Managing your personal finances is easy. The hard part is managing your self-control so you don’t overestimate your earnings, spend too much, or save too little.
To increase the health of your finances, take a three-pronged approach:
- make more money
- cut spending
- save more
Most people would assume that someone making $120,000 per year is stronger financially than someone making $60,000 per year, but that is not necessarily true. To be financially well off, you need to balance all three prongs of personal finance. One can easily make a lot of money and live below their means, yet have no savings. Or someone might be frugal in spending and relentless in saving, but have very little cash coming in. Or another person might make a lot of money and save a lot for retirement, but frequently overspend and take on debt.
Make more money
The key to making money is to help people. Help your boss. Help your clients. Help your neighbors. Money will come to you.
Helping your boss look good is the surest way to get raises and promotions within your company. When you help your clients, they will reward you with more business and more money. If you help your neighbors, you create social capital that will help you make more money down the line.
In the long term, you can only keep what you can afford. Look at your money as streams. You have a stream of income coming in, and a stream of spending going out. If your spending stream flows faster than your income stream, your financial river will dry up eventually and you go broke. However, if the stream of income flows faster than your spending stream, you start accumulating wealth.
Do an audit of your money streams for at least a month. Record every penny coming in, and every penny you spend. After a month when you look at your record, you will be surprised at some of the ways you’re leaking money. You might have subscriptions you pay for but don’t really use. You might be buying conveniences that aren’t worth what you’re paying. You might be spending extra for services you don’t need. Your record will help you cut expenses in the least painful way possible. Cut at least until your income is greater than your spending.
When your income stream flows faster than your spending stream, you accumulate wealth. The accumulation of wealth is your savings. It isn’t good enough just to collect savings. You also need a plan for what to do with your savings.
The easiest solution is to just let your money accumulate and do nothing. This is not a good way to keep your savings though, because your money loses value over time. The United States typically has a yearly inflation rate of around 3%. That means something that costs $100 today might cost $103 next year. The effect of inflation compounds, meaning something that costs $100 today might cost over $200 in 24 years.
You can do nothing to stop inflation. Instead of fighting inflation, you have to go along with it. You need to invest your savings so that it increases in value at least at the same rate of inflation. There are many ways to do this, but the most common involve investing in stocks, bonds, or mutual funds.