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Common knowledge is everywhere. That’s why it’s considered common knowledge (don’t worry, this post will get better).
And almost nowhere is common knowledge more, ahem, common, than in the world of personal finance.
If you’re anything like me, you know many of the so-called “rules” when it comes to winning with money. So if these maxims are so widespread, why are people in such messes when it comes to their finances?
Well, it’s pretty simple really. There’s a huge difference between common knowledge and common practice.
What is considered common knowledge?
In its simplest form, common knowledge is knowledge that is known by pretty much everyone. A classic example of common knowledge is that water freezes at 32 F (or 0 degrees Celsius for my Canadian brothers and sisters). Everyone knows that or should know that.
Common Knowledge Doesn’t Equal Common Practice
But here’s the thing about common knowledge, or any knowledge for that matter. It’s basically useless unless it gets translated into common practice.
Common practice is any behavior that gets done a lot. In fact, it happens so much so, that it just becomes the normal way to do things.
Common Knowledge Examples and Common Practice
For example, tons of people know that they should eat lots of fruits and vegetables, get regular exercise throughout the week, and sleep 8 hours a night. For most people, this isn’t an earth-shattering revelation.
But knowing isn’t worth jack. It’s a waste of space in our brains if we don’t DO anything with that knowledge and turn it into actual behavior.
And I’m the worst offender.
My dough-like belly and the bags under my eyes are clear evidence that I’m, well, to put it mildly, an idiot when it comes to my health. And if I don’t get my butt in gear, I’ll pay the price for my failure to heed the warnings of common knowledge.
What are some examples of common knowledge in personal finance?
But before I let this breakdown into a personal therapy session, let me say I’m not alone in being unwilling to translate common knowledge into common practice. It’s something that’s much harder to do than it would seem. And nowhere is this more evident than in how people handle their money.
When it comes to money, billions of words have been written detailing the rules to rock your finances. And even though different people may have slightly different takes on what could be considered common knowledge in the personal finance world, these are 5 that few people would argue with.
Spend Less Than You Make
Despite being one of the most mathematically simple of all the rules of money, this common knowledge tidbit is deceptively difficult. Ask any personal finance guru what the key to financial success is and this will be in their top 3. But in order to spend less than you make, you need to do one of two things: reduce how much you spend, or increase what you make.
Since most people aren’t willing to cut back significantly in the spending department, they work hard to pump up their income.
But here’s the thing. If you never rein in your spending, you’ll never make enough to spend less than you make. That’s why bankruptcy isn’t a low-income problem. It’s an every-level-of-income problem.
Because the root isn’t how much you make. No, it’s what you’re content with.
You Need A Budget
Perhaps I should’ve started here, but it should go without saying (another common way of stating that this should be common knowledge) that you need to have a plan for what you’re going to do with the money you make. Not only do you need a plan, you need to track what you bring in and spend in order to see how you’re doing. If you don’t, you’ll have a very difficult time knowing if you’re spending less than you make.
Well, now that I think about it, it actually won’t be that hard to tell.
Do you get a knot in your stomach when you see your credit card bill laying in that pile of mail you’ve been ignoring? Do you hold your breath every time you swipe your bank card for fear that your account will be dry?
If any of those experiences are even vaguely familiar, you’re spending more than you make.
Peter Drucker, the famous corporate management guru once famously stated that “what gets measured, gets managed.” This is true not only in the corporate world but with your personal finances as well.
If you can get a handle on WHERE your money is going, then you can make CHOICES to change WHAT you’re spending on. All this starts with a simple budget.
How To Start A Budget
To set up your first budget, start by keeping all of your receipts for a week.
Then sit down and organize your expenses into categories. If you used a bank card for any transactions, you can easily track these down with your online banking or app.
If you’re not sure which categories to start with, here’s a good list to get you going. These are some of our budget categories:
Housing (rent/mortgage), home maintenance, water/sewer, electricity, gas (home), home insurance, gas (vehicles), car maintenance, car insurance, groceries, cell phone, cable, clothes, physical activity, household items (toothpaste, deodorant, etc.), haircuts, fun, going out, Audible, life insurance.
Add up how much you’ve spent in each category and multiply by 4 (4 weeks in a month). Then use an app like EveryDollar, Mint, or You Need a Budget and set up your first budget using these totals as the starting amounts in each of your categories.
And don’t stress too much about the amounts.
Remember, you’re new to budgeting and you’ve been “surviving” without any form of tracking up to this point. If your estimates are off by a bit, it’s no big deal. You’re learning and a MASSIVE part of that is making mistakes. Accept mistakes for what they are; chances to improve and grow.
From there track your expenses using your preferred app. For us, we use EveryDollar and so I simply add the expense into the app right after I’ve bought something. It’s super simple, easy to use, has a KILLER app and online platform, and has saved us many nights of inputting dreaded receipts.
Again, remember that your budget is a living document. It can and should change depending on your circumstances. If you notice you haven’t budgeted enough in a category, make the necessary adjustments. Just remember that if you add in one category, another has to go down. Running deficits isn’t an option if you want to win with money.
