I don't know about you, but I do not want to work for the rest of my life. Today I read a statistic that half of Americans do not have any money saved for retirement. We've all heard the excuse that someone doesn't make enough money to cover their expenses so they are not able to save any. In some cases, this might be true but saving money is not just about how much money you make. We can see this in the stories of lottery winners that go bankrupt. They did not develop financial habits that would set them up for success for the rest of their life, instead they did just the opposite and spent all the money. Another example is professional athletes. Upon retirement, many of them are unable to change their habits and eventually lose it all, we heard about it all too much.
To me, not putting any income into savings/investments is like treading water financially. Basically working to live and living to work. I know some people love what they do and thinking about working late into their 60's does not bother them but for me, not long after working full time, I knew that I needed to be smart with my money if I wanted to stop working at a decent age. Retirement is not the only reason to make a budget, financial stress is also one of the main causes of divorce and other major problems. With this in mind, I started to think about how I was using my money and how I could make small improvements in my habits that would lead to huge financial options down the road.
Cash Flow vs. Profit
Cash flow is your income, Profit is your income minus your expenses. This is an important distinction to make. One thing everyone should do is go online and fill out a budget sheet that adds and organizes all of your expenses and debts throughout each month. Just by tracking your spending for a month, it can lead you to spend less because you become more aware of where your money is going instead of juts putting everything on the card without a thought.
Fixed vs Variable expenses
Fixed expenses are expenses that don't change from month to month (Rent/mortgage, insurance, cell phone, utilities, car payment, etc.) These expenses are normally not as easily decreased, an example would be a downsize/downgrade on your house or car to something more affordable.
Variable Expenses are expenses that change from month to month (groceries, entertainment, gas, etc.) This is where we can all take a look at what we are spending money on every month and try to find things to eliminate or decrease the cost of.
Once you complete the above and find out how much discretionary income (profit) you will have left over every month, you can move this money into places you are prioritizing. To me, the priority looks like this but could be modified for your needs:
1. Build an emergency fund (piece of mind fund)
Layoffs, medical emergencies, car problems can happen, the amount of the fund can vary depending on you but I would recommend at least one or two thousand dollars.
2. Aggressively pay off debt
Rather than making the minimum payments required every month, this is the step to get the debt out of the way which will save money on interest and get this profit decreasing cash flow out of the way. Once you pay this off, your discretionary income will increase each month by the amount you were paying prior!
3. Save and/or Invest for growth, income, and/or future use
This could be stocks, bonds, cryptos, real estate, or just sitting it in your bank savings account. I don't recommend the last option but knowing what to invest in is whole different topic.
The first step to solving a problem is admitting a mistake
Making progress in your budget might take some time but if you do make an effort to think about your budget and your habits on a monthly basis, you can make huge changes in your financial situation and future.
What are some ways you try to earn or save some extra cash?