Personal finance can be a tricky area for many people. Our lives and demands are constantly changing, and keeping on top of all areas of our money (saving, budgeting, investing, etc) gets to be a bit complex sometimes. It can even end up on the back burner when life gets too demanding, causing us to make costly mistakes or miss important opportunities.
Seth Godin, who runs a really great blog, wrote a post a while back called Demand Guardrails. In it he advocated for societal and government guardrails, to essentially protect us from ourselves. He was talking about seatbelt laws, helmet laws, and even soda taxes.
While I’m not a fan of government imposed guardrails, his article got me thinking. What if there were a few cut-and-dry things that we could set up in our own lives to help us make smart money decisions? To answer that question, I’ve laid out ten that I think are the most important and easiest to implement.
Putting up these financial guardrails can allow us to spend more wisely, save easier, and protect our money from simple – but costly – mistakes.
1. Automate your savings
We’ve talked about this before. I believe that automating your savings is the absolute best and easiest way to ensure it gets done, so that’s at the top of the guardrail list. Failing to save first, without even thinking about it, is a surefire way to allow it to fall by the wayside.
A 401(k) is a typical and very easy place to automate your retirement savings. Employers will often set up an automatic contribution for their new employees, in fact. Studies have shown that the percentage of people saving within those companies is much higher than in companies who don’t set up auto-contributions.
Of course, employees can change this or opt out later, but you’re often put into the plan from the get-go. Because you never really see that money in your bank account – as it’s taken directly out of your check – you get used to that amount being tucked away. You don’t even think about it, you don’t miss it, but it’s still being saved.
Related: How to Automate Your 401(k) Savings
Savings accounts, IRAs, mutual fund contributions… all of these can be easily automated as well. Set it up once and you can forget about it, while still meeting your financial goals each month.
You can also set up your paycheck’s direct deposit to go into different accounts. For example, you could automatically redirect some of those funds into a high-yield savings account. Companies like Fidelity, Vanguard, and most robo-advisors allow you to contribute monthly or bi-weekly with an automatic withdrawal.
Establishing these redirects and having them withdrawn without any additional effort can allow you to save more money. More importantly, though, it keeps us from justifying choices to skip saving — “just this month, because money is tight.” Or, of course, flat out forgetting to do it. Hopefully, by automating your savings, you’ll keep more of your money tucked away.
2. Automate your investments
We’ve talked about this in the past, too. Automating the investment process can save you time, money, and energy. This can help ensure that your money is being invested how you want, and in a way that is best for where you are in retirement planning.
If you’re not the type to pick each individual fund and do all of the rebalancing of your portfolio, then you need to automate the system. Put your money in a roboadvisor. Find a target date retirement fund, which will rebalance automatically according to your age and when you want to retire. Don’t like the idea of target date funds? Many of the big mutual fund companies offer the same concept, but the asset allocation won’t change.
Vanguard calls theirs Life Strategy Funds, where they take your money and put it into four different funds. You pick the bonds-to-stocks ratio, but then it doesn’t change moving forward. There isn’t a specific retirement date attached to the fund, but it essentially does the same thing. In any event, your investments are being automated, and it frees up some of your time. It can also save you from neglecting the balance of your portfolio, and losing out on money.
Learn More: Is Betterment or Vanguard Better for My Money?
On that note: if it’s been years since you rebalanced your own portfolio, this is a great time to do it. Then, think about automating the process and take that off your list altogether.
3. Cut up your credit cards
This might not be necessary for everyone. With credit card debt statistics where they are today, though, I think that it would be a good guardrail to implement for a lot of people.
If you’re smart with your credit cards – you pay the full balance each month, use cards for the rewards, and generally spend money on them well – this doesn’t apply to you. But if you find yourself spending more than you can afford, paying only a part of each statement (and therefore paying interest), or holding high balances, it may be time to cut up the credit card.
For some, cancelling the account altogether might be a better option, but keep in mind the credit score implications that can have. Most people would benefit from simply taking a pair of scissors to the plastic, to ensure that no more money can be added to the debt. This is particularly necessary if you have a high balance and will be spending some time trying to pay that down. The last thing you want to do is add more debt to that card while throwing money at the balance – it’s a losing game.
Resource: When to Cancel a Credit Card
4. Opt for a 15-year mortgage
Now, I’m a fan of 30-year mortgages. I really like the lower monthly payments, even though the interest rate is a percentage point or so higher. Of course, there is a great debate between the two, but a longer term is my personal preference.
If you’re not disciplined enough to do smart things with your money each month, though, a 15-year mortgage can help. At the very least, you’ll be forced to put a larger chunk of your money into something meaningful. Of course, this is the entire point of putting up guardrails to begin with. They force us to stay on the road, in a sense. So, if you can afford it, opt for the 15-year mortgage.
5. Track Your Spending
This isn’t something you need to do forever (unless you want to). If you’re having trouble budgeting and spending smart, though, tracking where your money goes can be very helpful.