So how many people keep a budget?
Unfortunately, the common knowledge that you need a budget to get ahead financially hasn’t become common practice. In fact, according to a Gallup poll, less than 1 in 3 people actually keep a budget (32%). That means that close to 70% of people have NO IDEA where their money is going every month, making it nearly impossible for them to make wise decisions about their financial health.
Because make no mistake about it. Winning with money requires you to take the long view. Skipping a latte here or there or stashing away a few hundred bucks every few years to invest isn’t going to get it done. To win, you need to have every aspect of your money working FOR YOU. And this WILL NOT happen without having a budget and tracking where your cash is going every month.
Build An Emergency Fund First
Finance experts recommend that you have 3-6 months worth of expenses saved to help keep you afloat in an emergency. This cash could cover things like job loss, health issues, and house or car repairs not covered by insurance.
Now that is A LOT of dough for most people, so it’s best to start small and work your way up. One way to make sure you’re saving is by automating a monthly transfer out of your checking account into a separate savings account. If it’s automatic, you won’t have to think about it. And don’t take this personally, but the less you have to think about your money, the smaller chance you’ll screw it up.
On the surface, it all seems pretty doable. But here’s the ugly truth.
57% of people have less than $1000 saved. And it’s even worse for Millennials, where 67% have less than $1000 and 46% have nothing stashed away.
Clearly, there’s a disconnect between common knowledge and common practice.
Your Next Step Is Getting Out Of Debt
With your emergency fund beginning to rock, throwing off the shackles of debt is your next priority. There are two schools of thought on the best way to make this happen, the debt snowball and debt avalanche.
The debt snowball has you paying off your smallest debt first and then rolling over that payment into your next largest debt. This process continues until you’re paying off your largest debt with the accumulated payments from all the smaller ones.
The debt avalanche, on the other hand, has you paying off the highest interest debt first regardless of size. From there, you work your way down the list of debts until you’re debt-free.
No doubt about it, the math clearly favors the debt avalanche. But what the avalanche method doesn’t take into account that the snowball does, is the psychology of momentum. Small victories can have big impacts on our ability to stay the course and actually become debt free. The favorable math is useless if we lose steam and give up on getting out of debt. That’s why I’m a big proponent of the debt snowball.
Regardless of the method you choose, paying off your debt is common knowledge when it comes to traveling on the winner’s way with money.
But once again I have to be the bearer of bad news when it comes to whether or not this common knowledge is also common practice. Here’s the ugly truth.
The average American has close to $40,000 in personal debt. And it’s getting worse, with that number up almost $1000 from last year.
Again, people know what to do. It’s not a secret that you should steer clear of debt. In fact, a recent study by Nerdwallet showed that paying off debt was the number one priority for people. But translating that common knowledge in common practice has proven to be easier said (or wished for) than done.
Invest For The Long-term
As I said earlier, winning with money is all about the long game. Why? Well, it’s pretty simple.
In order to CRUSH your finances and save enough so that you can retire at a reasonable age (at the latest, when your body starts finding it harder and harder to drag your butt out of bed every morning to go to work), you need to harness what Albert Einstein called “the most powerful force in the universe”.
What is this fearsome force? Compounding.
According to Investopedia, compounding is the process in which an asset’s earnings, from either capital gains or interest, are reinvested to generate additional earnings over time.
Invest $100 at 7% and at the end of the year, you’ll have $107. In year two, instead of investing $100, you now have $107 to invest. At 7% again, this becomes $114.49. If instead, you’d just invested the 100 bucks again, you’d once again have $107 at the end of year two.
By investing the $100 PLUS the $7 you made in the first year, you’ve improved your investment return by $7.49 ($114.49 vs. $107).
This extra $7.49 may seem like small potatoes. And over just one year, it is. But the power of compounding is that over 10, 20, or 30 years, it can cause investment growth to EXPLODE!! And the real power of compounding is witnessed when your investments are allowed to grow for 40-50 years. The difference between an investment that is allowed to grow for 30 years and one that is given an extra 10 years is ASTONISHING.
For example, consider two friends, Steve and Kyle. Steve puts $100 a month away starting at age 20. Kyle, on the other hand, waits until age 30 to start doing the same.
Assuming both earn 7% a year for the entire investment period, how much of a difference can those 10 years make on the total cash they each have at 65?
Kyle will have $181,256.
And Steve? Well, he’ll have $381,571, or over TWICE as much!!
And how much extra did Steve put away because he started saving 10 years earlier? $12,000. By saving an extra $12,000 over those 10 years before Kyle started saving, Steve will have over $200,000 more than his buddy.
That’s a pretty sweet return on investment.
How Much Do People Have In Investments?
Once again, the truth is ugly. People are in rough shape when it comes to retirement savings. According to a recent study, 21% have NOTHING saved and a third of people have less than $5000. In fact, the average savings for retirement is around $84,000.
This is downright SCARY. Scary because that much money will barely get you through your first year of retirement, and it’s far less than the million dollar number so often thrown out by financial experts (I’m not sold on that number, but that’s a topic for another day.)
