Have you decided you need to manage your money better, but you’re not sure how to get started? Great, you’re in the right place! This is the ultimate guide for learning to manage your finances, so you can get complete control of your money. Put these tried and true financial principles into practice, and you will never, ever, live paycheck to paycheck again!
Can You Stop Living Paycheck to Paycheck?
Unfortunately, the vast majority of people live the paycheck to paycheck life. In fact, a recent study from CareerBuilder shows the average American is so stretched financially that 78% of people live from month to month, with little to no money going into savings.
On top of that, 3 in 10 adults have zero money in their emergency fund, according to Bankrate.com. Even 25% of high-income earners making over $150,000 a year are living paycheck to paycheck every month.
Why Are You Living Paycheck to Paycheck?
There are a lot of reasons. Every individual has their own set of circumstances to deal with. But overall, I believe the biggest reason so many live month to month is that most people can do better at managing their money.
Yes, it’s possible to stop living paycheck to paycheck, even if you’re income is on the lower end. But it takes diligence, knowledge, and creating the right habits to get it done.
Common Myths About Managing Your Money
So, before we address how you can manage your money better, it’s a good idea to first start getting your mind right. It’s time to start understanding that many of the things you believe about managing your finances is just plain wrong.
You may have learned some of this bad information from your family, from the media, or just came to some of these conclusions on your own. It doesn’t really matter where the info came from. In the end, you have to dispel some of the most common myths about money if you want to get your mindset right and start managing your money better.
Below, you’ll find a few of the most common myths about money, and what you can do to dispel them from your life for good.
Money Myth #1- Budgeting Doesn’t Work
I’ve heard this one too many times. When people seek me out for help, they usually tell me they tried doing a budget in the past, but it never worked for them. When I probe a little further, I always discover that the reason budgeting didn’t work is because they weren’t doing it right, or they just didn’t stick with it.
A Budget is a Plan for the Future
A budget done correctly is a plan for the future. It’s a detailed plan showing how you will spend your money for the upcoming month. And when you implement your budget using the cash envelope system, you will never spend more than you make again!
It’s also extremely important that you stick with it. Just like any new habit, budgeting takes practice. You’re not going to get it right the first few times you do it. But when you totally commit to doing a budget every single month, it eventually becomes easy and routine.
Keep reading and we’ll talk more about this below. Plus, I’ll show you some great resources I’ve created to help you put together a drop-dead-easy monthly budget and envelope system.
Money Myth #2- You Need a Credit Score
So many people, from your momma to the media, tell you that you need a good credit score to get through life. They’ll tell you if you don’t have a high credit score, you can’t rent or buy a house, or buy a car, or even get a good job.
It’s all LIES!
A credit score is simply a number that tells you how good you are at borrowing money. It was created by financial professionals to help them know how likely you are to pay back your debt.
We Don't Need a Credit Score
Of course, you need to borrow money to maintain a good credit score. But that costs you a lot of money in interest and fees in the long run. I don’t have a problem with banks making money. But since my wife Angie and I learned to manage our money well, we discovered we don’t want (or need) to waste our money by using debt to fund our life.
You CAN get a job, a mortgage, a car, or anything else you want without having to spend extra money taking on debt to generate a high credit score. Here are a few of my best articles that show you how:
Money Myth #3- You Need a Car Payment
This money myth is another one that a lot of people have a problem with. Car payments drain your bank account every month, causing you to spend thousands more on a vehicle than if you had just paid cash.
In reality, if you can afford a car payment, you can afford to pay cash for a vehicle.
However, most people don’t manage their money in a way that allows paying cash for a car. Add to that the desire to have more car than you can afford, and car payments become a way of life.
It’s not difficult to make the transition to paying cash for cars. You can absolutely do it with the right plan. We’ve bought our last five vehicles with cash, and both of our kids bought their first cars with cash too! The article below shows you how to do it.
Money Myth #4- Do You Need Credit Cards for Emergencies?
Do you really need credit cards for an emergency? Do you really need a credit card for anything? No, you really don’t if you learn to manage your money well.
Studies show that the majority of people with credit cards carry a balance from month to month. When you do that, you’re paying unnecessary interest and fees that end up turning that $5 happy meal into a $15 disaster over time. It’s sneaky, and it drains away your hard-earned money.
Your best bet is to use cash to run your life. That means you can use a debit card, check, cold hard cash, or any other cash equivalent. It also means having a solid emergency fund in place (more about that later), so you don’t have to panic when the inevitable emergency comes along.
Money Myth #5- Debt is a Tool for Wealth Building
Using consumer debt never increases your wealth. Anytime you use debt to purchase anything, whether it’s an investment or a cheeseburger, it costs you more than if you had just used cash instead.
