It is all too easy to focus on things you cannot control when it comes to money: the stock market, a looming recession, trade policy, the value of the dollar, inflation, the rate of return of your 401k account, how your neighbors spend and whether you need to keep up with their Christmas decor… the list can go on and on, resulting in depression and ennui. Wait a minute though. Personal finance is not something that happens to you, it is inherently something that you control. What happens in the world outside your wallet does not need to weigh heavily on you. Sure, it can impact the value of your 401k, but not your habits and actions. No one can control the markets, but we all can take control of our own personal market and money.
The number one most important thing you can do to take control of your money and reach financial success is to create space between your income and your spending…then actually save that space.
Building the Habit
Getting into the habit of living on less than you make is one of the top struggles for most Americans when it comes to their personal finances. Expenses are high and salaries are stagnant, that much we know is true (thanks, economy) but you can control how much of your salary you spend. If you have expenses that take up all of your income and don’t leave you any money left over to save, you have two choices: make more money or spend less money. It is truly a simple concept, yet difficult to implement. Even if you increase your income, a high salary does not mean you are wealthy. In fact, I know many families making well over $100k and $200k a year that are broke and in debt from day-to-day living expenses. When your spending rises to meet your salary, you kill your ability to save and gain wealth.
The Vicious Cycle
High earners all to often fall into the vicious cycle of spending more to up their lifestyle because they believe they work hard so they deserve the life they want. When you bring home a great salary you likely believe you should be able to afford the accouterments that you desire and that you see your peers enjoy. Think of all the things you believe you should have in your life because you work hard for your salary: dinners out, private schools, vacations to Disney World or exotic locales, expensive gifts for holidays, new cars, subscription services, grocery delivery, private tutoring and music lessons for the children, house cleaning services, monthly massage memberships, new outfits for every special occasion, beauty treatments, even doggie day camp for your four-legged friends. These are the trappings of life that we have come to believe we are entitled to and that our salary should buy us, so we buy them and end up unable to build wealth, not having enough leftover to save, and often, debt. Spending all you bring home is a vicious cycle that often includes the common refrain, “I will save when I get a raise.” And then that raise comes and your spending raises to meet your new income, leaving you with nothing left over to save.
Savers Win, Not Earners
It’s not about what you earn, but what you save. The average wage in the US is $52,145.80 and people earning even modest incomes can still sock away plenty of cash and retire a millionaire. So why can’t you? It’s about building the habit of saving, not spending. Good saving habits are the key to taking control of your money and your financial success. Bad habits, like spending, are hard to break, but implementing new habits can replace those old habits in about two months. So really, why not start now and see yourself two months down the road, richer, happier, and on the way to building wealth?
Get Control of Your Spending
So then, where do you go from here to get there? First, take a hard look at your spending and ask yourself what things you value most. Decide to spend on the things you value that enrich your life. Does doggie day camp really enrich your life? Instead, maybe take your dogs on longer walks and you both of you get some exercise and bonding time together, while you get to reclaim a few hundred dollars each month to put into your savings account. Finding ways to cut that spending may mean some hard choices, so start with the low hanging fruit and get rid of subscriptions you don’t use and services you can easily live without.
Get In The Savings Habit
Next, get into the habit of automated saving. You were used to those monthly debits out of your account for subscription boxes and services you didn’t even remember you had. Instead, divert that money into saving for your financial future. There are four simple steps to take to build wealth with your savings habit:
- Start with your company 401k or other retirement plan and contribute as much as you can to get the maximum company match.
- Second, focus on building your cash reserves and keep money liquid in a savings or money market account.
- Finally, save for college and other future financial needs by investing in the stock market for long-term gains.
Aim to save 10% to 20% of your income to set yourself up for success and control your future finances. That savings target will put you well on your way to wealth, regardless of if you make 50k or 200k a year. Breaking your spending habit and developing a savings habit and is the most important way you can take control of your money. Outside stock market forces and recession woes be damned. If you take control of your money and set aside enough for a rainy day and long term future goals, you will grow your wealth and recession-proof your finances.
