Lately, I have been involved in a number of conversations with individuals who want to improve their finances. Many believe that improving their finances means getting a better paying job, a second job, or launching a money making venture. Increasing income is good, but it is only part of the equations. What I found is that over time, people will slowly increase their spending up to the new level of income. Brian Tracy, success guru, calls this the Parkinson’s Law, where expenses rise to meet income. In the end, they are usually no better off. A better solution to improving your finances is to manage what you have wisely.
Net Worth is a measurement of your financial well being. It is calculated by taking your assets (everything you own) minus your liabilities (everybody you owe). An increase in your net worth is the real measure of financial improvement. Buying more assets is one way to improve your net worth, but keeping more of what you make is equally as impactful. Below are five suggestions to help you to improve your financial position by managing what you have.
- Balance your account register (checkbook). Keeping your account register balanced is a simple step that you can do that can save you hundreds of dollars each year. As more people rely on technology, the practice of keeping a written ledger is lost. The risk of checking balances online or on an App is that the balances may be incorrect. You may forget about an auto debit or an outstanding check that has not cleared. An average bank overdraft charge is $34 a pop! Ouch! By maintaining a balanced account register, you will know how much you have to spend before you swipe the debit card.
- Create a budget. Before you cringe, a budget is just a spending plan. Instead of wondering where your money went, with a budget, you are telling your money where to go. Budgeting is the process of analyzing inflow verses outflow of cash each month in order to bring your spending in balanced. This process helps you to identify excessive spending that you can apply towards other goals. Also, if you receive a windfall of cash in a given month, you will know how to apply it. Without a plan, you are more likely to spend the extra cash on a “want”.
- Spend less than you earn. The number one key to financial success is to spend less than you earn. A guideline for balanced spending for your net income is 70/20/10: 70% for living expenses, 20% for savings and 10%for yourself. Earlier I said that increased income usually result in increased spending. The dual power of a detailed budget and spending guidelines will help you to keep more money in your pocket. It’s not how much you make, but what you do with what you make is the secret to financial success.
- Reduce Debt. Eliminating debt has the greatest impact on improving your financial position. Debt robs your future. The best way to explain it is by an example. Let’s say, you have a credit card balance of $3,000. The national average interest rate on credit cards today is 14%. The required minimum payment is $65.00. If you paid only the minimum, you will pay $2999.93 in interest alone and it will take almost 18 years to pay it off!
- Save more. You heard the saying, “pay yourself first”. You are your most valuable asset, not the clothes, car, house, or anything else. Saving pays in the future. If you spend it all today, that is all you will have. Start with a small amount, even it if it $10. Saving $100 per month is $1200 (not including interest). If you make more, save more, but the key is to get started and do it consistently.
Looking back over this list, you will see that the key to improving your financial position is better habits and behaviors. It’s the old 80/20 rule: 80% of financial success is based on behavior; the other 20% is the money. If you earn $50,000 per year for 20 years, you would earn $1,000,000! Unfortunately, the love of stuff, debt, and interest pry most of your hard earned money out of your hands. In short, growing your net-worth does not necessarily mean to make or invest more money; keeping more of what you earn can yield the same results.
Samirian Hill, The MoneyWise Teacher, is President and Founder of BudgetWise Financial Solutions, LLC, where they teach people to manage money wisely. She is a financial educator, blogger and consultant. In her spare time, Samirian enjoys golfing, reading, and cooking.