Today we are talking about what Marie Kondo, author of The Life-Changing Magic of Tidying Up (one of my favorite books), taught me about budgeting.
You may be familiar with Marie Kondo because of her book or because of her television show, Tidying Up with Marie Kondo. She’s known for her method for tidying up our houses–and our lives.
On her show, she gets people to pull all of their junk out of the closets and dresser drawers, toss it into a big pile in the middle of the room, and then spend time going through piece by piece and deciding what specific, important things they want to keep.
Today I want to share with you some of my favorite lessons from Marie that I think are so relevant to the budgeting process.
#1: “Make tidying a special event, and not a daily chore.”
In Marie’s book and her television show, she invites people to pull all of their possessions out of the nooks and crannies of their homes and makes a big to-do out of going through each item piece by piece and deciding which things folks are going to keep and which things folks are going to discard.
According to Marie, it doesn’t make sense to try to tidy up bit by bit along the way. You never finish the job. Instead, make it an event.
When it comes to budgeting, I teach folks to take the time to set up a values-aligned budget. And then to set up systems to automate that budget, so that their spending is aligned with their values on a regular and consistent basis.
For those of us who don’t love budgeting, it makes sense to designate time to sit down, look at all of your numbers, and make some decisions.
Once you set up your budget that aligns with your values, you set up systems so that you set it and forget it. It’s not something that you have to return to again and again and again (unless you want to).
#2: “Before you start, visualize your destination.”
Budgeting for the sake of budgeting is boring, right? But budgeting because you have a goal in mind–now that’s a little bit different.
Before you set out to make a budget, I first want you to create a vision for your life. What are you trying to achieve financially? What goals can your budget help you accomplish?
Once you have the broader vision in mind, then you can set up a budget with that specific goal as your destination.
Your budget now serves a larger, more interesting, if not inspiring purpose in your life.
#3: “Reduce until you reach the point where something clicks.”
Marie Kondo does a great job of getting people to let go of lots of clutter in their lives. If something isn’t serving you, you’ve got to let it go.
This applies to our budgets as well. How many sneaky little expenses have made their way into our budgets without our realizing it?
This could be things like those subscriptions that you forgot to cancel that are starting to add up, or the mindless purchases that you make; the little candy bar at the checkout–things that you buy without even thinking about it.
When you’re setting up your budget, to accelerate your progress toward your goals, you’re going to have to clear out all the clutter.
Things that simply don’t belong in your budget. Things that are not aligned with your personal values, that are getting in the way of you reaching your goals as soon as possible.
Keep the things you love the most and kick everything else to the curb.
This purging process can be harder for some of us than others. I want to share with you an excerpt from Marie’s book that I find especially relevant for the things that are so difficult to let go. This is from page 61:
“When you come across something that you cannot part with, think carefully about its true purpose in your life. You’ll be surprised at how many of the things you possess have already fulfilled their role. By acknowledging their contribution and letting them go with gratitude, you will be able to truly put the things you own and your life in order. In the end, all that will remain are the things that you truly treasure.”
Don’t you love that?
I find this especially true when it comes to that 4 letter word we all hate: debt.
Make a list of all of your debts. Instead of feeling guilty about having accumulated all that debt, why not replace your guilt with gratitude?
Thank each debt for what it’s taught you or for what it brought into your life. It has served its purpose and now you’re ready to let it go.
#4: “Follow your intuition and all will be well.”
I remember in my younger years looking for budget templates, wanting someone else to tell me what was an appropriate amount to spend on different things.
What I have learned as I’ve gotten older is that my intuition, my personal values, are the best guide I can have for setting up my own personal budget.
Let your intuition guide your budgeting process. Feel free to spend on the things that are most important to you. And feel free to get rid of the things that are not.
Who cares what your friends and neighbors are doing with their money? Your budget is a reflection of you.
#5: “Designate a place for each thing.”
Isn’t that what a budget is?
You decide how much you’re going to spend on each line item. And then the most important step–where are you going to put that money before you spend it?
I have found it helpful to have separate accounts based on different categories of spending.
Just like you put your socks in the sock drawer and hang your dresses in the closet, you might find that all of your money doesn’t belong in the same account.
Maybe you would benefit from a separate account for bills, an account for savings, and an account for your everyday spending. Once everything has its place, it’s hard to get things mixed up.
So the next time you watch Marie’s show, or if you get a chance to pick up her book at the bookstore, I want you to read it with your budgeting hat on.
I shared with you a few of the things I learned from Marie. I’m curious what you take away from her work.
And let me know if these lessons in tidying up help you with your own budgeting process.
Have you heard of a Roth IRA? Let’s explain what it is and why you should open one today.
“IRA” stands for “Individual Retirement Account.” These are retirement accounts that you open up on your own as opposed to through your employer.
