DIY personal finance: How to take control of your financial life

This story originally appeared on Boing Boing in slightly different form. It's my favorite article I've ever written.

I'm not a trained financial professional; I don't have a degree in finance, and I'm not a certified financial planner. I have no formal training. I'm just an average guy who was deep in debt, and finally got fed up with his situation. After deciding to turn things around, I read dozens of financial books, and used what I learned to pay off my debt and begin to save.

In four years of reading and writing about money nearly every day, I've learned that in nearly every instance, the way to take control of your finances is to embrace the DIY ethic. Instead of trusting others to manage your money, you need to have the guts manage it yourself.

DIY Personal Finance
Your Money: The Missing Manual

Last summer, O'Reilly media — the folks behind Make magazine and the computer books with the animals on the cover — asked me if I'd be willing to write a book about money. But not just any book about money. Your Money: The Missing Manual would let me share the tips I'd gleaned since starting Get Rich Slowly in 2006.

I knew right away that I wanted to encourage readers to take control of their financial lives. One of my mantras is: “Nobody cares more about your money than you do.” Other people, both pros and amateurs, are keen to offer advice, but their recommendations are often counter to your own interests. To really build a financial future that meets your needs, you have to learn how to save and invest, set financial goals, and master the art of conscious spending.

My belief that you need to take charge of your own financial life has only been strengthened over the past two years. The housing crisis, the market meltdown, the controversy over credit card policies — while these things can't be avoided entirely even by smart money managers, their effects can be mitigated. If you call the shots when buying a house, the real estate agent can't talk you into spending more than you can afford. (My brother lost two houses to foreclosure because he listened to his real estate agent instead of making his own decisions.) If you invest based on your risk tolerance, you can avoid catastrophic losses during a market crash — or insure that you don't miss out on the subsequent boom.

Why Bother?

Why bother with DIY finance? There are many advantages to taking charge of things yourself, including:

  • You have more control over the outcome. Instead of placing your money at the mercy of somebody else, you succeed or fail based on your own decisions.
  • You can customize your financial framework. You can choose the accounts that work best for your situation, you can invest the way you want, and you can choose your own financial goals.
  • You get more bang for your buck. When you do more of the work yourself, you pay fewer fees to other people. You're also able to find products and tools that work best for your needs.
  • It's satisfying. Just as you feel a sense of accomplishment when you build a computer or install a new window, it can feel awesome to do the research to find the best bank account in your hometown.

Now, it's important to understand that DIY finance is just like DIY anything else. You can't enter a woodshop and expect to be building Stickley furniture overnight. You need to read. You need to practice. You need to start small. If you try using the heavy powertools first — say, directing your own investments — you can get into a lot of trouble if you don't know what you're doing.

And there will always be times you'll want to call in an expert. I've promised my wife that I won't mess with major plumbing or electrical work; for big jobs, I call in somebody who knows what they're doing. The same is true with money. Though I can handle most of the routine stuff myself, I have a team of trusted experts at my disposal for when strange stuff happens: if I sell a business, if a parent dies, if the IRS audits me. An important part of the DIY ethic is knowing when to pass things off to the pros.

Action Steps

If you've decided you want to take control of your financial life, there are a few essential steps to get you started. I can't give you the secret to wealth and happiness in a single blog post (I just wrote a 300-page book, and even that felt short!), but I can give you some basic guidelines.

#1 – Take Control of Your Spending

I'm not a big believer in detailed budgets. They work fine for some people (and if you're one of them, that's great), but for many others, a broader budget makes more sense. After trying (and failing) to use all sorts of detailed budgets, I finally settled on the Balanced Money Formula, as described by Elizabeth Warren and Amelia Warren Tyagi in their book, All Your Worth. Here's what it looks like:

The Balanced Money Formula

Whatever you decide to do, start tracking what you spend. Sign up with a service like Mint and start watching your pennies the same way you watch your calories.

