Ramit Sethi: The Only Wealth-Building Way To Manage Money
Your money management style matters more than you think. Ramit Sethi, author of the bestselling book, "I Will Teach You To Be Rich," recently wrote a newsletter article about the five ways people manage money. Some are clearly ill-advised and some seem like good ideas — but he praised only one as the way to build wealth.
Let It Be: Money Ignorance
The first two money management approaches are hands-off:
Ostriches bury their heads in the sand, ignoring anything to do with money. They don't know how much they owe or have saved. Their approach is to hope everything works out.
Free spirits play things fast and loose. They might occasionally check their balances or credit card bills, but usually, it's spend, spend, spend. Free spirits are often in debt and have little, if any, savings.
It's easy to see how these approaches can go south. If you don't know or care about where your money is going, building wealth becomes a game of chance — and it's likely to be one you'll lose.
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Nickel and Dime: Money Micromanagement
The next two management styles are as hands-on as the previous two are laissez-faire:
Tool hoppers try every money app they can find, always believing the next one will solve everything. Some of these budgeting apps are excellent, but hoppers expect too much, too fast. When their money doesn't fix itself, tool hoppers quit.
Personal finance nerds build intricate spreadsheets and track each expense, no matter how small. They think accounting for every dollar will help them build wealth, but the work exceeds the typical payoff, according to Sethi.
Other financial experts agree. Financial advisor John Browning said budgeting apps lead to financial micromanagement and make consumers anxious. People can't build healthy relationships with money when they track every single dollar and cent.
Experts say the key is to change your behavior before using an app or building a spreadsheet. They offer the same advice as Sethi — pay yourself first and automate.
Hands Off, Minds On: Money Automation
Sethi's recent newsletter article saved the best for last. After describing the perils of undermanagement and micromanagement, Sethi turned to the one money style he recommends: automation.
Automators plan first and act later. They spend an initial few hours deciding what will happen to their money monthly. They determine how much will go to their bills and how much will be left for savings.
Once that plan is ready, automators set up recurring transfers and autopay billing.
Sethi recommended scheduling automated transfers based on your pay dates. For example, if you get your direct deposit on the 15th of the month, your deposits might look like this:
401(k) match directly from your paycheck on the 15th or 16th
Automatic transfer from checking to savings on the 20th
Automatic transfer from checking to a Roth individual retirement account on the 20th or 21st
Automatic bill payments on the 22nd
How To Start: Pay Yourself First
If you look at Sethi's recommended automation schedule, you'll notice bills come last. That's because Sethi is one of a growing number of money experts who recommend that you pay yourself first.
Traditional budgeting has you paying everyone else first. You list all of your spending categories, including discretionary expenses like eating out. Then, if there's anything left, you put money into your savings or investment accounts.
Paying yourself first flips that plan on its head. Instead of paying your bills first, you pay your future self by saving and investing. As money expert J.D. Roth wrote in "Get Rich Slowly," shuffling that money to the side is the best way to protect it.
If you save last, you'll likely find dozens of reasons to cut your goal down or you won't save at all. You could budget $100 instead of $50 for clothes, for example or $200 instead of $100 for eating out. Those "little treats" add up and the next thing you know, your savings contribution is gone.
Of course, paying yourself first also takes discipline. The "what if?" voice in your mind pipes up, asking if you would rather spend a little extra on coffee or Christmas presents. Enter automation. When you schedule your savings to leave your account first, those dollars aren't in your checking account to tempt you.
Begin by paying yourself what you can afford. The classic recommendation is to save at least 10% of your income, but as Sethi noted, that's just a starting point.
Identify your goals, crunch the numbers and decide how much you want to save every month. Choose an account for your savings and then set up automated monthly or biweekly transfers. You can always change the specifics, but you can never get started too soon.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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