Not only that, debt increases your risk. Consumer debt drains away money you could have used somewhere else, increasing the likelihood you will continue living paycheck to paycheck. Using debt to fund an investment increases the likelihood you will lose money if something goes wrong (and it always does eventually).
Money Myth #6- I Don’t Make Enough Money to Pay Off My Debt
It’s easy to believe the myth that debt is just a part of life. So is the lie that the average person with an average income (or less) can’t live debt free. Too many of us believe the system is rigged against us and there is no way to get ahead.
Absolutely not true! With a solid plan to manage your money properly, some internal grit, and time, anyone at any income level can become debt free. Debt freedom is not just for special people with a high income or the right knowledge. Anyone can achieve it if they really want it.
Money Myth #7- Not Everybody Can Get Out of Debt
Don’t believe the myth that some people can achieve debt freedom, but not you. Many times, this is tied to a lack of self-worth. Some people don't believe they’re worthy of becoming debt free, for a variety of reasons.
Sometimes it’s a lack of self-esteem. Or, there may be issues with self-control when it comes to managing money. Previous failed efforts at getting out of debt may be psychologically holding you back. Whatever issues you need to work through, don’t let them stand in the way of making your financial life better.
Budgeting- The Most Important Tool to Manage Your Money
Now that you know what not to believe, here is one absolute truth. The most important tool you can use to manage your money well is a detailed budget.
If you don’t have a forward looking plan for your money, you will never have complete control over it. Learning to do a budget consistently is job one for managing your money like a pro!
How Do You Start a Budget?
Learning to do a budget starts with commitment. Doing a detailed plan for your money isn’t always easy at first, so you need to decide early on you’re going to stick with it, no matter what.
Once you’ve committed to the process, then you can start the real work.
If you’re not used to doing a detailed budget on a regular basis, it’s takes a little time to wrap your head around it. There is a bit of a learning curve, so you won’t get it perfect the first time. In fact, it will take you a few months of doing your monthly budget before you really feel comfortable with it.
The More You Do It, The Easier It Gets
I know when I first started budgeting years ago, it took me at least 3 months before I really got the hang of it. It would take me a couple of hours to get it done, and it was kind of stressful.
These days, creating our budget rarely takes more than 30 minutes a month. The point is, the more you do it, the easier it gets, so stick with it.
You can find all my budgeting resources on the CFF Budgeting Page.
Should You Use the Envelope System with Your Budget?
Along with a detailed written budget, using the cash envelope system is the key to ensuring that you never spend more than you make. When you use cash to make your everyday purchases, you can only spend what you budgeted for the month, and no more. I can tell you from personal experience, this is absolutely the best thing Angie and I have ever done to get control of our money!
The envelope system is the best thing you can do in combination with your budget to manage your money efficiently and never spend more than you make. Better yet, when you only spend cash, you no longer need credit cards to fund your life, so you don’t keep digging the debt hole deeper.
What if You Don’t Like to Use Cash?
Of course, you don’t have to use physical cash if you don’t want to. Some people just don’t feel secure carrying around cash. If that’s the case there are apps such as Mvelopes, Everydollar, and GoodBudget that allow you to create virtual envelopes linked to your bank account. Every time you make a purchase, you just deduct it from the proper virtual envelope inside the app.
Create an Emergency Fund
Another essential tool for managing your money better is the emergency fund. It’s yet another way to ensure that you manage your money wisely by keeping yourself out of debt when the inevitable emergency comes.
Think about it- what do most people do when they have an emergency that costs a lot of money to resolve? If they don’t have the cash, they use debt to pay for it. This is just one of the ways so many end up in perpetual debt.
Why Do You Need an Emergency Fund?
An emergency fund acts as self-insurance. It allows you to be prepared for inevitable emergency expenses without having to use credit cards or some other type of debt that takes months or years to pay off.
A well-funded emergency fund keeps you out of debt and gives you serious financial peace of mind. I can tell you from personal experience, when your car needs expensive repairs or your HVAC unit dies, it’s so much easier to write a check than going into debt and paying it back month after month.
How Much Do You Need in Your Emergency Fund?
Most experts (including me) recommend you fund your emergency fund as follows:
- $1,000 beginner emergency fund- do this while you’re paying off debt. It will fund most emergencies you might encounter without getting you sidetracked from paying off debt.
- 3-6 months of expenses- Once you get all your debt paid off except for your mortgage, then save up enough to cover at least 3-6 months of your expenses. This ensures you against a major emergency such as job loss, health crisis, etc.
Pay Cash for Everything
Paying cash for everything is also a really smart way to manage your money wisely. Not just for small purchases either. I recommend paying cash for large purchases too. I realize that sounds like a hard thing to do, especially if you have an average income.
Think about it this way- if you can afford to pay monthly debt payments for large purchases, you can definitely pay cash. Those monthly payments come with interest and fees attached, so when you use debt, you’re paying more for everything.
