Everyone likes lists right? Top 10 this or that, 5 best places to retire, most viewed cat videos, etc… you get the picture. If you google “top 10 list” 767,000,000 results pop up, I figured that we needed one more list, one that might actually be useful for you.
My 4 steps are not earth shattering or ground breaking in any way but as my wife likes to tell me “common sense is now a super power”. If I can get you thinking about these steps regularly and putting some effort into them I guarantee you will start seeing some improvement in your financial lives. Let’s get to it…
Step 1:
Start Tracking Your Spending
If you want to win with money you have to know where it is going. You need to know who is getting their hands on your cash after you work so hard to bring it in. The vast majority of people out there work way too hard to not have anything left over at the end of the month. There have been plenty of families I have met with that say “we have great incomes but the money just seems to disappear”.
We were pretty lazy about this at one point, too, but as soon as we committed to tracking it and could see where every dollar was going, everything changed. We then had the power back, we could see what areas needed to be adjusted, and it gave us a starting point of where we wanted to start making changes. I’m not the one that is going to tell you to stop visiting Starbucks everyday or to give up that full deluxe package of cable or that you never need to go out to eat at restaurants. But it does give you knowledge to start making smart decisions with your money.
Step 2:
Spend Time Thinking About Your Future Life And Set Goals
This is where you have to dream a little. You have to envision things you want to accomplish, and you have to visualize what you want your life to look like financially 5, 10, 20 years from now. This step will be your motivation to make changes to what you discover in Step 1. These goals will be your catalysts to work and sacrifice for what you want in the future.
For us, knowing that our main goal is to be financially independent by the time grand-kids start showing up drives the decisions we make today. Being debt free and investing will get us to our goal. Could we not worry about these things and go buy two brand new Teslas? Sure we could! Someone would lend us the money and I could make payments for the next several years. Will I do it? No…it would wreck our main goal, even if it would be tons of fun. Once you have clear goals, you are able to make smarter decisions.
Use the SMART Goals system: Specific, Measurable, Attainable, Relevant, and Timely. Have a few short-term, a few mid-range, and a few long-term goals to keep you motivated and focused over the long haul. Financial independence doesn’t happen overnight. You will need short-term wins to keep you going. This is why Dave Ramsey’s debt snowball system works so well for many people.
Step 3:
Mind Your GAP
Chad, what the heck do you mean by this? Let me start by saying you do NOT have to have a finance degree, know how to read company financial statements, or know how to compute the time value of money in your head to become financially independent. The only equation you need to know is:
INCOME – SPENDING = SAVINGS
That’s it. It really is that simple. The larger you make your GAP between Income and Spending, the more savings you can put to work for you, therefore, reaching financial independence faster. Manipulate this equation any way you want to, increase your income somehow, reduce your spending, or do a combination of both to reach your goals. Some of you reading this have a GAP that is tiny or even worse negative. We have been there…make the decision now to fix it. Figure out what is really important to you. Some of you are well on your way to financial independence and have worked very hard on growing your GAP and putting that savings to work for you in Step 4. (Golf Clap)
Step 4:
Know Where To Put Your Savings To Work
Great job! Now that you have tracked your spending, set some life goals, made some changes and increased your GAP…now where do you put that savings to work? It depends on your goal, what time frame you have to accomplish that goal, and your level of competency. Here are some common places to put your savings to work:
- Checking/Savings Accounts
- Retirement Accounts: 401(k), 403(b), IRA’s, HSA’s
- Taxable Accounts
- Real Estate
- Businesses
- Insurance
Think of each of these as a large Tervis Tumbler (I love Tervis) that holds your money for you while offering varying levels of protection from heat loss or ice melt (taxes, loss of principal, etc.). The specifics of each are beyond the scope of this post and will be expanded upon in later posts, so stay with me here. The idea is to get your savings in a place that it can start working for you and earning more money for you. An asset, as opposed to flying out the window as a liability.
Obviously a savings account will not help you save on taxes or help earn a return on your money but this is where you should keep your emergency fund and any cash needed for short-term goals. For example if you are saving cash to buy a car in 6 months then you definitely don’t want to put that money in an IRA. Inversely, the money you want to save for retirement that is 10, 20, 30 years down the road, better not be sitting in a savings account…inflation will end up eating it alive.
Wrap Up
There you have it, my 4 common sense steps in the most simplistic form I could write them. I guarantee that if you will give these some thought and start putting them into practice that you will end up with more money. And having more money is way better than having less money.
PS. If you are married…doing these steps and being on the same page with your significant other and working on them together is an unbelievable feeling. I never thought that my wife and I would be high-fiving over sending a large extra payment to our credit card, but we have a plan and we can clearly see a path to reach our goals. And that my friends is a very powerful thing!
Good luck with your journey to financial independence,
What do you think of my 4 steps? Comments are welcomed!
Image courtesy of Master isolated images at FreeDigitalPhotos.net
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