Some people think frugality is a bad thing. It's not. Frugality is an important part of personal finance. While it's true that you can save tons of money by being smart when you buy a car or a home, chances to save on these things don't come along very often. But there are tons of opportunities to save at the grocery store or when shopping for your kids' clothes. Make the most of them. Save on the big stuff and the small stuff.

The bottom line? By practicing conscious spending, you can spend on the things that are important to you while pinching pennies on the things that don't matter.

Note: If you have trouble with compulsive spending, you can try “hacks” like the 30-day rule, but you may need to seek outside help.
#2 – Take Control of Your Debt

The only way you're going to get out of debt is to start spending less than you earn. I know that some people are in tight spots, trapped by medical problems or catastrophic accidents. But most Americans are in debt because they buy things they can't afford.

In the past four years, I've talked with hundreds (thousands?) of people who have struggled with debt. Those who have managed to kick debt to curb have one thing in common: They've stopped waiting for help and decided to help themselves. If you're willing to put in the time and effort, you can get out of debt.

I tend to favor the debt snowball method of debt reduction, which has been made popular by financial guru Dave Ramsey. Using this technique, you pay off your lowest balances first (instead of your highest interest rates). You pay a little more in the long run, but it works. This free debt snowball calculator lets you compare different debt-reduction strategies to find one that works for you.

Once you've taken control of debt, you need to avoid it in the future. To do that, you need to learn how to use credit wisely.

#3 – Take Control of Your Credit

Credit can be a convenience, or it can kill you. Establish some ground rules: Don't buy on credit if you wouldn't (or couldn't) pay cash, pay off your balance at the end of every month, and always read the fine print. Pick a card that works for you (from a site like CardRatings.com or Index Credit Cards) and use it responsibly. Don't just accept a card that is loaded with fees.

At the same time, take control of your credit score. Take the time to educate yourself on how credit scores work. A great place to start is Credit Report Card, a free service that rates your credit and gives you advice on how to improve it. (If you want to really geek out on this, pick up a copy of Liz Weston's Your Credit Score, which is packed with information. Also, you can stay up-to-date with the world of credit and credit cards by reading CreditBloggers.)

#4 – Take Control of Your Banking

Why are you with your current bank? Because it's close to home? Because they gave you a free Frisbee when you signed up? Your bank won't make you rich, but it's the central hub for much of your financial life. You should choose a place with features and fees to match your needs.

Rates are low right now, but they'll rise over the next couple of years. As they do, take the time to be sure your money is working hard for you. Like many readers at Get Rich Slowly, I use a local credit union for my checking account, and I use a high-yield online savings account for my savings. (I use ING Direct, but there are other great options.) Here's a tool to help you find a credit union near you. You may also want to look into reward checking accounts, which often give better returns than high-yield savings accounts!

#5 – Take Control of Your Investing

If your employer offers a retirement plan, use it — especially if they offer any sort of matching contributions. While it's wrong to say that an employer's 401(k) is “free money”, it's still a damn fine deal. Whether or not you have a retirement plan at work, start a Roth IRA, which is an easy way for individuals to set money aside for the future. (Here's a free Roth IRA e-book that explains the basics.)

What should you invest in? First off, don't make the mistake of believing that you need a broker or adviser to pick your investments for you. Studies show that paying others to make these decisions for you generally costs more than you gain from it — if you gain anything at all. If you want to learn about stocks and bonds, do some research at the American Association of Individual Investors website, or borrow a stack of books from the public library.

But I'd encourage you to instead consider index funds, which are mutual funds designed to track the movement of the stock market (or a section of the stock market). For example, Vanguard's VFINX fund is designed to mirror the movement of the S&P 500 index. Some people argue that index funds don't make sense because they can never beat the market. While that's true, they still perform better than 80% of investors (professional or otherwise) over long periods of time.

If you don't believe me, maybe you'll believe Warren Buffett, the most successful investor the world has ever seen. He advocates index funds for most investors, having once said:

I believe that 98 or 99 percent — maybe more than 99 percent — of people who invest should extensively diversify and not trade. That leads them to an index fund with very low costs.

