12 Steps to Financial Freedom, Part 3

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Step #9: Automate your finances

Over the past few years, I’ve been moving toward a system of paperless personal finance. Along the way, I’m learning the value of automating routine transactions. When you make things automatic, you remove the human element, making it more difficult for you to mess things up.

The classic example is overdraft protection. By tying your checking account to your savings account, you have a safety net if you bounce a check. But there are other ways this can work for you. For example, I’ve set up automatic payments with the gas company, the cable company, and my auto insurance company. I also make automatic deposits to my online savings account.

One terrific advantage to automation: when you pay your bills and do your saving and investing automatically, it’s easy to tell how much you have left over to spend at the end of each month!


Tip! Do what works for you. There are few hard-and-fast rules in the world of personal finance. I can suggest methods that have worked for me (and for others), but only you can determine if these methods are appropriate for your own circumstances.

Step #10: Earn extra money

You can meet a lot of your financial goals by reducing your spending and using the right tools. But nothing supercharges your progress like a boost in income. How can you earn extra money?

  • Ask for a raise. Several readers have written to tell me how they’ve given themselves a raise through ambition and ingenuity. How to negotiate your salary, either before or after you’re hired.
  • Switch employers. Not every employer is able or willing to offer raises, even when they’re merited. If you’re in a position where a raise isn’t possible, consider finding a new employer.
  • Take a second job. Many people find that the best way to get out of a financial hole is to temporarily take a second job. Nobody wants to work more than 40 hours per week, but sometimes that’s what’s needed to get out of debt or to save for a house. Just remind yourself that you’re doing this for a short time.
  • Use your hobbies. Yes, it’s possible to have money-making hobbies. You’re not going to get rich playing World of Warcraft, but many people use productive hobbies to earn a little extra income.
  • Sell things. When I decided to get out of debt, one of my first steps was to sell a bunch of the stuff I’d bought with that $35,000. I used eBay, Craigslist, garage sales, and the Amazon Marketplace to sell the things I no longer needed or wanted. The money I earned jump-started my debt reduction.

Another effective way to increase your income is to pursue entrepreneurship. While working to defeat my debt, I started a small computer consulting business. It didn’t generate a lot of income, but it did provide $2,000 a year that I wouldn’t have had otherwise!

Step #11: Learn the Art of Conscious Spending

Being frugal doesn’t mean you have to deprive yourself. You’re not giving up the good stuff for the rest of your life. Instead, frugality is about choosing to spend it on the things that are important to you while cutting back ruthlessly on the things that aren’t. Ramit Sethi calls this conscious spending, which is a fantastic way to describe it. Conscious spending implies that you’re actively choosing to spend on some things and not on others.

Contrast this with how most people spend. We tend to spend on reflex. We buy things because we’re expected to, because everyone else does. We spend to have what other people have. We sign up for gym memberships that we never use, subscribe to magazines we never read, and pay for golf clubs that get buried in the garage. We make impulse purchases at the grocery store — or even on large items, like computers and cars. Most of the time, people spend without thinking.

But with conscious spending, you evaluate every purchase. You ask yourself: “Will buying this help me meet my goals? Will it make me happier? Is it congruent with who I am and what I want to do?” I know this sounds like New Age mumbo-jumbo, but it’s not. These questions can have a powerful positive effect on how you spend and save.

Conscious spending isn’t restrictive; it’s liberating. It lets you cut back on the things that aren’t important to you so that you can spend on the things that do matter. Learning to practice conscious spending is a sure way to improve your quality of life.

Related >> Conscious spending in action.

Step #12: Educate yourself

Knowledge is power. Personal finance doesn’t have to be a mystery. Subscribe to this site. Read other personal finance sites. Visit your public library. Borrow money books and self-development manuals. Here are four of my favorites:

You don’t have to agree with everything in a book to get something out of it. I read a lot of personal finance books — some are good, but many are not. Even the worst books usually have one or two things I can pull from them. Learn how to read a personal finance book so that you can pick and choose those pieces appropriate for your life.

Blatant self-promotion! I wrote my own book precisely to help people who are struggling with money. Your Money: The Missing Manual contains all of the advice I wish I’d had when I was digging out of debt and learning to boost my income. If you like what you read here at Get Rich Slowly, you should like this book. It has tons of new stuff (as well as a few favorite nuggets from the past).

Final thoughts
Taking control of your finances can be intimidating — there’s so much to do! — but it doesn’t have to be that way. One effective solution is to take a vacation day from work: designate one specific date as your personal “Money Day”. Use this day to finally set up Quicken on your computer, to open a retirement account, and to call around for a better deal on your insurance.

