumstance will always require that you earn a certain amount of money, assuming you want to participate in the local economy.
Yes, some (mostly) fixed circumstances are institutional. Women earn less than men and not having a college degree means you have a higher likelihood of being unemployed and earning less than individuals with a degree. But it's still not impossible to overcome your circumstances.
Some are even more semi-fixed than others. The earning potential for some people are capped. For example, if you run a business that requires you to trade time for money (like a therapist or consultant), then there might be a cap for how much you can earn because you can only work so many hours in a day. Some positions and industries don't come with a huge salary package, like teaching, social work or non profit work. I say these are semi-fixed circumstances because you ultimately have a choice to accept the circumstances that come along with a career or an industry. You can make moves and change the circumstances you have control over.
Step 3: Change What You Can
Finance has a lot of shit going on, but I want to distill it down to these few important components: the money coming in, the money going out, savings (including investing) and then let's just say everything else.
Everything else is insurance and all the other things that you think you should know. Like what is a 529 account? What's the difference between a Roth and a traditional IRA?
What about debt? Debt is the overlap of money coming in, money going out and things you should know, like a strategy to tackle debt.
Money Going Out
You should have a general idea of your consumption habits and how that impacts your bank account. If you don't know how much money you need to spend, you can't figure out how much you need to earn and save.
Take stock of what's been going on in your bank account over the last few months and come up with a rough budget for what you have been spending. Don't forget about one-time or non-monthly expenses, like property taxes or DMV fees or when you pay subscriptions annually.
If you're a normal American who consumes more stuff than you should or need to, take a look at how you can change your behavior. The opposite could be true; maybe you realize you're depriving yourself and you want to spend more.
If you need to change, you probably need to trick yourself in some way. Change can be difficult. Going against habits can be challenging. Acting rationally despite your feelings takes mind games.
Savings + Investments
Emergency Fund (Short-Term)
You need an emergency fund. How much do you need? I'm glad you asked. You need 3-6 months worth of your expenses - hence another reason why you need to first understand how much money needs to go out so you can consume at the rate you want to consume.
Figure out how much you need to save. For example, let's say you need to save $4,000 more dollars so you'll have a total of $24,000. Figure out how long your time frame is to save or how much you can afford to save each month and you can back into how long it'll take you to save. Back to the example, let's say we want to save $250 a month. So $4,000 / $250 equals 16 months.
If you're in a similar boat, can you change behavior here to bridge the savings gap?
Long-Term Savings (Retirement)
One ought to be saving for retirement because it's responsible to be responsible for one's future self. Is that circular logic? Maybe, but there are generally tax benefits when you make contributions to retirement accounts, so you ought to leverage them. All the smart people are doing it.
Put the maximum amount you're allowed to contribute. If you can't put in the maximum amount each year, then run some projections with what you can contribute or what you're currently contributing. Then evaluate how far off you are. Can you bridge the gap by earning more money or changing your lifestyle?
Projections are just projections. We can't possibly predict everything that will happen. But you can control what you can by knowing what you should be saving.
Most people don't need to pay a financial advisor for advice. Buying a diverse basket of inexpensive index funds or exchange-traded funds (ETFs) is a very popular strategy right now. One big reasons is because you don't give away too much of your gains paying a fund manager or advisor. For example, if your account went up 3% but you pay management fees that total 1.5%, you really only got a 1.5% return. And if you do hire an advisor, make sure they are a fiduciary. A fiduciary is required, by law, to put their client's interests above their own.
Other Shit You Should Save For
Take stock of how you want your life to change. Do you want to move to another city? Do you want to start a vegan, artisanal dog food company? Do you want to buy an engagement ring? Do you want to have a fuck-you pile of cash?
Savings isn't always the answer. Some of us are lucky enough to borrow, inherit, stumble upon or convince others to invest in us or our project. The important thing is do your best to map things out. If you want to get to a place by a certain time, how can you work within your circumstances to get there? Even though you can't predict all the bumps in the road, there are some things you can control. Finances are the same concept with different parameters.
Money Coming In
You should have idea of what you're earning. If you get a steady paycheck, you should know what your salary is and what you take home every pay period. If you don't know this number, you're fucking up. Stop fucking up. Look it up. Got get your last pay stub. Look at the numbers. Make the number relatable. What could you buy with that paycheck?
Maybe one paycheck is equal to 1,750 hamburgers or 750 cheeseburgers. Maybe it's equal to an entire Coachella experience. Maybe it's an international trip. Maybe it's half of rent. Whatever the number is, play a little trick on your brain to help you understand that number.
If you are self-employed, you should have monthly revenue goals. If you are self-employed and you don't have monthly revenue goals, you are fucking up. Stop fucking up and figure out what your monthly revenue goals are based on what your business needs in cash each month, including salaries for you and your partners if you have them.
In other words, revenue goals are a function of expenses.
That is a very important pillar of fiscal responsibility. In the short run, if you don't understand what you need to earn to keep consuming at the rate you are, you could over do it and get into debt. All kinds of debt.
In the long run, if you don't understand how much you need to earn, you might stay in debt for a long time.
If you can't manipulate your circumstances to increase your earning potential, then you need to balance the equation with consumption. But there is only so much you can cut. So you have to realize that your only option is what I like to call "fucking up the equation."
How to Fuck Up The Equation
Fucking up the equation means having that MJ man-in-the-mirror moment and figuring out what needs to change in order to move the needle. It means figuring out how to turn up the dial on income because you can only be so frugal; you can only cut expenses by so much.
This isn't going to be easy. You might have to switch companies in order to get a higher salary or maybe go for a promotion. You might need to get more training. If you're a freelancer, you might want to consider hiring people and setting up a small business. Your business might need to change its positioning or come up with a supplemental product or service. Or maybe you'll need to take risks with the cash you do have to turn it into a revenue stream. Whatever it is, it's going to take work.
Once you're solid on earning money, saving money, investing for your future self and spending within your means, then you can move on to the next bracket of financial crap that will make you fiscally responsible like insurance, estate planning, understanding compounding, etc. etc.
Step 4: If This, Then That
Not everything, but close to everything you want to do will involve considering finances. You'll need to make decisions that will impact your actual life. For example, for a new business you're trying to launch or for your kid's college tuition, is it better to save or to borrow? One choice isn't totally better than the other choice because everyone's circumstances are different. Just understand how your choices can possibly impact your life. This is a very important pillar fiscal responsibility - understanding how your choices and actions impact you and the people close to you.