Use tools like Mint.com or Personal Capital to see which categories are eating up your hard-earned cash each month. Others, like You Need a Budget (YNAB), cost a little bit of money. However, they can be even more comprehensive and earn their worth.
Regardless of how or where you track it, just track it… even if you only do it for one month. It may be eye-opening.
6. Balance your checkbook
This one is a little old school, and some of you younger readers may not even use checkbooks. But the point still remains.
While the idea goes hand-in-hand with number 5 above, the idea of balancing your checkbook each month will allow you to see exactly where your money goes. There are tools like Quicken to help with the process nowadays, so you don’t necessarily need the check register anymore (unless you like that sort of thing). But finding potential errors (though rare), watching how you spend your money, and even keeping track of where you stand as the month goes on can be very helpful. It might even sting a little bit.
7. Pay cash for your car(s)
There’s a reason I like this guardrail, and it’s not because I enjoy writing very large checks at the dealership. It’s simple: you’ll spend less money.
Maybe that’s because it doesn’t allow you to spend more than you have/can afford, as many Americans are wont to do. Even if you’re loaded, though, spending cash seems to hurt a little more. In turn, it tends to make us spend less overall.
I know that I feel this in my own life. For the little things, I use my credit cards and earn rewards. But when it comes to buying cars, I will always pay cash… and I don’t like it. Who wants to take that much money out of their savings account? I certainly don’t.
Forcing yourself to part with a stack of crisp bills may make you reconsider that little upgrade that you don’t really need (even if it sounds fun). Keeping a few hundred – or thousand – dollars in your pocket becomes even more enticing when we talk about cash, instead of just financing. In the end, I promise you’ll spend less if you pay cash for the big stuff, especially cars.
8. Hide your emergency fund
No, I don’t mean to put bags of cash in the freezer or under the mattress. Hiding the bulk of your emergency fund from yourself, though, is very important.
Personally, I keep a small amount in the savings account at our primary bank, but the rest I put in an online bank. We use both Capital One 360 and Ally (long story), and it keeps the money out of reach.
Why is this important? Well, it makes it very difficult for you to pull from that money, and will deter you from spending it without a true emergency.
How to Decide: Big Expense? How to Know if it’s Emergency Fund-Worthy
If I need money from one of these accounts, I can initiate a transfer… but it’s going to take a couple of days. It’s not immediate. This gives you some time to think about whether you truly need to spend it, and might keep someone from blowing their rainy day fund something that isn’t necessary.
What if a true emergency arises? I can use my credit card in the interim, until the money arrives from my savings account. But keeping it in an online bank, out of my reach, deters me from touching it for anything other than a serious, actual emergency.
9. Don’t stretch out your student loans
If you can, you’ll want to avoid extended payment plans for student loans. They obviously stretch out your payments, and some people may need the lower monthly bill. But you need to know that it’s going to take you much longer to pay off those loans and you’ll pay much more in interest in the long run. It’s not a smart financial move.
When you consolidate your federal student loans and extend the payments, it doesn’t save you a nickel. Consolidating into a private loan may potentially save money, but that’s an entirely different animal (especially as they don’t provide extended plans). In general, stretching out the repayment is a very poor decision.
Learn More: How to Consolidate Your Student Loans
Of course, this is a case of “do as I say, and not as I do.” I used the extended payment plan for my own loans. It wasn’t the end of the world, no, but it took me forever to pay them off. In fairness, I could have put more toward it and paid them off sooner, but the point remains: I spent way more time and money getting rid of those loans than I should have. So, avoid it if you can.
10. Go old school
If after everything, you’re still having trouble saving money, you may need to go back to the basics.
Sift through your expenses and figure out where you’re having the most trouble. Are you eating out too often? Buying clothes that you don’t need? Maybe you go grocery shopping on an empty stomach and end up the proud owner of aisle 17. Whatever the case may be, find your weak point.
Then, go old school. Determine your budget for that specific category, and put cash in an envelope for the month. You don’t necessarily need to use the envelope system for your entire budget, but make sure you try it with this one troublesome category.
As the month goes on, you’ll hopefully find yourself spending smarter. Paying in cash automatically causes us to part with our money a little less readily, but you’ll also be a bit more cognitive of your habits. You can see the envelope getting thinner and thinner. And, of course, the key of the exercise: once the envelope is empty, you are DONE with that category until next month. No breaking the rules, no working around it – you’ve got to be true to the system.
While I’m not the biggest advocate for the government getting all in our business and running our lives, some guardrails are obviously necessary. Actual guardrails keep our cars on the road, speed limits can prevent accidents, and seat belts save lives. These are all great rules to implement.
Personal finance is not much different. There are a number of guardrails that you can put into place in your own life, especially if you are struggling, to, in essence, “keep you on the road.” Hopefully, these ten that I’ve just given you will help save you from yourself when needed, and allow you continue on the path to financial freedom.