There are generally two types of IRAs: Traditional and Roth. The Traditional IRA works just like a regular retirement account. You’re able to put in money before taxes and you’ll pay taxes when you take the money out in retirement.
If you already have a retirement account from your job then you don’t need one of these (you will get the same benefits with higher contributions at work).
What you do need is a Roth IRA. A Roth IRA has some unique features: First, you put in money after tax. What does that mean? When you get paid from your job, taxes are taken out of your paycheck, right? So you’ve already paid taxes on that money when it arrives in your bank account. To invest in a Roth, you take that money from your bank account and you use it to invest.
Why would you want to invest after-tax money? The cool thing about the Roth is that because you’ve already paid taxes on the money that you put in, you don’t pay any taxes on the earnings that you make in the account. That means 30 years from now when you retire and you’ve amassed millions of dollars in interest and dividends, you have all of that money tax free!
That’s a HUGE benefit. This is why everyone who qualifies for a Roth IRA should open one today.
How do you know if you qualify? There are Income limits. If you make less than $140,000 as an individual or less than $208,000 as a married couple (in 2021), then you qualify to invest in a Roth IRA. Generally, depending on your income, you can invest up to $6,000 a year.
Here’s the quick summary. A Roth IRA is a retirement account. You put in money after tax and you don’t pay any taxes when you take the money out after you retire.
So what do you think? Are you going to open one of these accounts today?
Do you have an old 401(k) sitting around? Let’s talk about the most common mistake to avoid and what you should be doing with that money.
The other day a woman asked me how to roll her old 401(k) into a new 401(k). She was trying to be responsible with her money. Good idea, but wrong strategy. Today let’s talk about what I told her to do instead and why.
What’s a 401(k)?
First let’s talk about what a 401(k) is. A 401(k) is a retirement account that is offered by your employer. Typically, for-profit companies offer 401(k)s and non-profit companies offer 403(b)s. These two retirement accounts work essentially the same; the numbers and letters just stand for the IRS code that describes the rules for these accounts.
In this post I’m going to be using the term 401(k) as a general term to refer to whatever retirement account your employer offers.
Here’s how a 401(k) works. You put money into a 401(k) “pre-tax.” That means that you don’t pay any taxes on the money that you invest in your 401(k) until you withdraw that money in retirement. The tax structure of a 401(k) is important to remember.
Now what happens to a 401(k) when you leave your job? The money remains in that account until you move it. Many of us have old 401(k)s that are still sitting with our former employer.
Should you move that money? YES. Today we’re going to talk about how to move it and where you should move it to.
What’s an IRA?
I want you to move your old 401(k) into something called an IRA. “IRA” stands for “Individual Retirement Account.” This is an account that you own and that you get to open at the firm of your choice.
Here’s what’s important to know about an IRA. The tax structure is similar to a 401(k). It’s pre-tax money that you pay taxes on when you take it out in retirement. This is important because you can roll a 401(k) into an IRA without paying any fees because both accounts have the same tax structure. Are you following me?
Here’s how to open an IRA. First you need to pick a brokerage firm. A brokerage firm is just a firm that offers investment accounts. I recommend choosing Vanguard, Fidelity, or Schwab. When you open your IRA, you will tell them that you want to roll over your old 401(k) to fund the account.
Now you may be asking why not just roll my old 401(k) into my new 401(k) at my current employer? Let’s talk about the limitations of the 401(k). First of all, your company chooses the brokerage firm, not you, and investment options are limited. So you have less control over how your money is invested.
This is why I recommend investing in your company plan up to the match, and then putting your money into a different type of account (which I will talk about in another post). But for today, the important thing to know is that given the limitations of a 401(k), you absolutely should not be rolling your old 401(k) into the new one. That is the wrong strategy.
Choosing Investments
Instead, you’re going to put that money into your own IRA. When you roll the money into the IRA you get to choose what you’re going to invest that money in. I think that index funds are the best type of investment for lots of reasons, including lower fees and more predictable returns.
So you’ll take your money, you’ll put it into an IRA, and you’ll invest it in a total stock market index fund. And you’re done! That’s it.
Okay, so let’s recap. A 401(k) is a retirement account that is offered by your employer. You invest money pre-tax, which means you don’t pay any taxes on the money in the account until you start withdrawing it in retirement.
When you leave an employer, you should roll that old 401(k) into an IRA. You can open your own IRA (Individual Retirement Account) at the brokerage firm of your choice. Vanguard, Fidelity, and Schwab are three good ones. And then invest your money in a total stock market index fund.
Then with your new employer, I want you to invest up to the company match regardless of what else you’ve got going on with your finances. The match is free money that I want you to get every single time. If you’re wondering what to do after that, subscribe for more!
It’s time we settle this age-old question, once and for all. In today’s blog, we answer the question “can money buy happiness?” by discussing two things: 1) what makes us happy?, and 2) is that for sale?
