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1. Determine your monthly cash flow

This means understanding what your true after-tax income is and what your fixed expenses are. Fixed expenses may include liabilities, such as mortgages or student loans. It’s important to know how much disposable income you have. Only once you know what your disposable income is can you allocate it in the most efficient manner. For you, that may mean paying down additional debt, setting aside money for a cash reserve, or increasing investment contributions for a particular goal. If you want to better understand your complete financial picture, I highly recommend the app Mint. Especially if you pay everything with a credit card it’s very easy to track a budget on Mint. If you do use Mint, don’t worry about itemizing every single transaction as much as keeping track of your entire outflow.

2. Automate savings and bill paying

It’s honestly amazing how little you need to invest these days and the costs associating with doing so. There are so many options for automated savings into diversified investment portfolios there’s really no excuse not to at least start something. Even if it’s $100 a month, you want to have the option readily available so that you can increase contributions at any moment. If you don’t take the time to establish these accounts, it’s less likely you’ll make the contributions once your cash flow permits. For fixed expenses use auto payment so that you can focus on what’s left over for discretionary spending.

3. Develop a cash reserve

I’ve wrote about this previously, and yes it’s still lame (but needs to be said)! Having 3-6 months’ (or more depending on circumstances) worth of living expenses is essential to allowing yourself the flexibility to invest the way you want to. The opportunity cost of holding that money in cash is negligible and worth it. There will always be times in life where unexpected lump-sum expenses arise. Credit cards should be seen as a secondary reserve for true emergencies.

3. Focus on improving net worth 

Paying down debt also increases your net worth. As long as you are increasing your net worth in some way, you’re moving in the right direction. In the long run, your net worth is much more important than your income. If you save and invest properly, your net worth will have the potential to fluctuate more in a single week than what you currently make in a year. It’s not what you make, it’s what you save. Again, the app Mint is a great way to track your net worth. Mint even allows for the tracking of real estate (via zillow) and vehicles (via Kelley Blue Book).

4. Use your credit card like you would your debit card

Credit cards serve a couple purposes. They serve as an intermediary to protect you from fraudulent charges (since it’s technically not your money). They provide rewards, such as cash back or travel miles. Lastly, they provide cash flow support in true emergencies. Otherwise, it’s best to treat them as you would your debit card, meaning you spend only what you have in your actual bank account so that you can pay it off in full each month.

5. Live for today while planning for tomorrow

Don’t live your life worrying about every dollar you spend. Focus on the big expenses and let automation be your friend. Understand the trade off between what really makes you happy and the extra stuff that you don’t really need. I’ve never been a fan of worrying about tracking every little expense. If going out to Starbucks with your friends for a $5 latte makes you happy, then do it. Financing a $50,000 BMW on the other hand will set you back. Focus on the major expenses in life and keep perspective on the small ones.

Full Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities

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