5 Money Management Tips for the Average Income Earner
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There are several things millionaires have in common, and it’s probably not what you think. Most weren’t born knowing how to become a millionaire.
Sure, some people are privileged, but many became millionaires through hard work, extreme frugality, and saving money.
I’m going to show you exactly how the average income earner can learn money management skills and become a millionaire without selling everything and living “off the grid” in a tiny house.
Step 1: Start Thinking & Acting like a Millionaire
If you want to learn how to become a millionaire, you’ve got to start thinking and acting like a millionaire. There’s a reason Dave Ramsey asks every person on his “Millionaire Hour” how much they paid for their last pair of jeans.
No, he’s not a fashionista. He could care less about the latest trends. Most millionaires don’t frivolously waste money on items such as clothing and accessories.
They also don’t finance fancy, expensive cars. The millionaire knows the power of compound interest.
Make Compound Interest YOUR Friend…Not the Bank’s Best Buddy!
When you deposit money into a savings vehicle, such as a CD, money market account, or an IRA, the bank pays YOU.
Alternatively, when you take out loans from the bank to pay for things such as cars, boats, and campers, you end up paying the bank interest.
Step 2: Pay Off All Debt Except the House
Instead of paying interest to the bank for your “toys”, make a plan to pay off all debt and stick to it. The funny thing about debt is when you don’t owe creditors, you pay yourself! You have money!
How Do You Eat an Elephant?
One Bite at a Time. It might feel like your surmounting debt is impossible to pay off. You just have to know where to begin.
Start with the unsecured loans:
- Payday Loans
- Title Loans
- Credit Cards
Payday loans and title loans take priority. Lower-income class people take out these loans when they’re living paycheck to paycheck.
These need to be paid off immediately, and you should never borrow from them again! I can’t stress this enough. These high-interest loans are meant to make the poor even poorer!
Credit cards are an interesting means of payment. Credit card companies and banks give you instant access to borrow funds with a (quite scary) minimum repayment every month of 1-2% of the balance.
Think about that for a minute. If you charge $1,000 to a credit card at 25% interest, your minimum payment would be just $10-$20. This means IF you pay just the minimum payment, you’re left with a balance of 98-99% plus interest! Most people aren’t disciplined enough to pay the card(s) off every single month, so they end up paying hella interest over several years.
My freshman year of college, I found myself working at Walmart and opened a Walmart credit card.
I quickly learned how to use my credit card in the place of an emergency fund, and instead of buying groceries with my paycheck, I was blowing my paycheck and using my credit card for groceries.
The Debt Snowball vs Debt Avalanche Method
Dave Ramsey has coined the debt snowball method as the one and only way to pay off debt fast.
Method 1: How the Debt Snowball Works:
You list all of your debt balances in order from smallest to largest amount owed. You then create a written budget and take all extra funds left over after paying all bills/expenses for the month and throw it at the lowest balance on the list, while paying minimum payments on everything else.
As you pay off each bill or credit card, you immediately add that minimum payment to the next lowest balance and keep attacking, growing your snowball little by little.
Method 2: The Debt Avalanche Explained:
Suze Orman, feminist finance author and speaker, believes the debt avalanche is the smartest method for paying off debt. She claims that the numbers are all that matters, and you must list all debts in order from largest interest rate to smallest interest rate and attack the highest interest debts first.
While this makes perfect, logical sense, Dave Ramsey knows that most people need the quick wins associated with paying off smaller balances first. If you can knock out half of your credit cards by paying those small balances first, it’s extremely motivated.
Method 3: The DOLP System for Paying off Debt from Oprah Debt Diet
DOLP stands for Dead on Last Payment. It was the system created by David Bach, author of Smart Women Finish Rich, in which you list each debt balance by their corresponding minimum payments. This gives you a DOLP number. You then list each debt smallest DOLP to largest.
Oprah Winfrey featured David Bach on the show several years ago offering the Oprah Debt Diet including the DOLP Method.
The DOLP system for paying off debt is similar to the debt snowball but may vary slightly as some loans have higher minimum payment percentages than others.
The most important takeaway of this section is that if you’re paying interest on loans (excluding a mortgage) and credit cards, you need to put a stop to it.