We Pay Cash
Since we made the transition to a cash only life, we save a ton of money, and we don’t have any of the stress or bondage associated with debt. Since we went cash only, we have paid cash for:
- Our last 5 cars
- Every Christmas
- 12 years of college for Angie and our kids
- Our daughter’s wedding
- Every vacation
- And everything else we buy
Pay Cash for a Car?
Anybody can pay cash for a car. It’s simply a matter of managing your money the right way to make it happen. When we decided to start paying cash for our cars, we still had car payments.
We were diligent about paying off our car debt for years. Then when we finally sent in our last payment, we vowed to start putting what we used to send to the finance company into a savings account every month. We also vowed to drive our paid for car until it died.
Once the car finally died, we had plenty of cash saved up for the next one, and we were able to buy a nicer car than we had before! It’s an extremely simple thing to do, but it takes some time and discipline to make it happen. But no matter your income level, when you put this principle into place, you can easily pay cash for every car for the rest of your life!
How to Pay Cash for Christmas
Christmas comes around at the same time every year. But it still seems to take some people by surprise! You don’t have to have a January credit card bill hangover if you manage your money properly.
Paying cash for Christmas expenses starts in January, and should be a part of your regular monthly budget. Make Christmas expenses a line item in your budget every month, then when the holidays roll around, you have a nice pile of money to get all the gifts you need. It’s really that easy! And you don’t have to dread those January credit card bills ever again.
Can You Really Pay Cash for College?
Yes, you can pay cash for college. Of course, the easiest way is to start saving for college when your child is born. If you save just $100 a month in a savings plan such as a 529 plan or an Education Savings Account, you will easily have enough to pay for a decent college education when the time comes.
However, if you’re getting a late start saving for college, you will need to save more in a shorter amount of time. As your child gets into their high school years, finding scholarships and grants for college should be job one just behind school work.
How to Save Money on College Expenses
Also, finding ways to save money on college expenses is the easiest way to make college affordable. Here are some tips:
- Live at home while attending a local college
- Go to a more affordable public in-state university instead of a private or out of state college
- Attend two years of community college, then finish the last two years at a traditional 4-year college.
- Work while you go to school
- Make finding scholarships and grants a priority
Of course, these are just a few suggestions. For more detailed info on how to go to college without debt, I recommend the book Debt-Free Degree: The Step-by-Step Guide to Getting Your Kid Through College Without Student Loans.
How to Save More Money
Of course, learning how to manage your money better means learning how to save money. There are two ways to do it:
- Reduce your monthly expenses.
- Put money into savings and investments for the future.
So, whether trying to save money on groceries, or put more money in your bank account, what’s the best way to save?
Automate Your Saving
I believe the best, most efficient way to save money is by automating the process. When it come to saving money on monthly expenses, that means finding ways to reduce your regular bills, and using shopping apps like Honey, Rakuten, and others to save money every time you shop.
When it comes to saving money for the future, the best way to automate the process is to have a percentage of every paycheck automatically placed into a savings or retirement account. Your account increases over time with zero effort on your part after the initial setup.
How Do I Manage My Money on a Low Income?
When you have a low income, managing your money efficiently is extremely important. Since you don’t have much money to work with, you have to be really careful to keep from getting into debt.
However, even with a low income, you can stay out of debt, pay cash for everything, and live a comfortable life if you choose. It’s all about being diligent and disciplined with your finances.
However, if your income is extremely low, you may need to reevaluate where you’re headed career wise. Find ways to bring your income up through changing your career, getting a side gig, or working more hours if you’re not working full time.
A few things that can help improve your finances if you have a low income:
- Find a good side gig to make extra money.
- Evaluate your career path. Find ways to increase in your career.
- Are you overspending on basic expenses like rent, mortgage, groceries, etc.?
- Do a monthly zero-based budget.
Manage Your Money on a High Income
Surprisingly, about 25% of people making over $100k per year are living paycheck to paycheck. In this case, it’s less about income than it is about good money management skills.
Fortunately, when you have a higher than average income, it’s much easier to figure out how to get your finances under control. Usually it’s a matter of changing your mindset about how you spend money. Since you have a high income, it’s easy to think that you don’t need a budget. But if you make a great living and you still have car payments, credit card bills, and don’t put money into savings, then something is wrong! Here’s one of my top articles on the subject:
Do You Really Need a Credit Score?
What does maintaining a good credit score do for you? It helps you take on more debt. But if you want to manage your money like a pro, then staying out of debt should be your goal.
The credit score was created by companies to help them decide who is a good candidate to pay back debt on time and in full.
If you believe the media, you think you actually need a credit score to get by in life. If you don’t have a credit score, then you’ll never be able to buy a house, a car, get a job, or anything else.
