Rachel Cruze is a personal finance expert and the author of “Know Yourself, Know Your Money.” She is also the host of “The Rachel Cruze Show,” where she shares practical tips to save more money, get out of debt quickly and make progress toward your financial goals.
Recognized by GOBankingRates as one of Money’s Most Influential, here she shares why she believes having a budget is the key to financial freedom, why taking on debt is the biggest money mistake you can make and how to get out of debt ASAP.
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What is the best thing you did to improve your own financial wellness?
A budget is one of the best things I’ve ever done with my money, and now my husband and I budget together every month. A budget is simply a plan for your money — and you need to have a plan for your money! I used to think a budget limited my freedom when it came to my money, but it gives you freedom because it gives you permission to spend.
I recommend a zero-based budget. This is where your income minus expenses equal zero. You’re telling every single dollar where to go. If 2020 has taught us anything, it’s that we need to be intentional with every dollar we have coming in. A budget will also help you and your spouse get on the same page with your finances. It forces you to talk about how you’re spending your money, your financial goals and your dreams. Money is the tool that will help you achieve those dreams, and the budget is how you steer the ship. I love using the free budgeting app EveryDollar.
What are some simple strategies or tools anyone can use to make sure they are allocating their money smartly?
A lot of people get overwhelmed with their money because they’re trying to do too many things at once. You’re trying to get out of debt, save, invest… the list goes on! Take one thing at a time. I recommend following Dave Ramsey’s Seven Baby Steps. If you have debt, your first priority is getting out of debt.
Start by building a starter emergency fund of $1,000. This gives you a safety net as you’re working your way out of debt. Then, work your way out of debt using the debt snowball [method]. List all your debts smallest to largest, regardless of interest rate. Make minimum payments on everything, except for the smallest debt. I want you to attack that one with everything you can. Once that’s paid off, roll that payment to the next one. Repeat until you’re debt-free.
Then, when you’re debt-free, you’re free to save money! Maintain that momentum and build your starter emergency fund of three to six months of expenses. Can you imagine what you’d be able to do with your money if you had no debt and a fully-funded emergency fund? All of your money coming in every month is yours. You don’t owe anyone! At that point, you’re free to invest 15% of your income into retirement, save for your kids’ college fund and pay off your mortgage. That’s the type of freedom you’ll experience when you follow this plan.
What is the biggest mistake people make?
The biggest money mistake I see is taking on debt. The world will tell you that debt is normal, but debt will keep you paying for your past when you should be focused on your present and future. People use debt to fund a lifestyle they can’t afford or turn to it for emergencies.
It’s a foreign concept today, but my advice is simple — live on less than you make. We live in a world of instant gratification, so I totally get how challenging this can be. But living below your means is how you create a margin with your money. And the key to building wealth is not a high income — it’s margin. So, practice delayed gratification. Save up for purchases that you would normally put on a credit card or finance, cut up your credit cards and use cash. I promise you won’t regret it!
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Jaime Catmull contributed to the reporting for this article.
Last updated: Oct. 22, 2021
This article originally appeared on GOBankingRates.com: Finance Pro Rachel Cruze Shares the Biggest Money Mistake You’re Probably Making