In my last article I gave you the assignment to do a financial “weigh-in” to begin to measure where you are so that you can manage your money through tracking your monthly cash flow—how much money comes into your household and how much goes out.
“Managing money usually requires more skill than making it.” —Roy L. Smith
If you followed through with this assignment you have a clearer picture of your current spending habits and thus what your true priorities have been. Have your spending habits been in alignment with the kind of lifestyle you have described in your “life vision,” and with the things that are truly important to you? How would you prioritize your cash flow differently to reach your lifestyle goals and increase your prosperity?
“That which each of us calls our ‘necessary expenses’ will always grow equal to our income unless we protest to the contrary.” —George Clason, author of a must-read book to achieve financial success, The Richest Man in Babylon.
Our society is set up to encourage consumer spending. You may be watching TV when a commercial comes on—and immediately, you think you need something that five minutes before was completely unimportant. Or you drive down the street and smell the delicious aroma of honey-roasted ribs, and suddenly, they are a priority.
Unless you know your priorities, have set up goals and a plan to reach those goals, and have a system of checking in periodically to see if you’re on track, when you are confronted with those enticing and brilliantly designed marketing campaigns to get you to spend your money, you are likely to succumb.
This is exactly why most people live on a financial treadmill. Typically, the faster they run, the more they earn, and the faster the treadmill goes, the more they spend. You’ve all heard the saying: “It isn’t how much you make, it is how you spend it that counts.” In my financial coaching experience, I’ve found this to be true.
Here’s an example of how that works: You make more money so you buy a more expensive car. You believe you now have the cash flow to support the higher monthly payments, higher registration costs, higher fuel costs, higher insurance premiums, and higher maintenance and repair costs. All of this requires you to make more money, which requires you to pay higher taxes, so you must make even more money—and the cycle continues.
Is it OK to have a newer, more expensive car? That depends on your priorities. For some people, having their dream car is a priority when it comes to what truly makes them feel prosperous. If you use your creativity to come up with a way to make more money more efficiently so you can have your dream car, then bravo for you! Set a goal to pay for it with cash.
It is amazing how priorities change when you decide you will no longer cave into your desires, no longer succumb to sales and gimmicks that give you instant gratification but damage your financial condition for years to come. You will soon learn how important certain items are to you, and find creative ways to buy those items that qualify as priorities in a better, less expensive way.
If building up your savings account so you have money to spend on singing opportunities that come your way is a priority, then set a savings goal amount, establish a high-yield savings account (check out these two great website resources: www.ingdirect.com and hbscdirect.com), and set up automatic monthly deposits. Begin with a small amount, but always set an amount that challenges you.
Most of the time it is the small “impulse” purchases we make that lead to the big problems. When we don’t have cash flow goals in place it becomes very easy to justify small purchases, such as eating out, buying that expensive shampoo, getting that new MP3 player, filling your closet with shoes and clothes, or going to the movies once per week.
We are creatures with desires. Desires are good! Those desires motivate us to create and to succeed—but at the same time, we need to set priorities so we can get on the pathway that will lead us to the goals that create prosperity in our lives. If having a load of debt weighs you down, then having a plan to become completely debt-free will increase your enjoyment of life.
Tracking your finances lets you know where you are and helps you see your progress, which provides positive reinforcement to stay on track.
I have one client couple that has an income of around $3,950 per month. When they started coaching with me they had no savings, liabilities of $123,000, and a net worth of $109,852. By setting cash-flow goals then tracking their cash flow on a biweely basis to keep them on track, in a period of just three years they reduced their living expenses to only $2,000 per month, paid down their liabilities by $74,575 with only their mortgage left to finish paying off (which, if they stay on track, will take them only another 2.5 years), put $13,042 into savings, and increased their net worth by $90,434.
This couple did all of this while their income actually went down because the wife had a baby and chose to reduce the amount she worked. They reported to me that their level of happiness increased exponentially during the same period. The two are in their mid-20s and, if they follow their current financial plan, could easily be millionaires and retired by the time they’re in their mid-30s. Think of the time they will get to spend with their children.
If you followed through with creating a “life vision” statement, you are clear about what your priorities are. By tracking your cash flow, observing your spending habits, and setting up goals that are in alignment with your priorities, you can begin to drive a wedge between how much you make and how much you spend. You can develop new spending habits that will ultimately create prosperity in your life.
From now on, whenever you buy anything consider “opportunity costs.” In other words, if you buy that meal at the fast food restaurant, how will it affect your ability to reach your goal of putting $100 into your savings account every month, $100 that would give you the ability to take advantage of singing opportunities when they come your way? What will it cost you in terms of paying off your credit cards or mortgage early, which would eventually free up your time? How will it affect your ability to invest in your education to make your services more valuable, which would put you in a better position to charge more for your services?
Set target cash-flow goals in any of the areas in which you see you are overspending, such as eating out, entertainment, hair-care, fixing up the house, etc. For instance, if you normally spend $300 a month eating out, set a target cash-flow goal to reduce that to $100 a month. You can allocate $100 of the money you would have spent eating out towards your savings, and $100 towards rapid debt reduction, if those are your priorities.
Check at least twice a month to see if you are on target with your goals. If your goal is to spend only $100 per month eating out, you’ll have $50 for the first half of the month and $50 for the second half of the month. On the 15th you can add up how much you’ve spent to see if you’re on target. You could use an envelope method of spending where you put $100 in an envelope for eating out during the month. When it is gone—no more eating out.
Have fun finding creative ways to live on less money. The client couple I told you about earlier found great pleasure in cutting back their phone bill from more than $100 a month to only $25 a month while enjoying even better quality in their phone service.
Let’s say you’ve done everything you can think of to cut back on your expenses, live very frugally, but haven’t been able to reduce those expenses substantially. In the next article I’ll discuss other ways you may not have thought to try.
Assignment: Keep tracking your cash flow and begin observing your spending habits. Set target cash-flow goals to bring your spending habits into alignment with your priorities.
