7 Tips to Break the Mold of Average Finances in America

Image Credit: 401(k) Calculator, CC BY-NC-ND)

 

Did you know that over a third (34%) of Americans have no savings? Not a penny in their savings account.

The news doesn’t get brighter from there. Another 35% admit to having less than $1,000 in savings; that’s not enough to even cover a month’s rent or mortgage payment, much less keep food on the table, if they lose their job.

And to keep our northern friends from feeling too smug, Canadians are no better at saving money, either.

“Maybe all their money is invested in stocks?” you ask hopefully. It’s a nice thought, but unfortunately not true. Only about half of Americans own any stocks whatsoever. Ten years ago that figure was nearly two-thirds.

“What about retirement savings?” Also ugly. The median retirement nest egg in the U.S. is only $5,000. It’d be hard to live for two months on $5,000, much less for 20-30 years.

Don’t want these stats to reflect your finances? Good, I don’t either.

If you want to break the cycle of average, here are seven tactics to go from zero to financial hero in no time.

 

1. Base Your Monthly Budget on 4 Weeks’ Income

Answer honestly: is your monthly budget based on a year’s income divided by 12?

I hate to break it to you, but in a given month, you don’t earn 4.33 weeks’ income. In most months, you earn four weeks’ income. Occasionally, you earn six weeks’ income.

You can count on four weeks’ income in any given month. Specifically, you can count on four weeks’ after-tax income. That’s what you have to work with. No more.

And in those occasional months when you earn a bonus paycheck? It should go straight to your savings account. Do not pass Go, do not collect $200, do not go on a shopping spree.

 

2. Want Better Financial Fitness? Start an All-Cash Diet

No, you don’t need to take a pair of scissors to your credit cards. But you do need to leave them at home, tucked away in a drawer somewhere.

Set a spending allowance for the month, including food, clothing, gas for your car and entertainment. From now on, you can only spend cash – no cards!

On the first of the month, visit the ATM and pull out your monthly spending budget. Then take it home, and split it into weekly chunks. Leave most of it in the drawer next to your credit cards, and only put one week’s worth of cash in your wallet.

That’s what you can spend for the week. Total. Including groceries.

You’ll think a lot harder about every dollar you spend, when it’s denoted in physical bills in your wallet. You’ll also subconsciously track what your spending – something your mind doesn’t do when you just swipe plastic.

 

3. Cash Diet Too Extreme? Become a Debitarian

Do you have a separate savings account set up, in addition to your checking account?

Every time you get paid, on payday, set automatic transfers to move money from your checking account to your savings account. This should leave in your checking account only the money you’ve budgeted for spending, plus mandatory expenses like your rent or mortgage.

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Free Video Training: Passive Income from Rentals

Once again, your credit card is banished to a drawer in your bedroom. You can only spend with your debit card – whatever’s in your account is what you have to spend, and when it’s gone, it’s gone. Credit cards have their purposes – you can even use plastic to finance real estate investments! – but the average person abuses their credit cards. If you end up having to pay finance charges on your credit cards due to unpaid balances at the end of the month, it means you’re using them wrong. Pay them off, become a debitarian, and you can reintroduce credit cards back into your financial diet once you’ve become more accountable to your budget. If financial accountability were easy, we’d all be millionaires, right?  

4. Split Your Paycheck

Can your employer split your paycheck to be direct deposited into two accounts? If so, set up your operating budget to go into your checking account, and your savings to go directly into your savings account. That way, you won’t be tempted to spend it – it never even touches your checking account! Because willpower is a problem for many of us, this makes saving a lot easier. You never see it, it just happens. All automated, no willpower (or even any thought) required.  

5. Use Your Savings to Build Passive Income (and Don’t Spend the Extra Income!)

What do you do with all that money being deposited into your savings account? Leave a little for your emergency fund, but put the rest to work! Every dollar you invest is a little green worker, who marches off every day to work for you. As a blog at the intersection of real estate investing, personal finance and passive income, you know what we think you should invest in. Rental properties can generate high returns and yield, with predictable cashflow if you properly project expenses like CapEx, vacancies, etc. After all, real estate investors are much, much better off than the average American! But rental properties aren’t the only vehicle for passive income. Some stocks, mutual funds and ETFs offer high yields due to strong dividends. Then there’s the old standby: bonds. Just remember that bonds perform best in credit markets with high interest rates, which we haven’t seen in decades. However you build your passive income, make sure you reinvest it, rather than spend it! Use the extra income to accelerate your investing and snowball your debt repayment.  

6. Surround Yourself with Financially Responsible & Ambitious People

If you want to get better about saving and investing money, spend more time with others who excel at it. Jim Rohn popularized the quote “You are the average of the five people you spend the most time with,” and it’s true. Start spending more time with people who earn good incomes but invest a large portion of it. Spend more time with real estate investors who are obsessed with creating passive income. As we’ve pointed out before, the rich really do get richer in real estate, and you can join them by adopting the habits of the wealthy. Most of all, if you want financial independence, spend more time with people who are actively pursuing financial independence.  

7. Make It a Family Affair: Raise Your Kids to Be Financial Geniuses

How many big-ticket lottery winners go broke within a few years? If you answered 70%, congratulations, you win the prize (but not the lottery, sorry). Why? Why is it that, no matter how much money you give a person, they still end up poor? Simple: most people don’t have strong financial skills. If you want your children to succeed financially, you need to teach them those skills. We all know they won’t learn them in school! Start with basic budgeting at an early age, and then get into the fundamentals of investing in stocks and real estate. As they get older, you can even raise your kids to be good entrepreneurs, rather than good employees! It’s also critical that you bring your spouse and kids onboard with your financial goals. It doesn’t matter how well you plan your budget if your spouse is going to ignore it and spend whatever they like.  

Forget the Doom & Gloom: Anyone Can Escape Average

You can’t control the economy. Or the stock market. Or the real estate market. But you do control your career, and therefore your income. Even more importantly, you control your savings rate, and don’t have to settle for an average 5.6% savings rate. You also control what you invest in, and with real estate, you have direct control over your returns. You can choose to only invest in a property that will return 10% annual yield for you, if you like. As you build passive income, you’ll become less and less dependent on your job to pay your bills. It’s an incredibly empowering feeling, and the more income you earn, the more you can invest. The more you invest, the more income you earn, and one day you wake up realizing that you’re financially independent. Forget average. Aim for financial independence! Have any financial superpowers? Any tips, tricks or tactics you’d like to share? Don’t be shy!    

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