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On Inc., Ilya Pozin wrote about 10 things anyone can learn in 10 minutes to make them more productive for the rest of their life.
More productive is one thing — but how about richer?
Only 10 minutes won’t teach you everything there is to learn about managing your money and building wealth, but setting aside some time to learn one of these 10 things can only improve your financial know-how.
How to calculate your net worth
Your net worth is the financial value of everything you own — it’s something we should all know, yet tend to overlook.
A negative net worth — when you’ve spent more than you’ve earned — can be the wake up call you need to make some serious financial adjustments. A positive net worth, on the other hand — when you’ve earned more than you’ve spent — can be a confirmation that you’re doing well, and can help you plot out how much longer you need to reach your next financial goals.
How exactly do you determine your net worth?
Certified financial planner Sophia Bera provides a simple equation in her book, “What You Should Have Learned About Money, But Never Did“:
Your net worth = what you have — what you owe
Here’s the exact method she uses:
I have a spreadsheet that I pull up, I log into my accounts online, and I enter the balance of each of my retirement accounts, savings, investments, and so on. Then I enter any debts and subtract this number from my assets to determine my net worth.
If you own a home you can pull the approximate value of your house on Zillow.com, and then subtract your mortgage balance to determine how much home equity you have.
How often should you revisit your net worth? Twice a year, Bera suggests.
How to figure out where all of your money is going
Most of us know how much cash is flowing into our bank accounts each month — but just how much is flowing out? Do you know how much you spend eating out, on monthly subscriptions, or on coffee? Chances are it’s more than you think.
If you redirect smaller, everyday expenses towards a retirement account, it can accumulate and grow into thousands of dollars over time, thanks to the power of compound interest.
Where can you cut back? First, you’ll need to figure out where all of your money is going. There are plenty of apps out there that will automatically track and categorize your expenses for you, such as Mint, You Need a Budget, Personal Capital, and LearnVest.
If apps aren’t for you, try keeping a spreadsheet on your computer or writing down your daily purchases in a notebook.
How to change your mindset about money
Contrary to popular belief, finishing rich isn’t necessarily dependent on the size of your paycheck — and it has more to do with psychology and mindset than you may think.
This should strike you as good news, since anyone can change their thoughts, beliefs, and habits to reflect those of the rich.
The only reason to save money is to invest it. Put your saved money into secured, sacred (untouchable) accounts. Never use these accounts for anything, not even an emergency. This will force you to continue to follow step one (increase income). To this day, at least twice a year, I am broke because I always invest my surpluses into ventures I cannot access.
Next, start making choices like the rich and developing “rich habits.” As self-made millionaire T. Harv Eker says, “The fastest and easiest way to create wealth is to learn exactly how rich people, who are masters of money, play the game.”
Which debts you should pay off first
To start, you’ll want to rank all of the debt you owe in order of interest rate — from highest to lowest interest rate charged. While you’ll always want to pay the minimum on your various debts, prioritize the debt with the highest interest rate in order to pay less over the life of your loans.
Once it’s paid off, move down your list and tackle the next debt with the highest interest rate.
Note that the alternative strategy is what financial expert Dave Ramsey named “the Debt Snowball”: paying the smallest debt first, regardless of interest, then rolling that money into paying off the next-biggest debt and so on, so you completely pay debts as you go. The advantage here is more emotional than monetary — it feels good to cross a debt off the list, and for many people, that emotional boost keeps them going.
If the snowball works for you, go for it, but do keep in mind that paying high-interest debt first is cheaper in the long run.
How big your emergency fund should be
There’s no universal, one-size-fits-all answer to this question.
The amount of savings you need is highly personal — and it’s usually measured in months of living expenses, rather than a fixed dollar figure.
Many experts, including billionaire John Paul DeJoria, agree that it’s smart to have six months’ worth of savings tucked away. You may personally need more or less depending on your situation.
To get a general idea of the dollar figure you should be working towards, start by determining how much you spend each month and multiply that by the number of months you feel comfortable setting aside money for should an emergency arise.