Nobody Cares More About Your Money Than You Do

These tips just scratch the surface. In Your Money: The Missing Manual, I spend over 300 pages explaining how you can reclaim your financial life by taking back control from other people.

  • I want you to learn how to negotiate, not just when buying a car, but when buying furniture and appliances.
  • I also want you to know how to negotiate your salary.
  • I want you to read contracts instead of blindly signing them.
  • I want you to learn how to research big purchases.
  • I want you to know how to buy a house you can actually afford.

None of this is rocket science. But many of us never learned the basics. Our parents did their best to teach us, but they didn't know a lot of this stuff either. And we live in a society that is hell-bent on encouraging us to spend, so it can be tough to master the mental side of money. My goal is to help as many people as possible realize they can be masters of their financial destiny.

Taking charge of your own finances has a powerful side effect: When you encounter new financial situations — buying a home, starting a business — you feel less intimidated. You're able to grasp the basics quickly, and can have the confidence that you'll be able to figure out the rest. Plus, you put yourself in a position to parse the advice from the so-called experts. (You can even use your bullshit detector to process articles like this one.)

So, don't wait for someone to give you permission to do this stuff. You're an adult. Nobody's going to give you the go-ahead. Take charge of your own financial life today.

More about...Planning

Become A Money Boss And Join 15,000 Others

Subscribe to the GRS Insider (FREE) and we’ll give you a copy of the Money Boss Manifesto (also FREE)

Yes! Sign up and get your free gift
Become A Money Boss And Join 15,000 Others
guest
30 Comments
Oldest
Newest Most Voted
Inline Feedbacks
View all comments
Luke
Luke
10 years ago

‘You get more bank for your buck. When you do more of the work yourself, you pay fewer fees to other people. You’re also able to find products and tools that work best for your needs.’

Is that a deliberate typo in the first line? 🙂

J.D. Roth
J.D. Roth
10 years ago

Argh. I’ve corrected that particular typo over and over, but it keeps coming back. So frustrating. Fortunately, it’s mid-day here in France, so I can correct it before too many people notice.

Nicole
Nicole
10 years ago

That’s a nice primer. I had no idea that the Make magazine people were the same as the missing manual people.

Enjoy France!

Sam
Sam
10 years ago

The four most important aspects of my life: (1) my family relationships, this includes my husband, my parents, my brother, grandma/grandpa, cousins, in-laws, my close friends who are family; (2) my career, this includes my work career, certain community and charity activities that I’m involved in b/c of work; (3) my health, this includes diet, excercise, sleep; (4) my personal finances, this includes our spending plan, savings plan, retirement accounts, etc. It makes sense that I spend quite a bit of time on my finances since it is one of the four most important aspects of my life. Why so… Read more »

Everyday Tips
Everyday Tips
10 years ago

Great post. The thing is, the basics of finance do not require a college degree, but maybe some high school personal finance education and some common sense. You don’t need a chartered financial planner to tell you not to spend more than you make. It is a no-brainer to only buy the amount of house you can afford. (Basic math principals should teach you what you can afford.) So why are so many people in debt? Because they want too many things. There are so many ‘fun’ electronics out there that have so much appeal, everyone wants a nice, new… Read more »

lawyerette
lawyerette
10 years ago

Regarding reading contracts – this works only if you can change the terms of the contract. Most contracts are “contracts of adhesion” meaning you take it or leave it. I’m sure I’d love to change the terms of my cell phone agreement, but I can’t. So what’s the point in reading it? (And this is from a lawyer) Totally agree with taking ownership over one’s finances. I obsessively track my money, its one of my favorite hobbies. I just don’t understand people who don’t know exactly what they owe/have and budget/save agressively. Nothing I love more than thinking about or… Read more »

Tara
Tara
10 years ago

I really enjoyed this article. We paid off our non mortgage debt yesterday and are trying to determine how to proceed with savings, buying, etc. We put off many needs and even more wants during the payoff process. We now need to prioritize what to buy while keeping in mind we need to seriously build up our emergency fund. I appreciate you sharing the Balanced Money Formula, as that gives us a starting point. Any thoughts on how to break that down–i.e. is a car a need or a want? food would be a need, but going out to dinner… Read more »

Traciatim
Traciatim
10 years ago

I’ve always been confused at the balanced money formula when it comes to taxes. I assume this means after tax income so that chart should really be 50% Tax/Fees, 25% Needs, 15% Wants, 10% Savings. If taxes are part of needs, then would you ever have any money left over for housing and food?

