When you're learning about money, odds are good you'll hear the phrase "personal finance is personal." Don't fall for it, cautions Ramit Sethi, author of the New York Times bestseller "I Will Teach You To Be Rich."
"I'm not a fan of that phrase," he says, "because most of us believe that we are so unique, and that belief produces lots of bad decisions."
For the most part, people benefit from taking the same basic steps to achieve their financial goals. "Most of us at a high level have very similar financial goals," Sethi says. "We want our money to work for us, we want to be safe and secure, and we want to have a little extra money so we can spend it on all of the things we love."
When we fall into the trap of believing our financial situation is unique so none of the usual rules apply, it can make financial planning feel overwhelming, leaving us paralyzed, he says. For example, when you're trying to figure out how to juggle goals like paying down student loan debt, building an emergency savings fund, and boosting your retirement contributions, you may end up feeling so inundated, you make little progress on any of them.
"Most of us are mostly the same," he says. "Let's acknowledge it, then master the basics and we can earn the right to be different."
Here are the basics it's important to master before you personalize your finances, according to Sethi.
Many people Sethi speaks to don't know basic details of their finances such as how much debt they owe. Various surveys back up Sethi's point: For example, 38% of people with mortgages don't know their current interest rate, according to Bankrate.
To get a sense of your finances, start by asking yourself these three questions, Sethi says:
1. How much do I owe?
Make a list of your accounts so you can see how much money you owe on loans such as your mortgage, credit card debts, or student loan payments. Note details including monthly payments and interest rates.
2. How much do I make?
It's key to have a clear idea of what your net pay is, meaning how much you're taking home each month.
3. What percent of my income am I saving and investing?
Take note of what you're contributing towards your retirement account, like a 401(k) or an IRA, and toward other goals such as an emergency savings account or a brokerage account.
Once you know your numbers, create a conscious spending plan. Broadly, you need to think about how to cover your needs, wants and savings. Some recommend using the 50-30-20 framework, which splits your paycheck into those three main buckets.
This is where you can personalize your finances, Sethi says. Ask yourself: "'Do I know where I want my money to go?' It sounds so obvious, but the average person does not know. And if you ask them, 'What percent of your money do you want to go to investments next month?' They'll look at you and just stare and blink. That's not the reaction you want," Sethi says.
Video by Ian Wolsten
It's smart to automatically save and invest a portion of your money each month if you can, he says. "In general, if you set up that you're saving and investing a certain amount of money, most of these questions are simply turning the dial up or down," Sethi says. "Do you want to save 18%, or do you want to save 20%? Okay well let's talk, do you want to retire at 55 or 50? Right? ... But those are minor changes. I find that most people do not have the dial set at all. That's who I'm speaking to."
To focus your spending, think about "what do you love spending money on?" Sethi says. "And how much have you given yourself every month to do that, guilt-free? It could be eating out, it could be working out at a gym, or spin class, it could be a beautiful coat. I want to know and I want people to be proud of that."
Once you have mastered the basics, Sethi says, then you can say "I have earned the right to account for my 5% unique perspective, but until then I'm not going to sit here and be paralyzed by my supposed uniqueness. No, I'm going to get started right now."
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