How to Take Care of an Upside Down Car Loan
Sometimes selling cars is a great way to kick start paying off debt, especially if you earn an average income. If you’re upside down on your car, owing more than it’s worth, take a moment to assess your situation. How much is the negative equity?
The best thing you can do is pay off your credit cards and unsecured loans first, and throw all extra money towards the car until you’ve brought it up to current value. Then you can decide if you want to keep it or sell it and buy something more affordable.
You have to decide whether you’d rather have nice cars or a million dollars in the bank.
Step 3: Take Advantage of Your Employer 401k Match
Some would say to pause retirement contributions while focusing on paying off debt. If your employer offers a matching contribution to your retirement plan, please take advantage of it.
In this case, especially, do not listen to Dave Ramsey. You are losing out on free money from your employer to the tune of thousands of dollars.
And remember when we learned about compound interest above? Every year that you aren’t contributing to a retirement plan is another year that you will be working to make it up.
If you earn $50,000 per year, and your employer offers to match 100% of your contributions (up to 6%), you need to find a way to contribute 6%.
By doing this, your retirement account will increase approximately $6000 per year, plus interest. Where else can you double your money (without risking it all on blackjack)?!
Step 4a: Learn How to Budget and Live on Less
Let’s assume your net (take home) pay is $4000 per month, and you’re a family of three with a small child in daycare. Your budget should look like this when you’re debt-free:
- Income – $4000
- Retirement ($250) – Balance increasing $500 per month with employer’s contribution!
- Rent/Mortgage – ($1000)
- Utilities ($250)
- Phone ($50)
- Internet ($50)
- Car Insurance ($100)
- Child Care for One Child ($600)
- Groceries ($400)
- Sinking Funds (House/Car Maintenance, Vacations, Replacement Appliances, etc) ($200)
This leaves $1100 per month to invest in accounts such as real estate REIT’s, money market accounts, annuities, mutual funds, and other savings vehicles.
And did you know that you can become a real estate investor with just $500? These REIT’s have grown historically at a rate of 17-20% annually, on average, which is far better than money market and savings rates.
With $1,600 deposited into savings and investments every month, it’ll take some time to reach your goals, but you’ll have a firm foundation. And when you earn raises and bonuses, save the extra money and don’t adjust your lifestyle.
Remember this is a long-term goal in which simple, positive habits and behaviors play a big role.
In five years, let’s assume your child starts public school, and you now have $2,200 being deposited into savings.
Step 4b: Find Ways to Make Extra Money
There are plenty of extra ways to make money from home or online, whether you work a full-time job or are a stay at home mom.
One of the best decisions I made (for myself and my family) was to start a blog and YouTube channel. I bring home more per month than I did in my banking job, and I have complete flexibility and ownership of my schedule.
Other ways to make money include:
- Donating Blood Plasma for Extra Money
- Selling homemade crafts
- Providing a service
- Selling real estate on the side
- Selling on EBay
- 76 Ways to Make Extra Money on the Side This Year
Step 4d: Shop Insurance Rates
Has it been a while since you’ve shopped insurance rates?
Life changes fast. So should re-evaluating your life insurance needs. Consider life insurance coverage that actually covers what your life looks like today.
You can apply for life insurance in less than 5 minutes. Or take your time. You do you.
You might also be able to save on car insurance and homeowners or renter’s insurance, but one of the biggest expenses we cut out of the budget was health insurance.
Yes, it’s true. We don’t have health insurance, but we participate in Christian Healthcare Ministries instead and have had nearly $60,000 in medical bills paid from other members.
Step 5: Get Started & Know When to Seek Help
It’s never too late to start on the path to financial independence. What exactly does this mean for you? For some, this means calling their human resources department to start contributing to retirement.
Others may need help setting up a systematic plan for paying off debt and saving. I offer financial coaching to those looking for extra help and guidance.
How to Become a Millionaire Related Posts:
- Retire a Millionaire (Even if You Haven’t Started Yet)
- The Ultimate Estate Planning Checklist for Dummies
I’ve done all the things! Girl, I’ve washed my face. I’ve trashed everything that doesn’t spark joy. I’ve walked the baby steps. I’ve cried. I’ve prayed, but my perfectionism has really held me back.
Perfection Hangover can be crippling. Stop comparing yourself to others and start living your best life! That’s why PH exists! I want to encourage you to take control of your money, your blog, and your business.