Chris
Chris
10 years ago

It actually amazes me that personal finances and how to manage them are not taught properly in schools..

Should this not be one of the best way’s to educate our children for adulthood and life in general? Teach the practical life skills and not algebra or some other really interesting subject!!

This will help you work out your life finances and how to properly manage money.

jeffeb3
jeffeb3
10 years ago

@6 Lawyerette:
In my area there are at least 5 choices in cell phone providers, and they all have different things in their contracts. In addition, there are user agreements for the software running on the phone. Since Apple and Google won’t change their contract, some people might choose a webOS, or windows 7 phone. It’s still important to read the contracts you sign.

Sam
Sam
10 years ago

Congrats to Tara! Without knowing more about your circumstances, I would focus you efforts on building up your emergency fund before funding your wants. But, I like the question as to whether a car is a want or a need. It would depend, do you need a car to get to work, do you have good and reliable public transport to get to work, if yes, that a car is probably a want. There are lots of folks in big cities who don’t ahve a car, use public transport and rent a car if they need one. If a car… Read more »

Pete
Pete
10 years ago

A fun game my wife and I play… Save receipts from groceries, clothes, other purchases that shows the money that we by using club cards, coupons, sales, etc. This accumulating money ledger becomes our vacation fund. Early on I realized that this had the potential to drive spending through the roof so another rule had to be created… every dollar spent over the budget in categories like groceries, clothes, and fun was a dollar removed from this vacation fund. There is now great incentive to save as much as possible in order to expedite and enhance travel (something important to… Read more »

strick
strick
10 years ago

Love it. Great article, great advice not just for finance but for life. It wasn’t until I started taking responsibility for my life and getting rid of that entitlement mentality that I started resembling the person I wanted to be. Thanks J.D.

Ian
Ian
10 years ago

I teach in a Finance Academy at a High School. GRS is required reading every Monday. I especially love it when a reader makes a comment that backs up what I’m telling the students.

Many of my students have the mindset that money grows on trees. I wish I could get their parents to read this too!

Paul
Paul
10 years ago

JD, As a “Pro” who visits your site on a regular basis and routinely recommends it to my family, friends and clients, I am a little disappointed by your blanket statement that we pros offer recommendations that, from the readers perspective, are “often counter to your own interests”. When I started in this industry in 1996 I was taught to always do what is in the best interest of the client. The vast majority of advisors practice this every day. You have often asked your readers to respect writers who publish their stories on your site by not being overly… Read more »

Nicole
Nicole
10 years ago

@8 Could you just take taxes as given and do the formula with take-home pay (making sure retirement savings taken out in advance are added to the savings box)?

El Nerdo Loco
El Nerdo Loco
10 years ago

@Paul #15: no disrespect to your profession, most of your colleagues are knowledgeable honest people, but there are also bad apples and at least one has to know enough to tell the difference. (E.g.: http://www.investopedia.com/articles/02/120502.asp ) Besides, a professional can get caught up in trends in their field– before the housing meltdown, lots of financial advisors were peddling mortgage-backed securities like they were a pot of gold at the end of the rainbow. It’s not just financial advisors– it happens in all industries, like every other kid getting a Ritalin prescription these days. Besides, every professional wants to do their… Read more »

Pirate Jo
Pirate Jo
10 years ago

My financial planner was always hawking a commercial real estate fund that had the now-bankrupt General Growth Properties as it’s number one holding. His philosophy was that since it just keeps going up, let’s buy more of it! (Um, aren’t you supposed to buy low and sell high?) And then when the bottom fell out of it, he was like, ‘Oops, sorry, let’s get you into some bond funds.’ Which were already going way high, because everyone else had experienced the same thing and had already jumped out of stocks and into bonds. You don’t do well in the markets… Read more »

Rob Ward
Rob Ward
10 years ago

J.D. – I love your mantra of “nobody cares about your money as much as you.” Once people get that, you would think they would do something about it and start caring! (that is, take control).

