In my browsing of several personal finance blogs, there is a common theme of people looking for more ways to make money or have a second income. However, I am a firm believer in the fact that your money problems may not be that you make too little. More than likely, you are spending too much or just being careless with what you do spend money on. Now, before I become the “pot that calls the kettle black,” I too struggle in this area. Your money problem is more of a behavioral problem than it is a money problem.
This will be part one of a recurring series on better ways to manage your personal finances in everyday life. In this first post, you have to understand that your personal finances should be run like a business. What I mean by this is you need a positive cash flow. After all of your necessary expenses and wages are tallied up, if you have money left over, you have positive cash flow. If you spend more money than you make, you end up with negative cash flow. This will cause you to end up in debt, and debt is not good; in any form. If I business were to continue operating with a negative cash flow for an extended period of time, they would spiral deeper and deeper into debt and likely go out of business. If a person does this, you end up with such a large debt that your monthly debt payments outweigh your necessities and thus your income landing you in bankruptcy unable to pay your debts, doing serious damage to your credit score, and thus limiting your ability to borrow money down the road for things like a mortgage or that new GMC Sierra that you have always wanted. Not good.
First things first, figure out what your monthly, after-tax take home pay is. Then, listen the following in this order: mortgage/rent payment, utility bills, food, any outstanding debt payments (credit cards, car, boat, student loans, etc.), gas/fuel and tolls for said car if you use it to commute to work. These are your absolute necessities. Everything beyond this can be cut out (unless you work from home and need internet or whatever). Now add them up and subtract the total from your income. (Congrats, you just created a rough budget). This is your cash flow. If it is positive, good job, you are living within your means. If negative, you need to make some difficult cuts as these are necessary things to have. You may even consider looking into debt forgiveness options. Be careful though, the team at Nerdwallet points out that these most always come with a catch. Other ways to fix this would be to consider moving into a cheaper living situation, getting a cheaper automobile, or adopting a diet of rice and beans for a while until your expenses are under control. An even better solution, albeit, maybe more difficult is to increase your income. There are tons and tons of ways to make additional income, you may just have to be creative and a little open minded.
Regardless of whether you have a positive or negative cash flow, you must do a better job saving money. This money can then be using to pay more on any debt you have to make it go away faster (Hello everyone with student loans!!). The money can also be invested to create another stream of income. Whether it is just a high-yielding savings account or you invest it in low-cost index funds, there is definitely something to be said about how empowered saving your hard earned money makes you feel.
A very simple strategy to save more money, one that I have adopted myself, is to pay yourself first. This concept is demonstrated in the book, The Richest Man in Babylon. I highly recommend to anyone that enjoys financial literature. In the book, the first lesson that is taught is to Pay yourself first. This concept flips the script on taking what is left over at the end of the money and adding that into your savings and instead encourages you to pay yourself before spending any money. I have started doing this myself and I can safely say that I have not even noticed a difference in my habits. Making the transfers automatic when your paycheck comes in makes it even more seamless and easy! How much should you pay yourself? Depends on what you can afford to still be able to meet all of your other bills, but the rule of thumb is 10 percent. Just 1 dime for every dollar you make. Sound easy? It is. Give it a try and see what happens. Doing so will greatly improve your financial standing. The idea is that this saved 10 percent can go on to earn more money for you by being in an interest bearing savings account or invested in something else (or for extra debt payments for those that have them).
I can safely say that since doing this, my account balances have grown across the board while my student loan principal balance has been significantly reduced. Give it a shot and you will be amazed at just how easy it actually is!
Questions or feedback? Feel free to comment or email.