What better way to learn how to build your finances than with Legos? The Lego Company has brought joy to millions of kids (and adults) for 87 years! Those plastic construction blocks entertained me for years and now my son enjoys them, invoking my nostalgia for the colored blocks. My son spends hours building Lego sets, often using his imagination to create a robot, vehicle, or starship. In most cases, his creation battles mine, and we’re left with Legos strewn across the room. No matter what creation my son or I make, we start with a foundation and build upon it – adding various “lasers” and wings to make it the ultimate fighting machine! That got me thinking (I know scary!) how Legos and money were related. Both require a plan and starter piece from which we’re able to build our envisioned goal.
With Legos, it always starts with Step 1, the initial block whereupon additional ones will be added. Money is no different, you must have a foundation to build your wealth. Instead of colored blocks, your blocks are your financial goals such as retirement, investing, savings, budgeting, etc. But let’s not get ahead of ourselves, you need to look at Step 1 and determine which blocks make up your foundation. You can have an awesome Lego space character, but without a ship, he has no purpose and will be floating around space. Not ideal.
Step 1: Plan Block
Legos come with instructions – a step-by-step plan on how to build the Lego creation. Have you tried building a set by just looking at the picture on the front? I have, and it was impossible. The same goes for money. In your mind, you have a picture of what you want your future life to look like, but getting there seems impossible. But it’s not. You’re just missing the instructions – your step-by-step plan on how to get there.
Aligning ALL your personal goals with ALL your financial ones is too much for anyone to handle. It would be arduous and overwhelming. Start small. There isn’t just one Star Wars Lego set, there are close to 100, otherwise known as a series. You can combine various sets from the series to build a Star Wars scene, or have the ultimate Rebellion vs. Empire battle. Do the same with your financial goals. Break up your goals into “sets” which are all part of your life “series.” One set might be retirement, the other an emergency savings fund, or another might be investing. Heck, one might be buying that family car.
Whatever the case may be, split up your goals into smaller ones and build a plan for each one. Each plan and set of instructions should coincide with your series. Start with immediate financial goals such as paying off your debt with the avalanche or snowball method, or trying to live more frugal.
Step 2: Budget Block
Building your Lego creation would be difficult if you didn’t know what pieces you had to work with. It would be frustrating and deter you from playing with them. I don’t know many parents that don’t have a huge bucket of Legos from which their kids can dig through. We try to keep the Legos in a plastic tub, but once the “evil genius” in my son is unleashed, Legos end up scattered in his room creating a minefield for our feet. In any case, he can see the blocks and visualize his creation – changing and trying different pieces to fit his needs.
Learning how to build your finances requires a budget – your bucket of Legos – where you can visualize your income and expenses. The blocks are your bills, paychecks, groceries, etc. If you don’t know how much money you have and where it’s going, it’s impossible to build your foundation. As mentioned, not knowing what Legos you have is frustrating and will deter you from playing with them. The same goes for your budget. If you don’t know where your money is going, it will be frustrating and deter you from using your budget.
Your budget doesn’t need to be complicated. Here is my complete budget guide that provides links for FREE online apps and spreadsheets – making the process a breeze!
Step 3: Investing Block
Saving money is fantastic, especially for an emergency. However, saving money in a box under your bed or in a bank account provides you zero growth. Even high-yield saving accounts are offering below-inflation interest rates which provides a negative opportunity cost. Now don’t misunderstand me, investing doesn’t guarantee you positive returns as we saw in March due to the coronavirus. Historically though, investment returns have averaged 7% annually – add in the benefit of compounding and whammy – your money grows exponentially!
One of your foundation blocks should be investing, in particular, tax-advantaged accounts. These include your employee matched 401(k)s, IRAs, SEPs, SIMPLEs, or Roth IRAs. Don’t just buy any mutual fund – utilize tax-advantaged accounts that defer taxes and/or grow tax-free. If you’re unsure how to invest money – read my simple investing guide that includes linked articles to enhance your investment knowledge.
Final Block Thoughts
Now that you know how to build your finances, it’s time to start building the foundation. Pull out your instructions and start planning your financial sets that align with your personal goals. This could be as simple as paying down the mortgage, buying a car, or saving for Christmas each year. Second, layout your blocks, aka your budget, so you know what blocks you have to work with. An app such as Personal Capital aggregates all your accounts and creates a personalized interface of your income and expenses – a budget made easy, and automatic. Lastly, start growing your money through investments. Start small, $50 a month into a Roth IRA is a great way to get your feet wet.
Before you know it, you will start building your own Lego sets, growing your financial goals with your personal ones to complete your series.