I’m still blown away by how many stories I hear that someone is one paycheck away from losing their house, their car, etc. Granted, I have never been in a situation like that myself, so I cannot relate. But even so, why do people make it so hard on themselves?

Arnoud
Arnoud
10 years ago

Bonsoir J.D.,
I’ve learned a lot from your blog, but a lot of stuff is very American to me. Since you scan the web for a living, I suspect you have some links to the old country too. Where would a European find useful online information on personal finance?
Bonne soirée,
Arnoud.
P.S.: Since I’m not even a native French speaker, any language will do ; )

Shannon
Shannon
10 years ago

J.D.,
I love your statement that no one will care more about your personal finances than you will. But also your point that we have to take responsbility for our finances and our decisions and think for our selves, and make informed decisions.

I’m sending my 19yo brother a link to this, as I think that if he learns these lessons now, he’ll be so much better off than I was/am.
thank you for all you do and share!

Squirrelers
Squirrelers
10 years ago

“Nobody cares more about your money than you do.”

Very wise words, indeed.

Really, taking personal responsibility for one’s life is vital, whether it’s finances, health, or relationships. It’s a good mindset to have, regardless of the situation.

Really good post.

dotCOMreport.com
dotCOMreport.com
10 years ago

As usual, enjoy the comments as much as the blog. Great on both accounts. Thanks.

Nelly
Nelly
10 years ago

I just want to point out that much of my spending in particular was based purely on emotion as I suspect it is in the case of many other people. I had to ‘fix’ myself before I could get a handle on my spending (still working on the fixing part LOL but making definite progress). I began tracking spending in January 2008 so I’m coming up on 3 years of really working on my emotional spending and I can honestly say that it has taken me this long to feel that I actually have myself and my finances under control.… Read more »

Kelsey
Kelsey
10 years ago

I’ve been using this year to get my financial life back together– get out of debt and save up for a house down payment.

chacha1
chacha1
10 years ago

Re: the AYW percentage budget and taxes questions … ANY budget should be based on after-tax income. If you don’t have taxes automatically taken out by an employer, the very first thing you should do before making a budget is sit down with last year’s tax return and see just what your total income tax and self-employment tax added up to as a percentage of your gross. Then, every time you receive a payment, take out that percentage and sock it away in a savings account labeled “TAXES DUE.” (If you do this, you will never be short when estimated… Read more »

Laszlo Kramar
Laszlo Kramar
10 years ago

Congratulations to your post and work from – seemingly – the other side of the fence! I mean ‘seemingly’ since, just because one is a financial industry professional, one doesn’t necessarily have to be against DIY personal finance. On the contrary, while I, for one, am an insurance licensed Certified Financial Planner, I very much agree with your approach, and have been arguing likewise for years. In fact, “Education, coaching or support for Do-It-Yourself investors” is one of the things offered on the back of my business card, and I posted and referred to a lot of materials since 1997… Read more »

Adrian
Adrian
10 years ago

J.D,

This is truly one of your finest pieces of writing on GRS. It neatly sums up the majority of your core beliefs & teachings while providing the reader with countless instances of self-reinforcement and control.

This article is precisely why I have come to this particular website each and everyday for the past three years. It is realstic, it is honest, it is encouraging, and it is authentically & irreplaceably J.D. 🙂

Dan M
Dan M
10 years ago

This is a great post to bookmark for those times when GRS comes up in conversation and I have to send someone a link explaining what the site is about. It’s very representative of the core ideals of GRS and shows off JD’s distinct personality.

Excellent post!

Jermaine Mancos
Jermaine Mancos
7 years ago

So very very cool! I am thrilled I found your blog! Most points I completely agree with and knew about, but some stuff I had not thought about! Thanks!

shares