Three Major Costs of Not Running Your Money
Want to listen to this post instead of reading it?
Listen to the Run Your Money Show on Apple Podcasts!
Listen to the Run Your Money Show on Spotify!
When you run your money, it's not running you. Meaning you're not constantly worried or stressed out about it. You have a plan; basically, you're the boss rather than your money being the boss.
But it's important to understand what happens when you don't run your money.
For many people, anything about money can be so stressful that you want to stick your head in the sand and never open up your bank accounts ever again.
I get that because while I have always been good with money, I had one time when I was not good with my money, and it cost me a lot.
When I started my business, I did something I strongly advise against now: I went in cold turkey. My boyfriend at the time, my husband now, and I were living in Washington, DC.
I wanted to start my own business, but DC is expensive. We also wanted to move in together, and he had a job opportunity in Dallas, Texas. So we thought, let's get out of expensive DC and live in Dallas, where you can afford to support both of us while I get my business off the ground.
I want to acknowledge that I never had to worry about rent or groceries because we lived together. Even so, It was stressful for me not to have a regular income. What also added to that stress was that I didn't have a realistic idea of how hard it would be to get it off the ground.
My anxiety just went up and up, and as it continued to increase, I stopped managing my money and running my money system, which had given me the freedom to make this choice to quit my job.
In addition to not looking at my bank accounts, I stopped opening the mail. I was so afraid that I would open up a bill that I couldn't afford, or it'd be very stressful for me to pay. So I decided not to do it.
One of the bills that kept coming in the mail was for my health insurance. I was paying out of pocket because I had quit my full-time job, and my now-husband and I weren't married yet.
So, I purchased health insurance through the marketplace created under Obama. I thought that I had set up a recurring charge on my credit card for my health insurance. But I was wrong, and that bill kept coming. Lo and behold, my health insurance dropped me.
I could only sign up again outside of open enrollment if I underwent a significant life change like marriage or having a kid. And at that time, none of those things were happening.
As luck would have it, I had a big health emergency that summer. And it cost a lot of money to go to the emergency room and get the care I needed.
In addition to that, because I wasn't monitoring my bank accounts, I kept overdrafting. The way that I set up my money system is that my checking account gets close to zero at the end of every month. Typically, money came in at the beginning of the month, while my daily expenses went on my credit card.
That credit card bill goes through at the end of the month, and I pay it in full. When I'm closely budgeting, I have the money, but when I wasn’t monitoring my money, I often spent more than I had in my checking account.
So, it would overdraft until I could transfer money to my savings account to cover the difference. Of course, my bank slapped me with a fee each time. After that happened multiple times, they were less willing to refund those fees to me.
In the grand scheme of things, those fees probably never amounted to more than $200, but at the time, $200 was a lot of money and, frankly, $200 that I didn't have.
Thankfully, things have turned around for me, but even now, many years after that time in my life, when money gets stressful, I still feel that urge to not look at my bank accounts or to balance my budget.
For me, not running my money looked like sticking my head in the sand.
Perhaps not running your money looks different for you. You might actually log into your accounts all the time, but you feel crippling stress. Or, you know, you should be investing or doing more than just your 401k, but you don't know how, so you keep putting it off.
All of this has an actual number that it's costing you.
I've found that three major ways not running your money can cost you. So let's break it down.
1) Fees, Subscriptions, Interest, and Unexpected Expenses
If you've ever had an unexpected expense, that does not mean you're not running your money. Life happens!
However, many unexpected expenses come in the form of late fees or subscriptions that you forgot about or paying interest on a credit card because you were spending money you didn't have. And now those purchases have to go on your credit card.
According to the Consumer Financial Protection Bureau, Americans pay $120 billion in late fees or interest to credit card companies yearly. That averages to be about $1000 per household.
One of the best things you can do to run your money is track every penny. That doesn't mean you're not spending those pennies. It just means you know exactly where everything's going. When you do that, you can make strategic decisions on spending, saving, or investing your money.
2) Not being able to maximize joy
This isn't a dollar amount, but not running your money costs you not being able to maximize the joy your money can bring you.
You might want things that cost far more than the money you make each month, but that doesn't mean you can't afford them. But if you don't run your money, you might feel like you can't afford them. Or at least, you can't afford them without going into credit card debt.