Keep reading because the answer might surprise you!
Temporary Happiness
In order to answer question number one, we need to distinguish between “temporary happiness” and “lasting happiness.”
I’m sure we have a good idea of the things that bring us temporary happiness. Think about the last time you got a brand new gadget. Maybe it was a new car, a new outfit, or a new purse. How long did that thing make you happy?
What I have found is that material possessions make us happy for a limited amount of time.
We enjoy them, we get super excited to have them, and then after a while, we get used to them. The novelty wears off and we need to buy something else to bring that feeling of happiness back. So material possessions give us a temporary version of happiness. There’s nothing wrong with that, and yes you can use your money to buy material possessions.
But, I want to ask a deeper question. Can money buy lasting happiness?
How do we define lasting happiness? Have you heard of Maslow’s Hierarchy of Needs? Maslow’s Hierarchy of Needs usually shows up as a pyramid:
As each pyramid level is met, we’re able to advance up the pyramid. At the base of the pyramid are our basic needs–having a place to live, having food, things like that.
Lasting Happiness
At the top of the pyramid is self-actualization. I would argue that the top of the pyramid is true and lasting happiness. This includes things like meaning, connection, and creativity.
Are those the kind of things we can buy with money? Your first answer might be “no”–but I want us to think about this a little bit more deeply.
We know the things at the bottom of the pyramid usually cost money. Particularly when you live in a capitalist society like we do, things like shelter and food cost money. So yeah, we know you need money to buy the basics.
But as you move up the pyramid, what do you need more of in order to experience those things?
Think about this for yourself. What’s currently blocking you from being able to fully express your creativity? What’s stopping you from feeling fully self-actualized–particularly if all of your basic needs are met?
For many of us, the answer is “time.”
We get really busy with the daily requirements of life and we rarely have time to really step in our creativity, to contribute to the world at the level that we want to, to fully experience our own self-actualization. It requires time and it requires freedom of mental space, right?
So the question really is how could we free up more of our time? I teach that financial freedom is about buying back your time. No longer being required to work means that you own your time.
There are a couple of ways to start walking toward that destination today. One is to charge more money for your time. Your time is your most valuable asset. You cannot get it back. How much are you charging for an hour of your time today? Are you charging enough?
When you start making more money for your time, two things happen. One, you can work fewer hours to make the same amount of money. If you were thinking you need two or three jobs to make more money, imagine making all of that money from a single job! Imagine having your evenings and weekends free for creative endeavors.
Buying More Time
Okay, so now we’ve got you making more money. What can you do with that money to buy even more time?
There are two things I recommend. One is an investment in buying back your time for the long-term. Did you know that every dollar you invest today is an hour you don’t have to work in the future? So yes, one thing you should be doing with your money today is investing it.
The other thing I recommend is buying back your time in the present.
What are some things that you spend time doing that honestly if you didn’t have to you would not? For me, it’s things like cooking, doing laundry, cleaning the house, gardening…
How about using some of that money to outsource your least favorite tasks. This is important. We usually think you have to be rich in order to afford help. I would challenge you to think of one thing this week that you can outsource.
Go on an app like Thumbtack and just price out how much it would cost to hire a house cleaner for an hour or a day.
Do you spend a lot of time shopping for groceries or preparing meals? Do a google search and see how much it would cost to pay someone else to do your shopping (hello Instacart!), to pay someone else to plan your meals (HelloFresh?!) or to pay someone else to cook all your meals for you. That might be Uber Eats or it might be one of these new companies that deliver freshly prepared meals.
What’s your thing going to be? What are you going to research outsourcing? Give it a try this week and see how it makes you feel to buy back your time on that thing.
Let’s summarize. Can money buy happiness? Yes, money can buy temporary happiness in the form of things and money can buy lasting happiness in the form of buying back your time.
What do you think? Are you going to try any of these strategies this week? If you do let me know how it goes!
Are you buying things that are outside of your budget or spending money that you don’t have on things that you don’t need? Do you find yourself wishing that you had more discipline when it comes to spending your own money?
If you want to achieve financial freedom, getting your spending under control is incredibly important. Let’s discuss the causes of impulsive spending and key tips to stop being impulsive with money once and for all!
Discipline Is A Myth
Let’s talk about three things that get in the way of you sticking with your spending goals.
First, is thinking that you lack discipline. How often have you said to yourself: I just need more discipline and I would be better with money!
Let me let you in on a little secret… discipline is a myth!
If you’ve been feeling guilty because you think you have no discipline, you can set that down right now. Science has proven that each of us starts the day with a certain amount of willpower, and that willpower depletes throughout the day.
We do not have unlimited stores of willpower. We just don’t.
