A LARGE portion of Americans live their life paycheck to paycheck, stuck in a hamster wheel that feels impossible to escape. There are some who have an emergency fund saved up, but for whatever reason, can't seem to save large amounts of money. And there are others who understand how to build wealth and are taking steps toward that goal. Regardless of what category you fall under, this article is for you.
If you want to build your financial foundation, here are TWO things I want you to do.
#1 – Paint Your Financial Picture
First, you need to paint your entire financial picture so that you understand where you lie financially. I want you to write down the answers to these five questions:
Income: How much money do you earn every month?
Expenses: How much money do you spend every month?
Assets: How much do you own in cash, savings, checking accounts, real property, personal property (mainly cars), and investment accounts?
Debt: How much do you owe in ALL debt – credit cards, student loans, mortgage, car loan, etc?
Net Worth: What is your net worth – assets minus debt?
You may not know the answers to any of these questions yet, and that's okay. But I want you to become aware. I promise you, not acknowledging your debt will not make it go away. You need to face your finances, no matter how scary. Once you determine your net worth, monthly income, and monthly expenses, you can easily make adjustments to increase your net worth and monthly savings rate.
#2 – Evaluate Your Expenses
Next, I want you to evaluate your expenses. Often, people think that in order to become financially stable or wealthy, they need to earn a lot of money. And that is simply not the case. In fact, a 2019 study by Ramsey Solutions surveyed over 10,000 U.S. millionaires and found that most of them did not even earn $100,000 per year on average.
Only 31% [of millionaires] averaged $100,000 a year over the course of their career, and one-third never made six figures in any single working year of their career.
And believe it or not, teachers rank #3 on the list of millionaire occupations. So, accumulating wealth is not about EARNING lots of money. While having a high income certainly can help, it's really about saving what you earn. And how do you control what you save? Control your expenses.
Controlling your expenses does NOT mean you have to live in extreme frugality. It just means you need to become more aware of your spending. You need to understand where your money goes each month if you want to make a game plan to save more of it.
The first thing I want you to do is to write down your necessary expenses and determine how much you spend each month on those. These are the items you need to function on a day-to-day basis, and they include your rent or mortgage, food, gas, etc.
Once add up your monthly necessary expenses, I want you to think about and write down what type of spending brings you happiness. When you figure out what spending TRULY brings you happiness, you need to make sure you are spending only on those things.
Let me give you an example. For me, I am genuinely happy when I spend money on the people that are important in my life. So, a lot of my monthly spending goes towards gifts and thank you cards. It also makes me happy when I am healthy and financially stable, so I have no issue spending on groceries. But you will RARELY see me buy a meal for myself at a restaurant. Why? Because I value my health and financial stability, and I know that I can eat healthier and cheaper by preparing home-cooked meals instead of eating at restaurants.
I let my values and needs drive my spending decisions, rather than my urges and wants.
Remember that personal finance is PERSONAL. Everyone has different values, and that's perfectly okay. As long as you are staying true to your values and spending on what actually brings you happiness, then you're doing just fine. But if you are not spending according to your values, I want you to stop and think before you're about to spend money and ask yourself, "Will this ACTUALLY bring me happiness?"
I'll finish this article with a 30-day challenge. For the next 30 days, I want you to track every single new expense of yours. You can track it any way you'd like, but just make sure you do it. Once you see how much you spend every month and what you're spending on, you'll naturally try to find ways to cut back on your spending simply because you're more conscious of it.
If you don't want to track your expenses the old-fashioned way with a pen and paper or with Microsoft Excel, try Mint.com. It's an app on your phone and it is completely free to use. It automatically tracks your expenses if you log in to connect your credit cards, bank accounts, etc. I am not affiliated with Mint whatsoever and I am not getting paid to promote the app. I just think it's a fantastic tool to use and I use it myself.
Remember, knowledge means nothing without implementation. If you read this far, I hope you rise up to the 30-day challenge and start your journey to financial freedom.
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