When you run your money, you can easily afford many things you previously thought impossible.
One of my favorite money habits is opening up savings accounts for large purchases. Two savings accounts I have right now are for travel and large purchases.
Even if I don't have a trip plan, which right now I have a newborn baby, so I don't have anything on the calendar, I still put anywhere between $200-$500 away each month into this travel account. That way, when we're ready to travel again, I already have a nice sum of money in that account that I can use for an upcoming vacation.
I do the same thing with large expenses. A few years ago, my husband and I moved into our townhouse, and we bought a pretty expensive couch. It would've been outside our monthly budget when you account for the mortgage, groceries, and other stuff we pay for.
But because I put a little bit of money away each month, I had enough money in that account to pay for the couch so that it didn't put a huge dent into our monthly budget, and we didn't have to put it on the credit card.
3) Build Future Security
The third thing you can do when you run your money is build future security for yourself and your family.
Many people will put money into their 401k if their work offers one, hopefully, get a match, and assume that's enough. Unless you're a very high earner, what is in your 401k alone likely isn't enough. But if you're not running your money, you might not have done the math to realize this.
Let's do a quick simulation.
We will play with some numbers and make projections based on these averages.
First, a couple things:
Projections live in a vacuum! With the example I'm about to give you, rarely is someone's salary so linear. And the results I'm about to share will also be very much based on your exact numbers.
But it'll give you an idea of where you are with retirement.
If your numbers are higher than the example I'm about to go through, you are probably better off. If your numbers are lower than those I'm about to use in this example, you might want to start thinking about what you can do to make up that gap.
Let's say you're 30 and make $75,000 a year. $75k is the top end of the largest share of American salaries, so I decided to go with that number. Every year until you retire at age 65, you get a 3% annual raise, contribute 5% of your salary to your 401k, and have a 5% match from your employer.
I’ll project a 7% rate of return, but I will also account for 3% yearly inflation. So, the real return is 4%. This is pretty conservative, but whenever I'm making projections for clients or myself, I always err on being conservative. That way, you can be pleasantly surprised later on.
If you did that until age 65, you would have $1.5 million in your 401k. That seems pretty sweet, except we need to do more math here. $1.5 million is equivalent to just under $550,000 in today's money. This means that even though the numbers on your account would be about $1.5 million, the purchasing power would be about 550,000.
A little less great.
In retirement, you could withdraw $9,246 monthly with a 3% annual raise to account for inflation. $9k to live off of might sound nice, depending on where you live, but that's only equivalent to about $3,300 in today's money.
And because this comes from your 401k, you'll also owe taxes on your withdrawals.
Depending on your age, if you're lucky, you might also get a couple thousand dollars a month in social security. But remember, some of that is going to be taxable as well. Let's say you have about $2,000 from social security every month and about $3,300 from your 401k every month. That's still only about $5,300 a month.
That likely isn't enough, and it isn't what most people dream of when they retire.
This means that checking off the forms with HR is not enough to plan for a secure and hopefully fruitful retirement.
Even if you made $100k starting at age 30 with 3% annual increases, putting 5% into your 401K with a 5% match would only give you $4,300 to pull from each month after adjusting for inflation.
I started this post talking about late fees, which are annoying, to be sure. If you're in a stressful financial situation, they really can feel like the end of the world.
But not running your money to the point where you're not taking investing or your retirement seriously can cost you hundreds of thousands of dollars.
Quite literally.
Especially if you're young, it only takes a little money each month to build quite a bit of wealth for yourself. By the time you get to retirement age. And that's thanks to the power of compounding interest.
Could it be as simple as putting more money into your 401k beyond the match? Sure. I don't think that's necessarily a bad thing, but you've probably heard about diversification in investing. And I think that's important in a couple of ways.
It's essential to diversify your investments so that if one stock does poorly, it doesn't affect your portfolio much. But I think it's smart to diversify the kinds of investing accounts you have, too.
There are investing accounts where you're taxed now, some later, some never, and some now and later. None are better or worse; it's just about diversifying so you have more options and can mitigate any unforeseen tax burdens now or in the future.
I designed the workshop to teach you everything you need to know to start investing or optimize what you're already doing.
When you sign up for the waitlist, I'll also send you my investing cheat sheet so you can get started.
Get on the waitlist for my investing workshop and get your free investing cheat sheet.