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12 Steps to Financial Freedom, Part 2

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Step #5: Optimize your accounts

For seventeen years, I was an account holder at a large national bank. I paid an $8 “service charge” every month, as well as many other fees. I received terrible service and earned no interest. Over the last couple of years, I’ve finally begun to optimize my accounts. If you haven’t already done so, consider the following:

  • Open an online high-yield savings account. Interest rates are about as low as they can go, and should increase in the months and years ahead.
  • Choose a rewards checking account. Believe it or not, it’s possible to find checking accounts that pay interest. The best online checking accounts are paying about 1% right now, depending on your balance. But you can usually find an even better deal through your local bank or credit union. Check out this list of rewards checking accounts for rates of up to 5%.
  • Use a rewards credit card. If you have trouble with credit, it’s best to avoid plastic altogether. If you can use credit responsibly, be sure to choose a credit card that pays you. Avoid cards that carry an annual fee. Find a rewards program that matches your lifestyle. But don’t choose a card just because it offers a signup bonus or because it gives you a discount at your favorite store. Remember: your goal is to find a useful tool. Look for a long-term relationship you can live with.

It’s important to choose accounts and systems that work for you. I signed up for a rewards checking account at a local credit union, but the nearest branch is fifteen minutes out of my way. I never used it, so the credit union closed the account. I compromised by opening on online checking account instead. I earn a lower rate, but it’s an account I’ll actually use.

Tip! When optimizing your banks and credit cards, consider using multiple accounts at each institution. For example, I have ING Direct subaccounts that allow me to target my savings. I save for vacation in one account, for a car in another, and I use a third account for emergency savings.
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Step #6: Start an emergency fund

For years I lived paycheck-to-paycheck. I spent everything I earned. This worked well until something went wrong. Suddenly I’d find myself without money to pay for a car repair, or facing an expensive doctor’s bill. I financed emergencies with credit cards. Eventually I saw the light and built up a rainy-day fund.

After you’ve optimized your accounts, make it a priority to save for emergencies. In The Total Money Makeover, Dave Ramsey explains why he believes an emergency fund should come before anything else:

Since I hate debt so much, people often ask why we don’t start with the debt. I used to do that when I first started teaching and counseling, but I discovered that people would stop their whole Total Money Makeover because of an emergency — they felt guilty that they had to stop debt-reducing to survive.

Open an online high-yield savings account and add $20 or $50 to your account ever time you get paid.

Two years ago, I opened an account at ING Direct, where it’s simple to schedule automatic deposits. After you’ve saved $1000, then you can attack your debt.

Related >> Learning to love the emergency fund.

Step #7: Get out of debt

Are you struggling under a heavy debt load from credit cards or student loans? Make it a priority to unload some of this this burden in 2012. At the end of 2007, I said good-bye to 20 years of debt — it feels fantastic to have that weight off my shoulders.

If you have the mental discipline, you’ll save money by paying down your high-interest debt first. But if you’ve tried that method before and failed, consider using a debt snowball. Pay your debts starting with the smallest balance first. Here’s how:

  1. Order your debts from lowest balance to highest balance.
  2. Designate a certain amount of money to pay toward debts each month.
  3. Pay the minimum payment on all debts except the one with the lowest balance.
  4. Throw every other penny at the debt with the lowest balance.
  5. When that debt is gone, do not alter the monthly amount used to pay debts, but throw all you can at the debt with the next-lowest balance.

The debt snowball can give you awesome psychological payoffs, keeping you motivated to stay in the game. It’s not mathematically ideal, but it worked for me (and for many others besides). However you choose to get out of debt, stick with it. Don’t give up.


Tip! The perfect is the enemy of the good. When you spend so much time looking for the “best” choice that you never actually do anything, you’re sabotaging yourself. And an ideal solution that you don’t follow through with is worse than a good solution that you’ll actually use. Choose a good option and act.

Step #8: Fund your retirement

If you’re young, you probably don’t think you need to start a retirement account. You’re wrong. No matter how old you are, now is the time to begin saving for retirement. The extraordinary power of compound interest favors the young — and in a big way! In The Automatic Millionaire, David Bach writes:

The single biggest investment mistake you can make [is] not using your [retirement] plan and not maxing it out.

If your employer offers any sort of retirement-contribution matching, such as a 401(k), be sure to take advantage of it. It may not be “free” money, but it’s darn close. Also consider starting a Roth IRA.

After reading The Automatic Millionaire a couple years ago, I opened a Roth IRA at Sharebuilder. It was easier than opening a checking account. I’ve managed to make the maximum contribution since 2006. In 2008 and 2009, I maxed out my 401(k).