Volumes have been written that claim to have the secret to financial success. Some are good. Some not so much. But the truth is that personal finance really isn’t all that complicated. The secrets to financial success are really so basic that it really shouldn’t be necessary to state them. But the reality is common sense isn’t so common and as a result people struggle to follow these three simple steps.
1. Live on less than you make
This is the most basic of financial principles and yet is so often ignored. You will simply never make any progress as long as you are spending as much or more than you have coming in.
There are really only two parts to this equation. It is how much you have coming in (your income) minus what you have going out (your expenses). If you currently are spending more than you earn then you have to address one side or the other of this equation.
If your income is so low you can barely meet your basic needs then the answer lies in finding ways to improve your income. In the short-term that might mean getting a part-time job or trying to pick up some extra hours or some overtime at your current job.
Working long hours might solve your immediate problem, but it isn’t really a long-term answer. If you try to work 80 hours a week at low paying job for years on end eventually you’ll burn out. If this is where you find yourself then you need to start to think about what you can do to find yourself in a better place 5 years from now.
- What do you really enjoy doing and is it feasible to make a living at it?
- Are there some classes you need to take?
- Are there some books you need to read?
- Is there an apprenticeship that you could get into?
- Do you know someone that currently does that “thing” who could offer you advice or help you get your foot in the door?
The bottom line is the next 5 years will pass regardless of whether you do anything or not. You have a choice to spend those 5 years learning new skills so that 5 years from now you are in a better place, or you can spend the next 5 years complaining about your current situation and wake up 5 years from now no better off than you are now.
While there are certainly some folks who are living at the poverty level and have an income issue, the truth is that for most of us we have enough coming in to meet our basic necessities. Perhaps not all our wants, but certainly we have enough to put food on the table and provide basics of shelter, clothing and transportation.
The problem is we live in a very marketing-oriented culture and the basic job of marketing is to convince us that our lives are somehow lacking and we would be so much better off if we only had this one thing.
So we decide I’d be happy if I only had a better car even though my current one gets me where I need to be. Or maybe it’s a bigger house. Or a better smartphone. Or these new tools. Or that new gadget. And before we know it we end up spending more than we have coming in and we wonder why we can’t save or give like we know we should be.
You will never find real happiness in stuff. True joy doesn’t come from the newness of our car, or the size of our home, or anything else we can buy. Chasing after happiness through stuff is an empty pursuit.
If you have enough coming in to cover your basic needs but not all your wants it’s time to start looking hard at your expenses to see where you can cut.
2. Have a spending plan
The second key to financial health is you must live on a spending plan.
I don’t believe most people are purposely spending more than they make. Even the most financially irresponsible ones among us have at least some idea that you probably can’t spend more than you make over an extended period of time. So why do so many do it? I think the answer is simple. They simply don’t know. Without a written spending plan we only have a vague idea of what is going out and coming in each month.
Our easy access to credit cards makes this even worse because if we come up a little short we can always use the plastic and worry about it next month. A few dollars here and a few there don’t seem like that big of a deal until we finally reach the point where we can no longer make the payments and by then it may be too late.
A spending plan doesn’t need to be complicated. You don’t need an 8 tab spreadsheet full of complicated formulas to track your spending. It can be as simple as just a piece of paper where you list your paycheck at the top of the page and then start subtracting off one by one the expenses you have coming in for this month. The keys are:
- Since every month is different you need to do a new plan every month. Sure many things are the same from month to month, but every month has a few things that are unique.
- You need to assign a purpose to every dollar you have coming in. Unassigned dollars disappear. Maybe those extra dollars are assigned to paying down debt, or increasing savings, or even to buying that item you have been wanting. But if you don’t decide ahead of time, you’ll get to the end of the month and wonder where those dollars went.
- You have to stick to it. Your budget won’t be perfect. That’s OK. But just understand if something unexpected happens and you go over in one category you have to compensate by reducing other categories in your budget. It all still has to balance or you are wasting your time.
- It is about priorities. The purpose of your spending plan is to make sure you are able to spend your money on what matters most to you and not your day to day whims.
3. Look in the mirror
This is the most difficult of the three steps. Ultimately, financial issues are rarely related to money. Money is merely the symptom. The problem is our own behaviors and beliefs that get us into trouble.
For many years I basically lived paycheck to paycheck. I wasn’t doing anything dramatically wrong, but I wasn’t really doing things right either. I was frustrated because it seemed like I could never quite get ahead. Financial things were always a matter of two steps forward and three steps back. What I was doing wasn’t really working but I also didn’t really want to change. It was only when I reached the point that I was fed up with making a decent living yet always feeling broke that I was willing to start doing things a different way.
The truth is most often our problem is really the person staring back at us in the mirror each morning.
Living on less than you make is not easy. Often it means saying no to something you want today so that you can say yes to something you want even more tomorrow. While creating and living on a spending plan isn’t complicated, it does require some amount of discipline.
The Weight Watchers folks have a saying that “Nothing tastes as good as thin feels.” The point being if we want to be healthy and feel the way we want tomorrow, then we may have to put down that doughnut today. That’s hard to do when I am staring at that box of Krispie Kreme’s. My will power will likely fail until I get so fed up with struggling to tie my shoes that I want to be thin more than I want that doughnut.
The same thing applies to financial matters. Until you decide that it is worth whatever sacrifices you need to make, you will probably continue to struggle financially.
If you are frustrated with where you are financially, and you want to change but you aren’t sure where to start, send me a note. I’d be glad to work with you in more detail on any of these steps.
The bottom line is basic personal finance isn’t complicated. You don’t need a master’s degree in finance. There are no secrets that only the wealthy know and there are no short cuts. You simply need to spend less than you make, have a plan, and have the discipline to stick with it. Simple, but not easy or everyone would be doing it.