Plan for a Cash Surplus!
NEW BOAT! NEW TRUCK! LOW INTEREST RATES! Sound familiar? These are all the types of things that are getting people into financial trouble these days. Toys, toys, and more toys. Don’t get me wrong, toys are great. But they are only great if you have the cashflow on a month to month basis to afford them. And that is where a lot of people fall short. They don’t have a plan for their money each month, and because of that, it seems to vaporize. The building block to becoming financially stable and increasing wealth over time is to have a plan for your money. Wealthy people did not become wealthy by accident. They made plans, and executed on those plans throughout the years. Below are a few easy steps to follow to get control of your money, and begin your journey towards financial freedom. The journey will be exactly that, so take your time, and don’t expect results to happen over night. Be patient and be intentional, and results will come.
Step #1: Spend Your Money Where You Want To!
When most people get paid, their pay cheque goes into their bank account and they start spending immediately. They swipe their debit card for coffee, they swipe it at McDonald’s, then they swipe it for diapers. They do this day in and day out for a week, decide to look at their bank account, and realize they’ve spend half of their pay cheque already and it’s only the 10th of the month. They have no idea where all their money could have gone.
Where has all your money went? That is the first question that needs answered. Before you can start building a cash surplus, you need to be aware of where your money is being spent. Start by categorizing all your expenses for the past three months. Some normal categories can be: Housing Costs, Utilities, Food, Transportation, Clothing, Health, Recreation, Debts, Other. This exercise may sound some alarm bells. If that happens, the process worked. Now make a plan for where you want to spend your money from now on so that you have control of your money. Remember, how you spend your money now will decide your future.
Step #2: Save an Emergency Fund
Once you figure out where you want to be spending your money each month, you need to save an Emergency Fund. This should be in a separate account from your regular chequing account so you can’t easily spend it. This money should be used for emergencies only. Things like new vehicle tires or a new furnace, not Big Mac’s or beer (these things should be covered in step #1). The size of your Emergency Fund is up to you, but homeowner’s should save a minimum of $3,500 and non-homeowners should save at least $1,000. Obviously homeowners have more things that could potentially go wrong, hence the larger amount.
Step #3: Pay Off Your Bad Debts, Keep Your Good Ones
Don’t ever let someone tell you that all debts are bad. As Robert Kiyosaki describes, “good debt puts money in your pocket while bad debt takes money out of your pocket.” Bad debts include things like car loans, credit cards, and primary mortgages. Good debts include things like rental mortgages, business loans, investment loans (if done properly). The problem is most people have a portfolio full of bad debts, and no good debts. Once you have your emergency fund saved, work on putting every extra dollar towards paying your bad debts, starting with the highest interest rate (excluding your primary mortgage) and working down. For example, if you were putting $300 each month towards your emergency fund, once that is saved, put that $300 as an additional payment on your car loan. Then once your car is paid off, use the $300 from the emergency fund, plus the funds from the car loan to pay off your second car loan. Before you know it, ll your debts will be paid off and you’ll be ready to move to step #4. Dave Ramsey writes about this concept all the time and he calls it the “Debt Snowball.” If you would like to read more of his money ideas, visit his website at www.daveramsey.com.
The one thing that Dave doesn’t mention, however, is leaving your good debts. If you have some of these debts that are creating cashflow each and every month, do not worry about paying them off. Use those profits to catepolt you to paying off your bad debts.
Step #4: Invest and Build Your Dream!
Now that you’ve paid off your bad debts, you need to start investing, and investing often. All of those payments you were making to debt now need to go towards investing. Talk to a few different advisors and find one you are comfortable with. Make sure they only invest in things that are inside your comfort zone. If you are risk adverse, do not put your money in high growth, international stocks; you will not sleep at night.
Next Level Tip: If you want to take things to the next level, add investing to your monthly spending budget right from the start. Only do what you can afford while you are paying off your bad debts. Even if you can only invest $25 a month at the start, it will develop a habit and will allow your money to start working for you. And plus, investing $25 a month for 3 years in a fund that pays 10% return will give you $1,087. That’s a nice little nest egg to start your investing career while you pay off your other debts!
In the end, a financial plan is exactly that, a plan. Plan’s are useless without execution. Like I mentioned at the beginning, wealthy people got to be wealthy because they made a plan, and executed on that plan year after year. This stuff is not rocket science, but is not easy either. There are a lot of outside forces that will try and knock you off of your plan, but if you want to succeed, you have to put your head down and bull rush through the noise. This is your life, live it!
Other Helpful Tips:
- Subsribe to Mint (mint.com) to help track your monthly spending
- Download your banks mobile app to check on your accounts at any time
- If you want to increase your spending, increase your income before cutting other expenditures. “4 Hour Work Week” by Tim Ferriss is a great resource for this.
- Use cash, not debit/credit cards for spending, it is much easier to track
- You only need 1 credit card! If you have more than that, cut them up! Credit cards are for unique transactions that you already have the money for. They should be paid to zero each and every month and should not be used as a loan. Credit cards are the number one way to get into financial trouble.