That’s total B.S.!
You don’t need a credit score for any of those things! There are plenty of alternative ways to manage your money that keep you free from the bondage of debt and monthly payments if you choose.
Here’s a great article that explains it all for you:
What Kinds of Insurance Do You Need?
Good money management also means protecting yourself with insurance. I realize it’s not sexy. Nobody wants to spend their hard-earned money on insurance! But here’s the deal- insurance is what keeps you from a major financial catastrophe that would be difficult, or impossible, to recover from.
When you have the right kinds of insurance in place, you have the peace of mind that whatever happens, you’re covered. Here’s a list of some of the most important insurances you need:
- Life Insurance- Buy term life to make sure your family is well taken care of if you die.
- Disability- Preserves your income if you get injured and can’t work.
- Health Insurance- Helps you maintain good health, and saves you massive amounts of money in case of a major health issue.
- Emergency fund- Self insurance against any emergency expense that can (and will) arise unexpectedly.
- Car Insurance- Keeps you protected in case of accidents that can cost thousands of dollars in damages and medical bills.
Should You Declare Bankruptcy?
When you’re in a dire financial situation, bankruptcy might seem like the easiest way out. But you should be extremely careful when considering bankruptcy to manage your finances. You need to educate yourself and be wise so you don’t make a mistake that potentially costs you for years to come. Here are a few tips to consider if you’re thinking about declaring bankruptcy:
- Filing bankruptcy should be a last resort- you should do it only after you have exhausted all your options.
- Find a way to avoid bankruptcy if possible- It might be difficult, but with the right plan you can usually work your way out of a difficult situation without filing bankruptcy.
- Educate yourself about debt- It’s extremely important to understand how you got into trouble in the first place, and how to change things going forward.
- Get wise counsel- get advice from someone who handles their money well and has your best interests at heart.
How to Save for Retirement
Saving money for retirement is one of the most important things you can do to manage your money well. Even if you never plan to retire, you need a nest-egg to fund your life if you eventually can’t work. You may also want to leave something to the grandkids too!
There are plenty of vehicles available to invest for retirement, including:
- 401k- your company may offer it. If you’re self-employed you can open your own.
- IRA- anyone can open an IRA as long as they have earned income. You don’t pay tax on contributions, but you will pay tax on withdrawals at retirement.
- Roth IRA- anyone can open one. Allows you to invest after taxes so you don’t pay taxes on withdrawals later.
- Self-Directed IRA– allows you to invest in alternative assets like real estate, businesses, cryptocurrency, and more.
What is the Easiest Way to Save for Retirement?
Saving money for retirement doesn’t have to be difficult. In fact, it can be downright easy if you set it up the right way. Two of the best things you can do to manage your money for retirement in the easiest way possible, are:
- Automated Saving
- Passive Income
Saving money automatically is easy. All you have to do is have money automatically deducted from your paycheck, and sent directly to your retirement account. Since the money comes out automatically, you never miss it! The cool thing is, your contributions add up quickly, and you’ll get the pleasure of seeing your retirement investments continually growing over time.
Creating passive income that you save for retirement is automated saving on steroids! For instance, I have a rental property that generates income every month. The rental income goes straight into my Self-Directed IRA account. This passive income stream is as easy as it gets! I actually have someone else (my tenant) putting money into my retirement account for me every single month!
Rental real estate is just one of many ways you can manage your money to produce automatic, passive income for your retirement.
How Can You Achieve Financial Freedom and Independence?
Everyone wants to have financial security. It takes great money management skills to make that happen. But what does it take to achieve complete financial freedom? What does having financial freedom even mean?
The Definition of Financial Freedom
Financial freedom, at its core, means that:
- Your financial situation allows you to do pretty much whatever you want with your life, regardless of finances.
- You have no financial bondage in your life.
- You have enough money to work or not work if you like.
- In most life decisions, your financial situation becomes less of a consideration.
- You have control over your finances, instead of finances having control over you.
- You have more freedom to pursue things that bring you (and others) joy.
How to Achieve Financial Freedom in Your Own Life
Creating financial freedom is not a one size fits all formula. Everyone that achieves financial independence takes a different path to get there.
But there is one ingredient that every single financial freedom story has in common. That ingredient is excellent money management.
Financial Independence Starts Here
Whether you earn your fortune in business or win the lottery, if you don’t manage your money right, you will never grow it or keep it. So, if you want to achieve financial independence for you and your family, it starts here, with this blog post.
But this is only the beginning. If you really want to get the nitty-gritty and learn how to change your mindset and habits to manage your money the best way possible, you should take a look at my highly rated online course, The Divine Art of Money- 21 Days to Manage Your Money Like a Pro!
It’s all you need to start your journey down the best financial path possible, and finally start managing your money like a pro…