So, flash quiz: What is the number one reason most you will never build wealth?
If you said, “bad habits,” go to the head of the class.
Building wealth is a habit that relies on all the cylinders firing. Saving, investing, spending, retirement plans, estate concerns, tax minimization, proper insurance coverage, the list is long. And at the head of that list is a four letter word that offends most people: Budget.
“You’ve got to be kidding! Me? On a budget?”
No, not kidding. Money coaches are conditioned to hear this common lament, and should have the ability to address it in a collaborative way.
People with bad money habits who don’t begin at the beginning with a solid budget rarely achieve the wealth they desire. It’s likely that nobody took the time to teach you the tools of financial wellness, not in grade school, high school, college or at the dinner table. Still, you can’t blame anyone else. It’s your own behavior that will be the difference-maker in saving, investing and building successful lifetime wealth habits.
Lazy people don’t pay attention to money at all. As long there’s enough paper or plastic in their pockets to enjoy the weekend, everything is cool.
Impatient people want to jump in and mouse click into some stocks they know nothing about. They expect to cash in big and fast, but at the same time, their easy credit attitude means that spending is outpacing earnings 2:1 and their credit cards are bursting at the seams.
The road to wealth building is a long one, and the first step is the most important in the journey: creating a personal or family budget. If you’ve never put yourself or your family on a budget, other than the reality-imposed budget that a stretched-too-thin paycheck demands, you will find it to be liberating rather than encumbering.
After only thirty days you will feel more in charge, controlling your financial life rather than it controlling you. You will begin to see how your day-to-day discipline reaps significant long term rewards.
But how do you start budgeting cold turkey after having no savings or spending plan at all? By following this simple two step plan you can help your clients finally get a grip on their finances.
A budget is essentially a two step solution
Step 1) Know where you spend your money by categorizing and recording each cent you spend on a spreadsheet.
Create an Excel spreadsheet, or a paper ledger if you prefer, whatever works for you. For thirty days, don’t change a thing you are doing with your money. Simply record it. Record every penny you earn and every penny you spend, without attempting to change your habits just yet.
Make a section for incoming money, your paycheck and any other income you may receive on a regular monthly basis, and a section for outgoing money, your monthly fixed expenses and your daily spends. This is where you want to be a bit anal. Record EVERY cent you spend. You won’t do this forever. You are still in the analysis stage.
At the end of the thirty days, analyze what came in and what went out. Your analysis should help you determine why it may often feel like there is more month than money.
You’re looking for the fat. Which Fixed and Floating expenses can be reduced to bring your overall expenses in line with your income so you can easily pay your Forced expenses and create more opportunities to save and invest, your First Expenses.
You are looking for more opportunities to pay yourself first. You should already be participating in your company’s 401(k), even if they do not offer a matching contribution, but by cutting the fat in your expense columns creates more opportunities to do after-tax savings and investing. This is how you accelerate your rate of growth and wealth building.
Step 2) Modify poor spending and savings habits as you see them develop.
Make commitments to yourself and set spending limits. As with any good diet, you need to be relentless in cutting fat, and a budget diet is just as hard.
Be prepared to cut both Fixed and Floating expenses.
Fixed expenses like your mortgage, utilities, car payments, groceries, all can be cut, or even eliminated. If you are a couple that no longer needs two cars, cut! If you live in a bigger home than you need, cut! Fixed does not mean Forever. Fixed expenses can be cut.
Floating Expenses may be the area that you can really get aggressive in your fat frying, of course they are the ones you will want to trim the least. This is where the fun in life comes from: Dining out, movies, concerts, vacations, and the mother of all floaters: shopping!
This is where you have to tame your weaknesses. The daily $5 coffee, credit card fashion splurges, too many nights eating out. It’s time to ask yourself, “what can I live without?” As much as you think you will miss all this good stuff, you will be shocked at how much you can cut that you may never even miss.
Tame the credit beast
Take the cards out of your wallet. Yes, reward points are great, but are they just the rationalization to overspend? An $100 annual card fee and a rate of 18% or more is not smart shopping, unless two conditions are met: The rewards are wonderful and you pay off the card every month.
If the reward has seduced you but you cannot pay the balance each month, start using debit cards, or go old school and carry some cash.
Refinance aggressively. If you rely on financing for big important things, like your home, carry the debt at the cheapest price and best terms possible. Refinance old mortgages and credit lines to new lower rates, before rates climb too high to make it a profitable move.
Okay, that wasn’t hard, right?
No, it was hard. After a lifetime of bad savings and spending habits it’s hard work to reign your clients in and help them modify their behavior. Delayed gratification is hard, but commit to a short while of living like no one else will so that you can live like no one else can in the future. And have your clients reward themselves for understanding the important first step of living within the confines of a budget.