It’s not pretty. This in spite of the fact that I can’t watch TV for longer than 10 minutes and not see an advertisement for an investment brokerage or financial management company describing the perils that await if you don’t save for your retirement.
So why the extreme disconnect between all of these pieces of common knowledge and common practice? And what can be done to turn this knowledge into behavior?
How to translate Common Knowledge to Common Practice To Make Money
Find A Role Model
Dave Ramsey put’s it best when he says that If you want to learn how to be fit, don’t take advice from people who are out of shape. If you want to learn to win with money, you shouldn’t be taking financial advice from your broke cousin.
Instead, you need a financial role model.
And fortunately for you, find one has never been easier. With the number of personal finance blogs exploding every year, now is a great time to find a money rockstar whose strategy and behavior you can copy.
Yes, you heard me right. Find someone who’s winning with money and copy what they’re doing. Take a look at people like J$ from Budgets Are Sexy, Grant from Millennial Money, Paula from Afford Anything, Michelle from Making Sense of Cents and tons of others.
Heck, you can even follow me!! I’m not a millionaire…yet, but I will be someday! And not because I’m some kind of genius. No, it’s because I found people who were good with their money and I’ve copied much of what they do.
Find Your Why
Most addicts don’t change their behavior until they hit rock bottom. It’s only at rock bottom that they’re left with two options: change and truly start to live or stay the same and die (or lose your family, or job, or quality of life, etc.). When these are the two alternatives, the wise choice is very clear and the motivation to change is POWERFUL.
These people know what their WHY is. They know that the reason WHY they’re changing is that they don’t want to lose everything that is precious to them. And often these people can harness this motivation to produce long-lasting change.
Now I’m not suggesting you go out and gamble away all your money to hit rock bottom. Rather, people who win with money find a way to CONNECT with their WHY without having to crash and burn. As I’ve heard it said, a smart person learns from their own mistakes. A wise person learns from someone else’s.
In order connect with your why, take time to imagine your ideal future.
Think about what your life would be like without the stress of debt, or the pit in your stomach when the talk turns to your money. Really think about it and to dream deeply. What would it be like to be able to give extravagantly? To go on family vacations without having to worry about the credit card bill waiting for you when you get back? To retire when, where, and how you want? What does it look like, feel like, sound and smell like?
Dion and I have talked about this. In fact, we talk about our why for striving for financial independence a lot. It’s this talk that allows us to keep our goals at the forefront of our mind, always in focus. This why is what gives us strength when we’re tempted to overspend or stop saving. It’s what helps us to stay the course. And it’s what will one day help us reach our goals and become financially independent.
Make A Plan
One of my favorite quotes of all-time comes from an unlikely source. It was former New York Jets Head Coach Herman Edwards who said that “a goal without a plan is just a wish.”
There are lots of people who “want” to get in shape. They wish they could eat better, lose weight, get out of debt, make more money at their job, start their own business, or become wealthy. Fill in the blank with whatever people want, it doesn’t make a difference. The plain fact is that translating these desires into results rarely happens. And so, these dreams never become realities.
Sadly, this often occurs because people don’t have a plan.
I know this has been true in my own life. I’m often telling myself I need to get into better shape, lose some weight, and trim down. Unfortunately, all this often results in is a few workouts and healthy meals before I go back to my bad habits.
I’ve found that when I have a plan, like an exercise schedule when I’m training for a triathlon, I not only have way more motivation, I have hope that my goal is possible! There’s something about having an actual plan that makes things seem doable. When I’ve done this in my life, I’ve seen AMAZING results.
And it’s no different with money.
You can have the best of intentions with your finances, but if you don’t have a plan, you’ll slip back into your bad habits.
A plan breathes life into a dream. It gives the dreamer the concrete steps they need to take to make their dreams a reality. And seeing this plan on paper makes a person feel like they can accomplish anything.
To begin your financial plan, start with a budget. Use the steps I described above to get you off and running. Once you’ve got that cased, you can look at a more detailed financial plan.
When you do, I recommend that you look at advisors who are paid SOLELY for their advice and not on commision for the products they sell. These are often referred to as fee-only financial advisors or planners.
Yes, there are some commission-based advisors who give sound guidance. But I just don’t like taking advice from someone who’s getting paid based on the type of investments I buy. In my mind, avoiding “salesy” advisors will ensure that you get conflict-free advice that will set you up for success.
Bringing Common Knowledge and Common Practice Together
The more I read about personal finance, the more I see that there really is very little that is new under the sun. Personal finance is basically the same 10-20 precepts, packaged differently based on the author and the audience. With this knowledge being so commonly available, is it too much to think that one day it could become common practice?
Sadly, yes it is. I don’t think there will ever be a time when these financial concepts are so widely implemented that they can be considered common practice.
But that shouldn’t leave you feeling hopeless. As I often say to the students who find themselves in my office for some type of “unwise decision” (I’m an Assistant Principal), “you can only control your own behavior, not someone else’s.”
So go out and control your own behavior! Make the changes YOU need to in order to make financial common knowledge common practice in your own life.
You really CAN do it! But only YOU can!!