This is a guest post from Leo Babauta of the simplicity blog, Zen Habits. Leo also recently started a new blog about minimalism, mnmlist.com.

Finances are one of the most complicated things in many people’s lives … and yet, they don’t have to be. With a little effort, you can simplify your financial life and end the money headaches most people face.

I consider myself a minimalist. As such, I shy from all kinds of complexities. I look for ways to simplify. I like worry-free solutions — I like to forget about it, so I can focus on things that are more important to me.

Here’s how I simplified my financial life:

Step one: I opted out of consumerism.
This is the first and most important step. If you’re a long-time GRS reader, you already know all about this — if you’re new, dig through the GRS archives for some great stuff about frugality and the consumerist mindset.

Too often, we get into the mindset of buying, of attaining more, of shopping for pleasure or stress relief or finding self-worth, of impulse buys. This is a mindset that comes from years of exposure to advertising, and it’s hard to stop. Start by becoming more conscious of it, and by telling yourself that you will no longer find pleasure in buying and having material things.

When you find yourself with an urge to buy, stop and breathe. Put the item on a 30-day list and don’t buy it until 30 days after you put it on the list. Usually the impulse will dissipate. Give thought to every purchase and ask yourself, “Is this really necessary? Can I live without it?” Try to live only with what’s necessary and get happiness from doing things — from spending time with people, from creating — rather than from material goods and spending.

Step two: I saved up an emergency fund
Before you can find financial peace of mind, you need an emergency fund, otherwise you’re always going to be living on the edge, from paycheck to paycheck. Every unexpected expense that comes up will derail everything I recommend below. This point has been driven home many times on this site, so I won’t belabor it. But start here: Save up at least $500 by putting $50-100 per paycheck towards this fund, and gradually build up to $1000 or more.

To do this, cut out unnecessary expenses. Look closely at your spending, including regular payments you might have forgotten about, and see what can be cut. There’s always something:

  • magazine subscriptions
  • monthly payments for services you don’t really need (including online services)
  • buying books when you could use the library
  • cable television
  • a bigger car than you really need
  • gourmet coffee when you can make your own at home
  • a bigger home than you need
  • storage space when you could just sell your stuff
  • clothes and shoes when you already have plenty
  • gadgets and computer purchases you don’t really need
  • going out to lots of restaurants or bars or clubs or other expensive entertainment when you could stay home or do fun things without spending much

Put the money you cut into your emergency fund until it gets to at least $500.

Step three: I got out of debt.
Again, this has been well-covered here at GRS and elsewhere. But it’s important — otherwise, minimalist finances will be difficult to achieve. Debt payments are not essential — you shouldn’t have them in the first place. But until you pay them off, they’ll be headaches.

After you’ve saved at least $500 for your emergency fund, put most of your extra income towards debt payment, one debt at a time, until you’re all paid up. Maybe put a little each paycheck towards your emergency fund.



This step will take the longest, but it’s well worth it. And you can do the other stuff on this list immediately, without having to complete this step first.

Step four: I use cash, not credit
I’m a big fan of cash, and a big credit card hater. Credit card bills are a blight on most people’s finances; they make it too easy to spend money you don’t have, and then you end up paying tons in interest and fees.

Sure, it’s possible to use them responsibly, but in most cases, it’s an unnecessary temptation. Ditch the credit cards and use cash and (sometimes) Visa or Mastercard debit cards. These are better only allow you to spend money you already have.

Cash is great because you can withdraw a pre-determined amount each month, and you always know how much you have left. With credit cards, it’s easy to spend more than you have budgeted; to stay within a budget you’ll have to constantly track your expenses. No need to track expenses with cash — you can see you only have a little left. Try the envelope system for cash: Put designated amounts of cash into separate envelopes for groceries, gas and other spending.

Step five: I automated my finances.
I don’t like worrying about bills, so I’ve made my finances automagical. I have all my income automatically deposited in my checking account, and I’ve set up automatic payment for all bills. Some are done by automatic deduction, when possible, and others are done by using the online bill-paying system of my bank, set to recurring monthly payments. Other bills — my rent, for example — I’ve paid in big chunks, six months to a year in advance. I also make savings transfers automatic, and when I was in debt, those payments were automatic as well.

It helps to have a sizable emergency fund so you can make payments like this and not worry about whether there’s enough in your account for all of your automatic bill payments. I’ve actually split my emergency fund into two:

  • Most is in an online savings account.
  • The rest is in my checking, so I always have a comfortable cushion in my checking account.

It takes a little while to get automated finances just right, but you can start today by setting up automatic deposits and deductions and bill payments. It’s nice, because your finances also become paperless.

I recommend putting a reminder in your calendar to check on your bank accounts once a week, just for peace of mind. Otherwise, you can now forget about finances.

Step six: I don’t buy unless I need it — and have the money.
This is such an old and common-sense piece of advice that it’s almost embarrassing to put it here. But it’s important.

Once you’ve done all of the above, you’re debt-free with a good emergency fund and automatic finances. But what about purchases from that point forward? Should you buy a bike if you want to commute by bike? Should you buy new furniture? The answer is two-fold:

  1. Don’t buy it unless you really need it, and
  2. Don’t buy it unless you have the money already. Not “if you have the money next month or next week”, but only if you have the money in hand.

It’s as simple as that.

Avoid debt as much as possible. The last car I bought was used, and I was able to pay cash for it (with a trade-in). I hope to buy my first house completely with cash (or at least mostly with cash).

Don’t buy it unless you need it — and only if you have the money. If you follow these two rules, you’ll never have to worry about finances again. You’ll be able to bask in the glory of your worry-free financial life — and laugh in the face of humanity.

Update: Trent at The Simple Dollar has posted a follow-up to this article that provides some concrete examples of the advantage of going minimal.

GRS is committed to helping our readers save and achieve your financial goals.Savings interest rates may be low, but that’s all the more reason to shop for the best rate.Find the highest savings interest rate from Ally Bank, Capital One 360, Everbank, and more.