So what does that mean for you? It means that discipline is not the problem. It means that your willpower is normal. It means that you need better systems in place to deal with the inevitable reality of willpower depletion.
Values-Aligned Budgeting
The second thing that gets in the way is not having a values-aligned budget. If your idea of what you should be spending is not based on your own personal values, then there’s no way you’ll stick to your budget.
You need a budget that aligns to your own personal values. That will motivate you to want to stick to it. (We’ll talk about how to set this up in a sec).
The final thing that gets in the way is having ready access to all of your money.
In that moment when you have that impulsive urge to buy something, how easy is it for you to do it? Do you have cash on hand? Do you keep all of your credit cards in your wallet? Do you have everything saved in Amazon, where you can just click and the card is already there?
That is part of the problem.
So, what’s the cure to impulsive spending?
First is creating that values-aligned budget we talked about. Here’s how to do it. Go through your budget. You have to decide what matters to you. What are your top priorities? Getting out of debt? Traveling? Treating yourself to delicious meals or meals that you don’t have to cook yourself?
Decide what those top priorities are and then look at your budget and make sure your spending is aligned with those. You should be spending according to your own values and cutting out everything else that doesn’t align with what matters to you.
Once you have that values-aligned budget in place, now we have to put systems in place to make sure that our spending aligns with our budget.
These systems ensure that our money automatically flows from our paycheck into the allotted budget categories. How do we do that? Here are three tips to automate your spending.
Create Separate Accounts
Do you keep all of your money in the same account?
I recommend three separate accounts, at least. One of these accounts should be for savings. As soon as you get paid, put your savings money into the savings account.
One of these should be for bills.
You should know exactly how much your recurring bills are every month. These are things like your rent or mortgage, your cell phone bill, an estimate of your utilities; once you know that amount you can decide how much money from each paycheck should go into your bill pay account. All of your bills should automatically withdraw from that account.
The third account I recommend having is your discretionary spending account.
These are for things that are at your discretion. You decide throughout the month how much you want to spend. If you’re single like me, this could include things like gas and groceries. It could include things like Uber and eating out, movies, getting your hair done, buying an extra special outfit for yourself… these are all discretionary expenses.
I decide at the top of the month how much money in total I want to spend on discretionary items. Then when I get paid I put that money into my discretionary spending account. And then I just spend the money until it’s gone. I don’t track what I’m spending it on. I just spend it.
I enjoy the freedom of spending out of that account without worrying how much I’m spending, what I’m spending it on, or if I’m accidentally spending money that I needed for other things.
Spend “Cash”
Here’s another tip: only carry cash in your wallet so that you never spend more than you have budgeted. Are you keeping your credit cards and debit cards in your wallet? How easy is it for you to see something that you want to buy, look in your wallet, see that your credit card is sitting there and take it out and swipe it?
That is a problem. Your discipline isn’t the problem. The fact that your cards are sitting in your wallet is the problem. If you’re wanting to nip impulsive spending in the bud, then you’ve got to streamline this.
Only spending cash is a great way to make sure that you put limits on how much money you can spend.
And there are other ways to only spend cash outside of putting green money into your wallet. Another is to use gift cards. Some people will allocate gift cards for specific budget categories.
For example, are you intending to spend only a certain amount of money on groceries? How about buying a gift card from your favorite grocery store and putting that budgeted amount on the gift card so you can only spend that amount each month.
The point is to never put anything in your wallet that is not a part of your budget. (This includes your Amazon wallet.)
And the final tip is to not use credit cards for spending.
I know you want your credit card points and your miles, but if you are trying to cure impulsive spending credit cards are often the culprit.
Why is that the case?
It’s one thing to have a certain amount of cash in your wallet or in your bank account and you spend until it’s gone. The problem with credit cards is that the number goes up over time, not down. It’s really hard to stick to a budget when you can easily spend over that budget on your credit card.
I do not recommend carrying credit cards in your wallet.
Instead, if you’re going to use credit cards, use your credit card for predictable bills. Just like we talked about creating a bill pay account, you can set your credit card up as the automatic payment method for your bills. Then make sure that you pay that credit card off every month.
Never put anything outside of those allocated bills on the card and leave the card at home. Put it in a box, put it in the closet, freeze it in a block of ice, or cut it up and throw it away. After you put it into your bill pay account, you no longer need the card do you?
So, which of these methods are you going to try this week?
I want you to set a budget for how much money are going to spend this week. Then set up systems to make sure you can only spend that amount of money.
Trust me, the next time you’re feeling an impulse to buy something above and beyond your budget, you’re going to open your wallet and notice your credit card isn’t there. You are going to feel a little pang… like, I wish I had my credit card so I can buy this thing!
Just warning you, you will.
But you’ll get over it and by the end of the week you will have stuck to your budget. It really is as simple as that. So give it a try this week and let me know how you do.
