How To Organize Money
Last week I wrote about my old thoughts, beliefs, and behaviors toward money and how I started to care for it and respect it. This week I want to share some specific steps I took to take control of and care for my money.
“A journey of a thousand miles must begin with a single step.” Lao Tzu
1) I paid myself first
After I recovered from the shock of seeing the numbers in that first spreadsheet back in 2009, I plunged with gusto into Suze Orman’s book, where I learned the concept of ‘paying yourself first’.
What this means is that we allocate money from our income into retirement funds, savings, and investments first. The remaining amount is what we use for our expenses.
In other words, we put money first into retirement and savings, and not at the end of the month if there is anything left after all the bills are paid.
I was already contributing to my 401K, a type of retirement plan in the US, at work. Now I wanted to create my emergency fund. To avoid any temptation of using that money, I modified the direct deposit of my paycheck to go into two accounts: my savings and my checking. This way, I assured that every other week some money would go directly into my savings account to build my emergency fund.
2) I prioritized my debts
When I started my journey in 2009, I had two mortgage loans. Thankfully, I only had minimal credit card debt that was easily solved once I stopped buying things I really did not need.
The rule of thumb is to pay off the debt with the highest interest rate first. Then use that money to settle the second one on the list and so on.
In my case, the second mortgage was the debt with the highest interest rate. One of the things I learned in Suze Orman’s book is that I could accelerate a loan’s payoff time by doubling the principal amount. Let me break it down.
Often, every monthly payment for a loan has principal and interest in it. The amount for each one will vary every month even if the total monthly payment remains the same. During the first half of the loan term, we pay more interest than capital, so it is easy to double the capital amount.
For example, a $100,000 mortgage with 4.78% interest rate fixed for 30 years will have a monthly payment of $523. At the end of the 30 years, we would have paid $88,444 in interest in addition to the $100,000 we originally borrowed.
The first month principal portion of the $523 payment will be $125. If we double the principal that first month (or the second) we would pay an additional $125 to the principal (the total payment for that month would be $648). If we do this every month, we will pay off the loan in a little over 17 years (instead of the original 30 years) and we would pay $49,616 in interest (instead of the original $88,444).
Every extra contribution matters. Maybe we cannot afford to double the principal at least at the beginning. Putting in half of the principal (in our example, it would be $63 extra) will result in paying off the loan in 21 years and $61,540 in interest.
I started to double the monthly capital payment for my second mortgage, which had higher interest rate resulting in paying off the loan several years earlier than the original term.
I then had the second mortgage monthly payments as extra money every month. So, I reallocated that cash to go into the emergency fund and retirement plan.
3) I stopped buying things I did not need
When I first moved to the US, I was mesmerized with the beautiful things I could see and find everywhere and that were affordable to me. Clothing stores had sales every weekend. Bookstores were beautiful and the options for restaurants and entertainment were too many to count.
Do I really need to have more socks, earrings, rings, books, dishes, glasses, electronics? Ninety nine percent of the time, the answer is no.
It quickly became clear to me how the average credit card debt is $6,270 when the median income is $79,900/year, and how shopping is an addiction. And it dawned on me that I did not want to fall into the trap of getting into debt to have things.
Everything in moderation. I buy clothes, electronics, and other things. I also go to restaurants, concerts, plays, etc. but not at the expense (yes, pun intended) of having choices, independence, and peace of mind.
4) I got clarity on my priorities
When it comes to money, we all have different priorities. There are no correct answers because we are unique human beings with unique preferences and needs. And people will judge and criticize our choices anyway so might as well act following our own principles.
For me, it is important to have money for a rainy day (or year), for the future – I do not want to be a poor old lady – and for learning/education including traveling. To focus on those priorities, I sacrifice other things such as living in an exclusive neighborhood or building or driving a luxury car. And this is okay and normal for me.
For some of my friends, their priorities are to live in a neighborhood that has great schools, to have a home with a backyard where they can barbecue, or to drive a luxury car. To focus on those priorities, they may not travel to exotic locations or pay for professional development training or conferences. And this is okay and normal for them.
“It’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.” Robert Kiyosaki, American businessman
These actions worked for me, and I am sharing them so the information can spark other ideas in you. Take steps that are sustainable in time as time is money’s best friend (for assets) or worst enemy (for debts). The key point is that respecting your money is a conscious effort that requires consistent action.
Money deficiencies and unproductive habits are not magically solved. I wish there were a fairy godmother who could shake her magic wand and solve my financial life.
Start small with one action and then build from there. Time will pass anyway so might as well do something while it is going by. You will be amazed at how the results accumulate in time.
And let us not forget to contribute to people and causes outside of ourselves as, in the words of Jim Rohn (American entrepreneur), ‘only by giving are you able to receive more than you already have’.
What actions are you going to take to start respecting your money? Please, let us know in the comments.
As a leadership coach, I enable talent to achieve bold goals with high standards. My mission is to help underrepresented women in the financial industry transition from mid to senior level leadership positions by creating awareness, increasing emotional intelligence, and unveiling the tools and choices available to them.