A successful businessman once quipped that a company’s finances were a cakewalk compared to managing the contents of your wallet. We are no experts in the field but we fully subscribe under this since that’s exactly our experience. If you are to make your first attempts in that direction you can find it useful to see how our system “GoalBuddy” can assist you in this.
The long way to go
Niki recently gave an hour-long presentation on that same topic which took him only 15 minutes to prepare for. But he had more than 10 years of experience under his belt.
During this period he had tried many and various strategies to his vision for financial security before he could reach one invaluable realization.
You need something else than millions to be a millionaire
You will always struggle financially if you don’t have at least some way to manage your money.
You don’t need a lot to start acquiring assets that generate income. It all depends on the way you view the idea of having control over your finances. This became an eye-opener for Niki. A good and systematic approach will make you richer. Well, not directly but in a way that you will start noticing all the opportunities that life brings up in front of you.
What to do with your money!
Is “inherited wealth” a myth? Perhaps it is. There are many studies done by experts (including our friend Stoine Vasilev) that show most people can’t effectively take advantage of a financial bonanza. When asked what they would do with a large inheritance, the majority was thinking not how to put it to work, but how to buy things.
The personal finances system gets your money to the right place regardless of the amount, be that 10 or 100,000 bucks. We will show you the 3-step model, even if you have only a vague plan of what you want or how to get there. But let’s look at the big picture first.
A bird’s eye view
Investment is committing your earnings to some future greater return and that’s the ultimate objective here. However, before we get there we have to accumulate some capital and there are two essential prerequisites for this.
The first, of course, is to have money. It is essential to obtain some extra income at your disposal. This could come from your paycheck or perhaps you are self-employed and/or freelancing.
The second one is to learn how to save. It requires that you become fully aware of the nature of your spending. That’s what we will focus on next.
The three steps
An effective approach has the following phases:
- Clarity. Get a good map of the “terrain” so that you are sure where you are and where your objective is. Then you can start looking at how to get to it.
- Control. You have to take matters in your own hands. But not before you understand perfectly well what actions of yours are the productive ones.
- Habits. This is the state when you build up your new habits. And we can’t understate the importance of this. According to the research of Bruce Lipton, a developmental biologist, 95% of our actions are done “on auto-pilot”. That’s why our everyday routines must be efficient and productive.
We begin with clarity – what it means and how to reach it.
Clarity for personal finances
There was no “GoalBudy” in 2005 when Niki made his first attempts at managing his income. Still, he instinctively felt what he needed most. One should know where they are and where they want to go.
Niki’s starting point is evident in his notes from that same year. To achieve better understanding, he was looking for the answers to three key questions: where, how much, and when he spends.
Where, when and how much
It turns out it’s equally crucial not only how much we spend but under what circumstances.
In practice, each one of us can see how our spending patterns change over the months of a given year. There is time for taxes, vacations, and then there are others requiring some big expenditures. This cyclical nature means that we have to regularly monitor what is happening simply because the occasional review will not reveal the larger picture.
The solution is straightforward even if not an easy one.
You must keep a constant record throughout the year where your buck is going.
The first (and the harder) thing is choosing correctly the spending categories. This could be a down-payment for a house or a new car as well as clothing, insurance, etc. You can do a little bit of Internet research to find a set of these that fits you best. Niki, for example, uses 15, with several sub-categories (“Food” means drinks, nuts, snacks, dinners at restaurants).
The other type of effort requires a lot of willpower and perseverance. That is, making a record of absolutely every single one of your expenditures for one full year. Niki and his wife decided on the Android Expense Manager. In the evening they enter it every single receipt from that day.
And since it’s a tedious and difficult exercise we would like to offer you some piece of advice here.
He places every single receipt in his wallet right there with his cash. Then he makes the entries in the app and gets rid of them at the end of the day. He also sets up a reminder on his phone so that this task won’t slip his mind.
And if for some reason he doesn’t get a paper receipt he simply makes a note on his phone.
But the good part is that once you get through the year you don’t have to do it again.
A major realization
You will be surprised once you gathered and analyzed data. For example, if you are used to eating out the 30 bucks dinner might easily become close to the impressive sum of a thousand per month.
We’re not saying this is necessarily a bad thing. People have different attitudes and views after all.
