Know Your Income
Whether you are just starting out or a highly paid executive, it is important to know your limitations.
Your short-term limitation is your income.
How you use your current income will determine your long-term limitations.
That concept is an essential part of building a better mindset for money.
Another aspect of planning for income growth is to match preparations to opportunities.
Value your observations and related ideas. Some services and product development might come to your mind that you could use for additional income.
Know the difference between getting a paycheck and making a profit. That is, work for a business or be the business owner.
Know Your Savings
With every type of income, pay yourself first. That is a mindset that you will find most beneficial over time.
Your welfare is protected by assets that are available to cover any emergency or loss of income.
This concept is especially hard for those who are early in their earning years. And it is not always apparent to those with high incomes, when spending is so easy!
Savings can lead to investing, where the returns can compound over time. Then, the wall of security gets higher and you and your family will be grateful for that effort to save.
As you progress with this practice of paying yourself first, your goal should be to make a consistent contribution to savings and retirement of 20% to 30% of your take-home income.
Know Your Needs
What do you need to survive?
For most, the answer is housing, food, and transportation. Housing would include utilities, such as electricity, gas and water. Not the internet or cable TV!
In my mind, I would consider renter’s or homeowner’s insurance, health insurance, and auto insurance as essential to protect your assets. And a phone is essential to communicate.
Keep in mind, you must provide for maintenance related to your housing and vehicle.
While there are a variety of measurements for funding your needs, a good consensus is that your needs should amount to less than 50% of your take-home pay.
Your type of housing and model of vehicle might well be evidence of luxury rather than basic need. Luxuries are hard to justify in a budget that only affords basic needs.
Know Your Wants
I may offend some when I say that cable TV and internet services are not needs. Any feature on a phone plan that goes beyond calls and text messages must be considered a want since they cost extra.
We forget that even though there are lots of technological products available to us, there is an added cost connected to them. They have features we want, for sure, but we do not need them to survive.
Gifts, travel, clothing, meals out, concerts, ballgames, etc. are choices we make to spend money beyond our basic needs to survive. They are what we want, not what we need.
That sounds harsh, I know. But if you are short on cash, these types of expenses must be the first areas to consider cutting out of your budget.
For your information, the internet is free at the library!
Your wants must be no more than 30% of your budget.
Know Your Debt
Debt is an easily justified part of your financial planning process.
However, just because debt is available to use to speed up your plan to get things, does that mean you can justify that as being the best option?
Please consider the mindset of those who manage to accumulate assets rather than debt. Some debt may be hard to avoid. However, paying it off early will make it less of a problem.
By shopping for used items, such as used vehicles and thrift stores for other needs, you can save a considerable amount for your basic needs and on some wants over time. That could include estate sales and auctions and yard sales.
That kind of shopping takes some time. However, the more effort you make to plan your purchases the more alert you will be when deals appear!
Another way to save on debt expense is to get a 15-year mortgage instead of a 30-year mortgage. You will save an enormous amount on interest expenses over the life of the mortgage, and even more if you pay a little extra on the payments, maybe 10%!
The same can be said of buying a good used vehicle versus a new vehicle. Most new vehicles are so expensive that they require a six-year loan to make the payments affordable. However, they neglect to mention the loss of value when you leave the lot, maybe up to 20%! A used vehicle may require some maintenance, but that cost will be far less than the interest alone, not counting the loss of value, on a new vehicle.
Save to avoid debt and those choices will become easier.
Debt is a choice. Be careful how you use it. Be aware of the savings in interest expense when you can pay it off ahead of schedule.
Know the Difference
Over time, you want your debt to go down and your assets to go up. That is easy to understand but hard to do.
Awareness of the facts will make this goal more realistic to achieve.
The facts are both in detail and in the resulting balances. You must be aware of the details. They help you to understand the resulting balances.
Let me explain. You make choices to spend or save with your income. Some spending becomes debt because of the amount of unpaid spending.
Though you may recap the details, the balances are what matter!
Tracking balances will help you to see how well you are managing your money. Goals help but the element of time should be included. Progress will be incremental. Give it time! Be patient!
Whether you look at your balances monthly or quarterly, be regular about recording your balances. They represent your position at that moment. They keep you aware of your progress.
Though daily activities will change the balances, periodic notations will reflect the gains or losses from your spending decisions.
So, what balances am I referring to?
First, your bank accounts are an asset. Your checking account will reflect spending activity and should be measured after regular bills have been paid. Hopefully, your savings account will show a continuous improvement in the balance. But, life happens, along with unexpected maintenance expenses.
If you are making progress in your money management, increases in asset balances will appear. If not, you must study the details.
Second, if you save enough to make investments, such as CDs, money market funds, or stocks, track those balances. The market will move up and down, so be aware of that and what is behind the movements.
Third, the offset to assets are debts. On a balance sheet in business, the assets are on the left and the liabilities are on the right (from my accounting background). The difference is Net Worth.
What is your Net Worth? When I was young, my net worth was negative! Your goal must be to make that a BIG positive amount!
As you build a better mindset for money, you will be able to determine the value of cash over debt. A good cash position will improve your opportunity for investing. A poor debt position will limit all aspects of your life!
Make building assets a priority. Make paying off debt a priority. That will put your net worth into a continuous growth pattern.
Be aware of details. Track your balances, good or bad. Build a better mindset for money and your money management decisions and you can build your net worth!
Track your assets and debt balances. Know the difference!