Where should you stash these savings? Try a short-term bond fund.
How your partner views money
As uncomfortable as they may be, money conversations are crucial — particularly if you’re thinking about popping the question. After all, arguments about money are a leading predictor of divorce.
“Smart couples talk about money all the time,” writes financial adviser David Bach in his book, “Smart Couples Finish Rich.” “When you work together on your finances, you can compound the results. When you don’t, the same can be said for the mistakes you will invariably make.”
Where do you start?
First, you’ll want to understand the financial background of your partner, Bach says. You’ll want to find out how your partner feels about money and what they consider to be its purpose in their life. This will allow you to understand how they make financial decisions.
Next, you can discuss the more concrete details, such as who is responsible for paying which bills, whether you want a joint account, and what your specific money goals are as a couple.
How to make sure you always have money to save
Believe it or not, in many cases having enough money to save is a matter of mindset, not dollars.
“What most people do when they earn a dollar is pay everyone else first,” Bach writes in “The Automatic Millionaire.” “They pay the landlord, the credit card company, the telephone company, the government, and on and on.
“The reason they think they need a budget is to help them figure out how much to pay everyone else so at the end of the month — or the year, or their working life — they will have something ‘left over’ to pay themselves.”
How do you fix this? You pay yourself first.
That simply means considering your savings as much as priority as the rent or the gas bill, and if you need to cut back on spending, savings isn’t an area you do it. Of course, there will be exceptions — people who truly don’t have wiggle room to rearrange their budgets — but if you’re meeting your financial obligations with room to spare, building your savings is as simple as changing your mind.
How to automate your finances
Changing your mind about your savings is easily accomplished in minutes, but how can you be sure you’ll stick to your new resolve?
Easy: Automate your finances.
Automating your finances means choosing where your money goes ahead of time and setting up a system to make sure it gets there, without taking a detour into your barista’s hands. Jim Wang, founder of Wallet Hacks, says it’s a great tactic for anyone who feels a little lazy about their money.
So how do you do it?
Once you set up your system, it will continue to work without your input or oversight, minus regular checking of your credit card accounts to make sure there isn’t any evidence of error or fraud.
How much money you need to keep in your checking account
The answer will be different for everyone.
Financial planner Tom Gilmour explains to LearnVest:
As a general rule of thumb, I recommend storing the equivalent of one month of your take-home pay in your checking account.
This gives you the security of a 30-day cushion — which should give you the peace of mind that you have enough to cover your expenses for the next month. It also safeguards against the stress of being on the verge of overdrafting or feeling unprepared to deal with an unexpected expense.
Gilmour warns that once you have that single month, it’s time to find other places for your money, whether that’s savings accounts, retirement accounts, or other investments. Because a checking account earns no interest at all, it should be considered a temporary stopover for your cash.
Once you have that month of pay in your account, you’ll have peace of mind, and you’ll be able to make the most of every other dollar you have.
What kinds of insurance you need
Everyone has to have health insurance, or pay a fee. If you have a car, you’re required to have auto insurance. If you own a home, you must to buy homeowner’s insurance.
But beyond that?
Here are a few rules of thumb:
If you support yourself, get disability insurance. LearnVest has an easy-to-follow primer on how to calculate how much you need.
If you have children or other dependents, share outsized debts like a mortgage with a spouse, or have substantial private student loans, get life insurance. Term policies are sufficient for most people. If you have a high net worth, you might want to look into whole life insurance for its tax breaks.
If you are a renter, get renter’s insurance. In addition to covering break-ins or damage from a fire or severe weather, renter’s insurance will cover you if your car is ever broken into. “Anything that is not part of your vehicle that is stolen from your car — golf clubs in your trunk, for example — is not covered by auto insurance,” Jonathan Meaney, a certified financial planner and wealth manager at Carter Financial, told Business Insider, “Your renter’s insurance on the other hand, will cover those items.”
When everything is going swimmingly, insurance seems like an unwelcome extra cost. But when the waves start breaking and something goes seriously wrong, it can make all the difference.