George S. Patton once said, “A good plan violently executed now is better than a perfect plan executed next week”. This holds true to the world of financial planning and too many people delay starting a plan to get themselves to a comfortable financial position. One of the first steps to take control of your finances is to start saving more than you spend. Whether you have a negative or positive net cash flow, the benefits of a financial plan are worth the effort. Even if you have a positive cash flow each month, what about your net worth which includes outstanding debt that you are paying interest on?
Living within your financial situation
What exactly does that mean? Why is it so hard to do? How can we make it a habit? Living within your means, or financial situation, is a simple concept: save more than you spend. It doesn’t mean clipping coupons or starving yourself of good food to save a buck or two. The problem is escalated with accessibility of credit cards, cash advances, and loans. Spending can get out of control in a hurry and all the sudden you can’t get your head above water with your debts. When you spend more than you make, you must create debt. Even though debit is money owed, think of it as spending your future earnings. After all, if you can’t pay for something you purchase today, you must use your future earnings to pay it off. This can be a financial setback and snowball out of control if you don’t first start with a savings plan.
A few thoughts on living within your financial situation
- People feel the need to compare themselves to friends, neighbors, or people that appear to have money. Humans are naturally competitive but involving financial decisions with competition can be a recipe for disaster. You should compare yourself to your own benchmark. Your benchmark should be your current financial life plus a written financial plan. If you have a plan or even thinking about one, you are probably already ahead of who you were comparing yourself to.
- Impulse buying. In today’s world, ads to your favorite stores are everywhere. Items that you have searched for recently, items on sale, free shipping, discounts. Companies know how to make consumers spend money. Here’s a tip: All those email subscriptions you signed up for that tell you about great sales, discounted items, or coupons…unsubscribe to them. If you don’t see it, you’ll never know it was there.
- Think your tax return is just free money? Nope, it’s money that you earned in the previous year. Many people feel like a tax return is bonus money and don’t feel bad about blowing it on a costly material item. Use this money to your advantage and see how it can fit inside your financial plan to reach goals you have. Something to think about: If you are waiting for your tax return money to buy something, then you probably realistically can’t afford paying for the item.
- Put your human capital to work and earn more. We work every day to earn more income. The trouble is, most people increase spending when their income increases. If you earn more or get a raise, save a larger percentage of income. You can still increase your savings percentage and your lifestyle.
- Not making financial decisions is a decision. If you don’t understand your own finances or learn how to improve them, you will continue to make unhealthy financial decisions. Financial literacy is something we can all improve on to help us make better decisions financially.
- The need for immediate gratification. We invest hours of time planning a vacation, researching hotels, flights, or locations to find the right deal. When you have created savings from your financial plan and want to treat yourself to a luxury item, don’t feel the need to buy it right now. Spend some time researching where to buy it and usually it can be bought at a discounted price during a holiday sale event or from an online retailer.
- BONUS: Spend less on overpriced material items. Use some of your extra savings on experiences over material items. You probably don’t remember many costly material items you had to have in your 20s, but I bet you remember the trips, vacations, concerts, etc.
Many people think its impossible to save for retirement while also saving for short-term goals and paying down debts. It only feels impossible when a plan has yet to be developed. An organized plan is a road map on how your money will flow into each spending/saving category. When you build a budget, and open the hood to your financial engine, it becomes easier to plan. Surprisingly, it will be easier to take vacations, go out to eat, travel, etc. when you budget. When you have an implemented financial plan, it will cut out unnecessary material spending and you can add experiences that now fall into your budget. It just takes smarter financial decisions along the way. Let us know if you need a boost to your financial plan.