3 Simple Money Habits I Swear By — They Quietly Changed My Finances
Easy habits anyone can use to improve their finances.
When I think about managing my money, I tend to center on an idea that you’ve probably seen in video games before, the idea of the war chest. Think about a game like Civilization.
In that game, you need resources both to expand your empire and to be able to essentially take a punch, to deal with enemies attacking you, and train up soldiers to go to war for you.
The resources you build and gain in that game, like gold, food, production, and other things, represent your war chest.
If they run out, then there’s not a whole lot you’re gonna do, and you’re probably going to lose the game.
Now, in the real world, your money is your war chest, and it serves pretty much the same purpose.
It lets you, number one, take advantage of opportunities like getting a better place to live or investing in your education. But it’s also there to help you take punches, like when your car gets a flat tire.
When it comes to building my own war chest and managing my own money responsibly, I have always followed some rules since I became an adult and left my parents’ house.
So what I want to do in this story is actually share some of those rules with you, including some rules on saving money, on using credit cards responsibly, and on investing for the future.
So think of this story as a bit of a foundation to the more detailed topics that we’re going to be covering in the future. And with that, let’s jump into our first rule.
Rule-1. Build a War Chest
Build up an emergency fund and a cash buffer. So as I mentioned earlier, your war chest is what allows you to take advantage of opportunities, but also to take punches and stand easily back up.
Now, unfortunately, a lot of people live paycheck to paycheck, which means they spend almost everything they make in the month that they make it.
They don’t have a war chest. So to become financially independent, financially secure, your priority should be to build one.
In the game Civilization, there’s something called the tech tree. It’s this list of technologies that your people can research, and it’s laid out in a certain order.
So, for example, you have to research pottery before you can research writing.
Civilization is my favorite video game analog for personal finance because we can actually think of the financial journey as a tech tree as well.
Now there are four main branches on the tree: savings, income, debt, and budgeting. Along the savings path, you will notice the very first checkpoint is a 500 emergency fund.
This is a savings account separate from your checking account that you do not tap unless you absolutely have to, unless something unforeseen comes up for which you absolutely need that account, like bursting a tire on your car, which you need to get to work.
The reason that having this account is so important is that if you don’t have one and something unexpected comes up, you might be forced to borrow money to handle it, or even put the expense on your credit card, which could put you into a debt spiral.
So if you don’t have an emergency fund yet, build one at all costs. And the next thing you want to do after that is to build what’s called a 1-month cash buffer.
You can do this by first figuring out how much you need each month to pay your necessary expenses like rent and groceries and debt minimums, and then making sure you have at least that much in your checking account, even after all this month’s expenses are paid.
This concept can also be called living on last month’s income, and doing so gives you a ton of peace of mind because at this point, you’re no longer living paycheck to paycheck.
Rule-2. Maximize Tax- Advantaged retirement Accounts
This brings us to rule number two, which is to invest as much as you can into what are called tax-advantaged retirement accounts.
These include accounts like 401 (k) s and IRAs, and if you use them strategically, you’re going to end up with a lot more money during retirement than you otherwise would.
Well, a 401k is an account usually managed by your employer, whereas an IRA is something that you typically open and manage yourself.
But both of these accounts let you do essentially the same thing: invest money into stocks or bonds or other kinds of investments that you can’t touch or withdraw until you’re at least 59.5 and a half years old.
Which sounds like kind of a bad deal until you realize that in exchange, you get to defer the taxes that you pay on some of your income by investing in them.
For example, if you normally make 80,000 a year but you contribute 5,000 of your salary to your 401k, then you’re actually only taxed on 75,000 that year instead of 80k, which reduces your taxable income and hence reduces your taxes. This is called a pre-tax contribution.
Another huge benefit to using IRAs and 401 (k) s is that money invested in these types of accounts tends to grow a lot faster than it would otherwise if you just invested it normally in normal taxable accounts.
An example in the book A Random Walk Down Wall Street shows how 5500 invested each year for 45 years grows to 1.6 million dollars inside an IRA, while the same money only grows to 938,000 invested in a taxable account, even though it was put into the same investments.
That’s a difference of over 600,000, and the reason for it is something called tax drag.
This is when taxes act like molasses, slowing down the growth of your investments.
See, anytime you make income off of your investments, you have to pay what are called capital gains taxes on that income.
To give you a simple example, one form of income that most people get from their investments, at least if they hold stocks, is called dividends.
These are regular payments that shareholders get literally just for holding the stock.
Not all stocks pay dividends. Some stocks are called growth stocks. They’re companies that basically want to take all of their income to grow the company, so they don’t pay a dividend.
But a lot of older, more mature companies do choose to pay a dividend. Nintendo is one of those companies.
For every share that somebody holds currently, Nintendo is paying out about two dollars and thirty cents per year.
For example, right now I have about 140 shares in Nintendo in my Fidelity account, so they are currently paying me about 322 each year in dividends.
But since those dividends are income, the government comes in and takes about 20 percent in capital gains taxes, so I actually only get to reinvest about 257 instead of 322.
That’s money that I don’t get to invest and grow over the next 20 or 30 years, and that’s tax drag.
Now, the great thing about IRAs and 401(k)s, tax-advantaged retirement accounts, is that they are not subject to capital gains tax when things like this happen.
So if my Nintendo stock were in an IRA, I would actually get to invest the full dividend amount instead of the reduced amount, and with compound interest working over a long period, that difference becomes huge.
Rule-3. Be a Deadbeat
Now our next rule sounds kind of bad at first glance, be a deadbeat. But this is actually a really good thing to aspire to be.
In the credit card industry, a deadbeat is somebody who always pays their entire balance on time every single month.
Credit cards often have very high interest rates, often over 20 percent. But if you pay off the entire balance every single month, you actually don’t pay any of that interest at all.
Since the credit card company isn’t making money from interest, you are considered a deadbeat.
I got my first credit card when I was 18 years old, and I have been a deadbeat ever since. Not once have I ever let the credit card company charge me interest.
That means I’ve gotten all the benefits of credit cards essentially for free.
Credit cards also offer benefits like fraud protection, cashback rewards, travel points, miles, and other bonuses.
But the main reason that you should have a credit card is to build your credit score.
Your credit score determines whether you get approved for loans, what interest rates you pay, and even whether you get approved to rent apartments or homes.
When you’re young, you probably don’t have much credit history, which means you might not even have a credit score yet.
One easy way to start is by getting a secured credit card, where you make a deposit that becomes your credit limit.
For example, if you give the bank 200, you receive a secured credit card with a 200 limit.
Eventually, you can get that deposit back, and the card becomes a normal unsecured credit card.
Once you have it, you can build your credit score by following three simple rules.
- Always pay your balance on time.
- Always pay your balance in full.
- Never use more than about 30% of your credit limit.
This last rule relates to credit utilization, which is your balance divided by your credit limit. Lower utilization usually results in a better credit score.
Finally, the last rule is to consistently invest in yourself.
That means improving your skills, learning new things, connecting with new people, and keeping a beginner mindset rather than assuming you already know everything.
It also means improving your ability to solve complex problems creatively, because those are the skills that are most valuable in today’s world.
The people who can innovatively solve complex problems are the ones who are most in demand.