The price we pay should match the value we receive in return.
If the experience of dining at a restaurant is well worth it for you, then everything is all right. And if not then being aware of it will give you an additional incentive to do something about it.
What were the “black holes” that Niki’s money was disappearing in…
Being the organized type, he thought he was reasonable about how he spends. And yet, he was astonished to find out about some unlikely “culprits”.
# 1 Credit cards
Like most of us, at some point in his life, Niki had fallen into the trap of unchecked spending.
According to statistics from Dun & Bradstreet, a business consulting and data company, people do between 12% and 18% more on cashless transactions. The fast-food company, McDonald’s, did an interesting study. They found that the average credit card bill was $7 while the cash one was only $4.5. That’s quite a sizable margin!
The dangers of the “plastic money”
The reason is somewhat psychological. You don’t feel that you’re giving anything away – you just swipe and that’s all. Plus, it’s convenient. It’s always with you, and you have access to larger sums without the need to run to the bank.
Nowadays, Niki is well aware of this and therefore he stopped using them on a daily basis. Instead, he made it a habit to do regular cash withdraws from an ATM.
# 2 Cars
As a rule, we are all pretty conscious of the big payments we make for the year. These are things like the mortgage, vacation, etc. But we don’t always realize that our new car can cost us well above its price tag.
Niki learned this when he looked at how much his family spent in 2015 for the two cars they owned. They were already paid off and were still under warranty. And yet, fuel, the usual maintenance plus insurance amounted to many thousands of bucks.
What is the “money consumptions” per mile?
For some people couple of hundred bucks every month may not be such a big deal. But if you calculate how many hours you have to work to earn it might make you think twice. The idea is that you weigh your labor against the value you get in.
After all, we have to remember that the price of a vehicle doesn’t include all the future charges towards maintaining it. Then you start questioning if the family that lives in a big city really needs two cars.
# 3 Food
If you’re someone who doesn’t pay much attention to the small everyday expenses you might be spending too much on something like food.
Don’t get us wrong. We are not saying you have to starve yourself or switch to low-quality products. No way! We simply want to emphasize the significance of price awareness. At some point, Niki realized that going to the deli around the corner cost him around 60% more if he was shopping for the same stuff at one of the major grocery chains.
A matter of opinion
For many people, looking for sales or cutting coupons might be quite annoying and a dedicated drive to the grocery store may not seem justified. Everyone makes their mind but it must be a well-informed one. And to be such you have to know exactly how much you spend on food.
These and several other “black holes”, such as credit card debt, comprised what was wrecking the family budget. Your circumstances can be completely different. Still, the starting point should be the same.
The first thing you do about your finances is to be perfectly informed where and how your money is “disappearing”.
The clarity for any vision
Collecting and analyzing data is a universal technique for a better assessment of any situation. We already talked about keeping the receipts to figure out the composition of our spending. It’s the same with the vision for health. Keeping track of your calorie intake will help you get to the bottom of “How come I have only fish and salads and yet I am not losing a single pound.” Ivan will expand on the topic in one of our next articles.
In any case, the trio of clarity – control – habits will bring in improvements in any other vision.
“Rome wasn’t built in a day”
We often get to see how participants in the “GoalBuddy” workshops think that having a good idea and building their vision will not change in the next 30 years. Well, that’s hardly the case. As things get clearer, the vision will come into a sharper focus while you are working through your 90-day goals. Niki has come a long way taking classes, researching and reading a lot. He formed his way of dealing with the vision for personal finance. Eventually, everyone finds their way.
One thing is for sure, though. Vision is what will guide you because it is the only thing that will not change. There is no way you want to be financially independent now and then in just a few years, you decide it isn’t worth it. Just as it is absurd to aim and eventually achieve a healthy lifestyle only to give it up later.
If you are ready to start now
Let’s say you can’t claim much success in reigning in your spending. Perhaps the problem is that you don’t have a good idea where you are going and how to reach your objective. Obviously, your first task is to figure that out. After that, it will become naturally for you to feel the need to change things. To move forward and register progress you will have to understand the relationship between your actions and their consequences. So, we strongly recommend you try out our approach. Expect more about the control and habits in our next articles. Thank you and see you soon!