2 Popular Options to Manage Your Money

28

A good friend of mine got me hooked on podcasts about 8 months ago. Podcasts help me stay focused on my goal throughout the day, as well as keep me on my toes with new ideas and questions to challenge my thinking and provide new perspective. I am always confronted with two questions when I listen to people talk about their life and relationship to money. First, should you spend less or make more? Second, what is the right balance between paying off debt, investing, and savings? Trust me, I know trying to figure out the right percentage of each bucket to put your money in can be hard.

There are 2 Popular options when managing your money:

Option 1

“The Dave Ramsey” approach, or “debt free” option. This is the ultra-conservative choice to pay off all debt and then start investing. After your basic essentials are covered (Food, Shelter, Transportation) all additional funds get allocated in steps. First, you would save 100% (additional funds) to get to $1000, next you would pay off debt 100%, and then finally you can invest, save, and give 100%. This is the basic concept behind attacking each bucket with 100% of your effort and additional funds, until you build your personal finance plan into what you want. Like a house you start with the foundation and build from the ground up.

Option 2

“The logical Analyzer” approach. This is the money mastermind that fine tunes their money plan according to interest percentages and tries to find a healthy balance in all buckets at once. This time, with all additional funds, they segment out each bucket and place a certain amount in each. An example would be if you were to take 30% and put it toward debt, 20% and put it towards savings, and 10% towards investing. (These are hypothetical percentages). “The logical Analyzer” would say, “The interest rate on your student loans is 4%, but your mutual fund investment is making 10% annually so it makes more sense to invest extra money because you get a larger return and it out weights the loan interest rate.

Related Post: 5 Overlooked Steps to Conquer Debt

Both of these options are real life scenarios that everyone has experienced at one time or another. If you were never introduced to option 1 than you are probably doing some type of balancing with option 2. Like I always say, everyone is at a different point in their life and has a different lens they look through so neither is right or wrong.

Let’s break down the Risk/Reward of each option:

Risk

Option 1 you risk not reaping the rewards of investing until further along in life because you only start investing once you have finished the first several steps.

Option 2 you risk being in debt longer and having that control your life decisions.

Reward

Option 1 is a debt free life that you can have more autonomy over.

Option 2 is having investments working for you earlier so potentially you could have more money faster.

THE ONE OVER ARCHING PIECE TO THE PIE

The one piece of pie that we didn’t discuss is the emotional aspect with money. As we weigh each option we find that there is a real emotional component to debt, money, and investing. How much risk should we take? How much debt should we take on? Should we pay cash or finance? These are real questions that we all face daily.

The only way I can explain it is through my experience. For me, I wanted to pay off debt as soon as I could so I could live a worry free life and take as much “risk” as possible. I am a pretty “chill guy”, and I didn’t want money or debt to ruin my good vibes 🙂 haha. For others, they are okay with the balancing act of option 2 and can separate their emotional ties with money. I try to take the most calculated risk as possible and for me I was okay with risking an “investment” loss for a year or two while I took care of debt and set myself up for a worry free life.

Now, I can’t tell you how to manage your money. What I would recommend however is to come up with goals for yourself. Whether you want to pay off debt or want to make a certain amount investing, having an exact number and time frame to shoot for is critical. Both of these option are similar, in that having a budget to manage your money is imperative. Here is the budget template that I have used to be successful.

Let me know your thoughts?
Comment below:
What option are you utilizing today?
Have you had an experience with one of these options that didn’t work?