Making more money is always the objective. Everyone wants to find ways to make more money. However, how you manage money can make or break your financial success. If you make a million dollars a year, that is great. If you make a million dollars a year but you spend a million dollars a year, you are flat broke. The point to understand here is it isn’t always about how much you make, it is more about what you do with that money after you make it. This is an often-overlooked aspect of finances in a world that frequently promotes and even sometimes glorifies bad spending habits. There is a simple rule that I’d like to share with you about how I like to manage money personally, but first we should explore a little deeper what the average American does with their money to better understand how we can correct this problem.
Average American Spending Habits
A big goal for many people is to have a job that pays over 6 figures, or in other words, $100,000 a year. This may feel like the threshold for success, but amongst people who have reached this threshold, many of them are still living paycheck to paycheck. According to Business Insider, 54% of Americans live paycheck to paycheck, and an astounding 40% of Americans making over $100,000 annually live paycheck to paycheck as well. A big reason for this is that American education fails to teach its students the basics of financial literacy. These people live more extravagant lifestyles than they can afford, spending thousands of dollars on clothes, cars, and subscriptions they forgot they pay for. So many people look for ways to spend their money immediately after they receive it. This lifestyle keeps people stressed about money regardless of their income, and ensures they remain a broke slave to their jobs. Our collective cultural mindset is why so many people work 9 to 5s that they hate to support their terrible money habits. This doesn’t have to be you however. Most of the material things that are bought on impulse are forgotten and discarded shortly. We live in a “retail therapy” culture, in which people frivolously spend their money on things they don’t need in order to reduce their stress about money they don’t have. This counterintuitive approach to money has led to many people accepting their realities and losing hope for change. With a few simple adjustments, living paycheck to paycheck can be avoided completely.
The 75/15/10 Rule
Learning has never been so cheap and accessible than it is today. With the advent of YouTube and the rise online educators, learning at a college level can be done for free online. You can choose who your teachers are and what exactly you want to learn! There are no tests, no pressure, and no learning things that are seemingly useless to you! Among these amazing YouTube personal finance creators is the Channel Minority Mindset. On this channel, founder Jaspreet Singh teaches very valuable lessons about money, financial literacy, sound investments, and more! One of the rules he talks about often is the 75/15/10 rule. These three numbers separate the three avenues of money you should be breaking your income down into. The rule is that 75% of your income can be used for day-to-day expenses and bills, 15% of your income should go into investments, and 10% should be saved. Most people living paycheck to paycheck might counter this rule by saying, “I can’t even get by spending 100% of my income. How can I possibly reduce that down to 75%?”. The answer to this is a simple one. Audit your spending habits. Where is the majority of your money going? Are you paying for subscriptions you don’t use? Do you have stacks of clothes in your closet that keep getting taller? Do you go out to eat or order takeout every night? These are just a handful of things people waste their money on. When you audit your time objectively and honestly, you will likely find that most of your money being spent is wasted on things you don’t really want or need. The 75% is just a baseline number, and can be adjusted IF TRULY NECESSARY! Don’t try to justify bad spending habits you know are bad. Be brutally honest with yourself. With the remaining 25%, separate that into 10% and 15%. The 10% will go into savings. Although you won’t earn much interest on savings, it is still necessary to have a nest egg of money for emergencies and opportunities that present themselves you may need some cash for. With the remaining 15%, it is your job to find sound investments that put your money to work for you. This can be stocks, real estate, a side hustle, crypto, or anything else that makes you income outside of your active job. As previously mentioned, these numbers can be adjusted. If you can get by spending less, do it! This can help you reach financial freedom faster assuming you make sound investments and good financial choices. Remember, I am not a financial advisor and you should always talk to one before making any large financial decisions.
Other ways to manage money
This is not the only way to manage money wisely, but from all the research I have done, this appears to be one of the top methods to avoid living paycheck to paycheck. Remember, the more money you are able to invest today, the less you need to work and worry tomorrow! Live below your means if you can, and find a financial plan that works for you. It doesn’t matter how much you make, it matters how much you keep! Remember that and educate yourself on financial literacy so you can be best setup for your future, and live with less stress in the present!