When you think about your personal finances, do you feel overwhelmed, confused, and stressed about where to start? Increasingly, this is the norm, not the exception, when it comes to how Americans relate to their financial planning and well-being. Money can stir up a wide range of emotions—including shame, confusion, and fear. Those strong emotions are compounded by the taboo nature of talking about money; the absence of formal personal finance education; and systemic barriers based on gender, race, and class.
In the developed world, our culture promotes wealth while many struggle to meet basic needs. As humans—and this is true for people across the globe—most people feel safe and nurtured when they believe they have “enough.” The concept of “enough” is clear when it comes to basic staples, such as water, food, and shelter. However, once those essential needs are met, it can become increasingly difficult to identify when enough is really enough in a culture of excess.
Here are five tips you can use today to reduce your money stress and nurture your financial security.
1. Be conscious about your inflows and your outflows.
One of the most powerful financial practices you can implement is to form a crystal clear understanding of your financial inflows and outflows—virtually to the penny. So much financial stress comes from spending more than you are earning. Assuming you are earning a living wage (which, sadly, is not true for far too many people), having a clear awareness each month of how much is coming in and going out of your bank account enables you to be fully present in terms of your finances.
If you do not know these two figures—your total inflow and your total outflow—virtually no other piece of financial advice will make a meaningful impact on your life. In a spiritual context, this makes sense. Knowing whether or not you are living within your means gives you a baseline to measure your financial harmony (or lack thereof).
2. Use the 50/30/20 money mantra to allocate your income.
When meditating, mantras simultaneously help you focus and help you let go. The same goes for spending. The most powerful tool for allocating money in a mindful way is the “50/30/20” balanced spending rule.
Senator Elizabeth Warren wrote about this framework more than 20 years ago while a bankruptcy professor at Harvard Law School. She suggested that roughly 50 percent of your income should go to needs, 30 percent to wants, and 20 percent to savings.
Yes, you read that correctly. Put 20 percent toward savings.
That number probably sounds huge, especially today when so many of us struggle to meet our basic needs or deal with student loans and credit card debt. If you have debt, strive to save as much as you realistically can. Maybe for now 18 percent of that 20 percent goes toward paying down debt while 2 percent goes into savings. (In a sense, paying down your debt is a form of “saving,” because you are saving on the interest you would otherwise be paying.) As you gradually pay your debt down, the money you were using for those payments can get redirected to emergency, near term, and retirement savings funds.
The key to this balanced spending formula is that it forces you to acknowledge that your income pie equals, and can only equal, 100 percent. If your outflows are greater than that, financial distress is inevitable.
3. Engage in joy-based spending.
What if you find yourself in an unbalanced position when it comes to your inflow and outflow? What if you compare your spending to the 50/30/20 money mantra and discover your figures are wildly off? Enter my all-time personal favorite money tip: joy-based spending.
When people try the following exercise, they often come up with ways to cut back on spending without reducing the level of joy in their lives. It works like this: commit to writing down every single thing you spend money on for a month. At the end of the month, instead of tallying up the numbers and judging yourself, simply take out a yellow highlighter and identify anything that did not make your heart sing.
Now some of the items on this list, like the electric bill, you can do very little about. But more often than not, you will find you spent money on a meal out that you really didn’t enjoy, or for an ongoing membership that once brought a smile to you face and now feels boring. By using joy as the initial measuring stick to rejigger your spending, you may be surprised at what you can cut back on.
4. Create a financial safe place.
Strive to have at least $2,000 in your starter emergency fund. This is your “financial safe place,” where you can turn when the going gets tough. The logic behind this figure is that $2,000 is, according to the Consumer Federation of America, the average amount of unexpected expenses typically experienced in a year (think flat tire or a plane ticket to see a sick relative).
When you use your emergency fund (for an emergency), clamp down on your “want” spending for a while, at least until you can rebuild the emergency fund. Your long-term goal (which may take some time to reach) is to have a more permanent emergency fund large enough to cover 3 to 6 months of living expenses. If you have a secure, steady job you could get by with 3 months of expenses in reserve. If you are work in an industry that is volatile or commission-based, aim for closer to 6 months of expenses.
5. Enjoy today and prepare for tomorrow.
If you are lucky enough to have a 401k, 403b, TSP, or other employer-based retirement plan that offers a match, make sure you contribute enough to get that match. Matching funds are literally free money. For every dollar you contribute to the plan, your employer may have agreed to contribute $0.50 or even $1.00. That's a guaranteed 50 percent or 100 percent return. There is no investment on the planet where you can get a guaranteed return—these programs are a gift you shouldn't pass up.