When it comes to finances, we have a tendency to make the situation more complicated than it is. We analyze complex investments, download sophisticated applications, listen to reports about trends in the marketplace, and complain about factors that don’t go our way.
But if we were to cut through all the noise, we’d quickly conclude that being successful with money is honestly pretty simple. At the basic level, you just need to have the appropriate building blocks in place.
The Building Blocks of Sound Personal Finance
There are thousands of different ways to save, invest, and increase your money. If you talk to 100 people, you’re apt to get 100 different and unique philosophies on how it should be used, managed, or deployed.
Some people are reckless with their money, while others hoard too much of it and never get around to enjoying it. Certain people have an impressive financial background and know how to turn a $20 bill into a $100 bill with very little effort.
At the other end of the spectrum are people who can’t seem to hang onto a $20 bill long enough to stash it for a rainy day. The point is, we’re all different.
Although the saying “different strokes for different folks” is reasonably accurate, it’s more valid to assert we all need the same foundational elements in place before we can think about tackling the finer points of managing financial resources.
Think about it like a house. A 1,500-square-foot bungalow in a small town in Mississippi and a 12,000-square-foot cliffside mansion in the Hollywood Hills may look terribly different, but they both need a foundation. Likewise, it doesn’t matter if you’re Bill Gates or Joe Shmoe, everyone needs basic financial flagstones beneath them.
If you don’t have these foundational elements in order, everything else will fall apart. The two most central foundational elements of personal finance you have to figure out are: expenses and income.
To improve your financial position, you have to adopt one or both of two basic strategies:
- Reduce your expenses, so you have more money to save, invest, and use as you please
AND / OR
- Increase your income, so you’re able to spend, save, and invest more.
If you can do both at the same time, you can increase your financial well-being and success so significantly that you may be surprised.
Three Ways to Reduce Your Expenses
We’ll start by addressing expenses because you have more control over this facet. It will require discipline and sacrifice, but reducing your expenses is little more than basic financial surgery.
Start by drawing up a budget and analyzing your expenses over at least the past several months. Figure out where all your money has been going.
Count every single dollar and assign it to a particular category. Once you have a clear breakdown of your spending, actively analyze where you could be bleeding money unnecessarily.
The truth is that you require only a few basic expenses for survival. For most of us, that consists of shelter/housing, food, clothing, basic healthcare, and (possibly) some form of reliable transportation. Everything beyond these is optional. (Notice we didn’t say evil or unnecessary … just optional.)
When you start treating extra expenses as optional, it should become easier to modulate your spending. You’ll have to analyze your budget carefully and search for the “leaks,” but if you’re trying to reduce expenses, here are three possible places to begin:
- Purge subscriptions. A $10 expense here and there isn’t going to kill you. But if you have subscriptions to Netflix, Spotify, Hulu, Disney+, Prime, meal delivery services, and premium websites, it’s entirely possible that you’re spending hundreds of dollars every month on services you don’t really use or need. Go through and purge the subscriptions you don’t use. For most people, this can be a surprisingly easy way to cut $100 in their monthly spending.
- Stop eating out. There’s nothing inherently bad about dining at a restaurant, but it’s far more expensive than the alternative. For a family of four, eating just two dinners out per week can cost as much as $400 per month (or nearly $5,000 a year). Add in the occasional lunch and breakfast, and you’re looking at more. Try cooking more meals at home, which can save you as much as 75 to 80 percent of food costs.
- Pay down debt. How much of your monthly income is committed to pay down credit cards, student loan debts, or car loans? Imagine how much more flexibility you’d enjoy if these payments disappeared. If you can tackle your debt aggressively in the short-term, you will free up significant financial resources over the long run.
Three Ways to Increase Your Income
Expenses are just one half of the picture. There will come a point at which you can no longer reduce your expenses any further.
So in addition to doing small things like purging subscriptions, eating out less, and paying down debt, you ought to focus on ways to increase your income. Here again, you have options. Here are three ideas:
- Invest what you have. One of the simplest ways to increase your income is to leverage the resources you already have in savings into income-generating investments. For example, you could purchase a rental property, hire a property management company to handle all the day-to-day operations, and generate steady monthly cash flow for months and years to come. You can learn more here.
- Negotiate an increase. Sometimes, you just have to go to your boss and negotiate a pay increase. The key is to show up prepared. Know what you’re worth and boldly ask for it. Don’t be naive about it, though. Have your facts in order. Give your boss concrete reasons why and make it clear that you want to stay.
- Add a side hustle. We’re living in the middle of one of the biggest economic booms of the past few decades. Millions of ordinary folks now have the capability to start their own businesses easily – with very little overhead or startup costs. The barriers to entry are all but non-existent in many places. Find a niche you like and add a side hustle. Even if it’s just $100 a week, that’s another $400 in monthly income for your family.
Mastering the Mindset of Money
Are there complicated technical aspects of money and wealth building? Certainly, there are. But do you have to be an amazing stock picker or investment analyst to build wealth? Absolutely not.
In reality, mindset is 90 percent of the matter. If you can master the mindset of money and control the psychological elements of saving and earning, you may dramatically improve your chances of winning with money.
We hope this article has given you some ideas about how to strengthen your financial foundation. Put them into action right away!