What separates the successful from those who aren’t?
There are a lot of factors that play into how people reach “success,” but one of them has to do with personal finance.
In my experience of helping hundreds of people with their finances, I’ve observed three main habits that almost always seem present among those who are financially successful. Thankfully, they’re all simple ideas. However, they do take effort.
But, these ideas are so simple, that you can even begin implementing them today with a bit of discipline and fortitude.
If you want to see big impacts in your finances, building habits is the greatest way to go about it.
“Change might not be fast and it isn't always easy. But with time and effort, almost any habit can be reshaped.”Charles Duhigg
The habits you develop to keep your personal financial life in order can bring life-changing rewards.
Things like having the ability to retire early or give you the ability to travel whenever you’d like. Creating the opportunity to develop the relationships with friends and family you otherwise wouldn’t be able to due to your work.
These basic habits can set you on the path to dominating your goals and living the life you’d like. Not just the one you have to.
1. Keep Track of Your Finances
How can you possibly get somewhere, without knowing where you are?
This is a question posed to me quite often while on road trips with my wife. Being the ever resourceful person, I like to think that asking for directions is a sign of weakness. Well, that weakness has wasted us many hours in search of the correct route to our destination.
You start to realize pretty quick that you have to have a starting point, in order to reach your final destination.
For many, their final destination, at least in their mind’s eye isn’t the grave, it’s retirement.
How can I get to retirement and have enough to live the life I’d like in the shortest amount of time?
One of the habits we try to implement with clients is showing them how to keep track of where they are at.
How to Keep Track of Your Finances
There are two areas that are most beneficial to track on a monthly basis.
- Net Worth
- Cash Flow
Net Worth Tracking
If you’ve forgotten since school, network is a simple equation to show you how much you’re worth.
It is Assets (what you own) – Liabilities (what owns you) = Net Worth
This provides a simple snapshot in current time of your overall financial health. Fortune 500 companies do the same thing, so if it’s good enough for them, it most certainly is for you.
Updating your net worth is actually very easy to do and should only take a few minutes if you have the right system in place.
Here’s an example of a system many of our clients as well as myself uses:
- Use an online account aggregator (we use fancy and expensive financial planning software, but you could get away with something like mint.com.)
- Link up all of the online accounts you can. Everything from your checking and savings accounts to your home mortgage, student loans, and everything else you can think of. Online aggregators are a tool to help you track where you are, not to fix personal finance problems.
- Create and use a spreadsheet to help tracking your Net Worth (Click here to use ours.)
- Every month, open up the software and spreadsheet you’re using and update your balances. (If you’re using our software, it is updated daily automatically)
In order to develop this habit, you need to start today. Don’t wait for something to come along, just do it now and start changing your financial future.
Over time you’ll be able to tweak this system and eventually it will only take a few minutes per month.
Cash Flow Tracking
Cash flow involves tracking:
Cash (Beginning of the Period) + Total Cash (Inflows) – Total Cash (Outflows) = Cash (at the End of the Period)
Seems pretty easy. The real issue I see people running into is the outflows. It’s pretty easy to stress yourself out when it comes to keeping track of everything that your family is spending. Here’s some advice, focus on the big plan. Don’t worry about getting every single detail in the beginning, just do your best and over time you will improve.
Thankfully, nearly every bank and credit card has ways you can track your spending online. It’s pretty exciting to start seeing how your money is being spent if you haven’t done it before. It can also be daunting, but being able to see a realtime picture of where your income is going is pretty great.
It takes about the same time as tracking your net worth, and over time will simply become something you look forward to doing.
Tracking your cash flow leads right into the next habit financially successful people do…
2. Save First, Spend Second
Here’s two equations that you’ve probably never thought about, but are things you do ever day:
- Income – Spending = Savings
- Income – Savings = Spending
Which of these two equations do you think most fits your current lifestyle?
When you receive your paycheck, do you buy what you want first, or do you save, and then spend what is left over? Here’s one that might be upsetting, when you purchased your home did you buy based upon what you could afford, or did you calculate what you’d have left over after savings?
There’s a big difference between saving first and spending first and it’s all based on your mindset!
This is one of the most common threads among people who are successful with their finances. They make sure to pay themselves first. I understand that there are alot of shiny things that you’d like to buy, but if you save now, you’ll be able to spend later.
You need to make the changes now, or change your long-term goals. Otherwise, they may not be met.
3. Invest Your Money using Simple Time-Tested Principles
The first two habits require that you do something on a fairly regular basis.
This habit still requires you to mostly do nothing.
What I mean by that is, rather than following the latest stock market trend, you will mostly be investing for the long-term. Forget what the news is telling you to do and stick to your investment plan.
But I don’t have an investment plan.
Then create one!
On Fed Retirement Planning I wrote about the 7 Steps to Creating a TSP Investment Strategy. Although that article is specifically tailored to Federal Employees, you could use it and instead replace TSP with 401(k) or IRA.
The idea is that you need a plan in order to get where you’d like to go.
Here’s some basic things to remember when investing:
- Have an emergency fund in place first
- The tortoise often beats the hare
- Invest in yourself through education and business development
- Don’t follow the news everyday
- Don’t listen to Uncle Bob’s investment advice
- Consider the impact of taxes
- Understand whether your investments are trying to keep up with an index or beat it
- Analyze your performance
- Don’t pay excess fees
Some pretty basic ideas that just about everyone can follow.
So, in summary:
- Keep Track of Your Finances
- Save First, Spend Second
- Invest Your Money using Simple Time-Tested Principles
Don’t make it harder than it needs to be!
– Cooper Mitchell