One of the key areas of controlling your finances is to control expenses. To many, this might be a very obvious point, but in reality it is much harder to do. We all know that the less you spend the more you can save, but do we really apply that advice? How many of us can put off instant gratification so we can save?
The problem boils down to psychology. Our present selves view our future selves as complete strangers. Because of this, we tend not to take our futures too seriously. We do things and expect our future selves to fix the problem. Sound familiar Take diets and exercise. We choose to eat poorly and not exercise, we gain weight. We know we should exercise and reduce the amount we eat, we know that if we don't we will develop health problems, but we can do it later. We wholeheartedly expect that our future selves will fix the problems. The failure of this method, this thought, is that we are the future selves, and eventually (as will all people) we won't have a future self that will fix the problem.
To go back to my point, how do we control spending? The easiest way to do it is to track spending. Record every time you spend money. This sounds very tedious, but it is illuminating. Do this for one week, and you will be amazed on what you spend. Many times, we swipe our cards and not thinking about it. These purchases, the ones we do without thinking, cost us the most. The goal of this exercise is to make us conscious of our spending.
After doing this for a few weeks one will become more aware of the flow of money. This is a key point of taking control of your money. YNAB helps, because unlike other software (Quicken and Mint) you have to manually enter each transaction. Quicken and Mint automatically categorizes your transactions. This means your daily routine of analysing your finances becomes nothing more than viewing graphs and making sure your software categorized everything correctly.
One final method of controlling expenses is to use cash. Cash is finite. How hard is it for you to break a hundred dollar bill? You are more frugal when your wallet is filled with hundred dollar bills than with singles. You can visibly see your money deplete, and once it is gone you cannot spend more. If you combine this method with tracking your expenses (either using a spreadsheet, Quicken, Mint or YNAB) you will see an increase of funds within a month. My wife and I noticed an increase of $200.
Want to increase your net worth quickly? Pay off your high interest debt (credit cards, payday loans, etc...). Take that money and split it between paying off other debt and savings. Below are quotes that should help motivate you and show current state of American finances.
Wired magazine, "In a 2006 survey, 30 percent of people without a high school degree said that playing the lottery was a wealth-building strategy. ... On average, households that make less than $12,400 a year spend 5 percent of their income on lotteries."
While some may argue that this does not apply to them, the concept is still the same. Any investment, whether in stocks, forex, gambling, binary options, that promise high returns with low risk and with little investment are most likely scams. Due diligence is required when it comes to investing. Get rid of the thoughts that high rewards can come to you via "risk-free" investments with "little or no money down". Also, gambling never succeeds in the long run, only the house wins. Prudent investing equals good returns with moderate risk.
According to David Wessel of The Wall Street Journal, Americans "spend about half of their food budgets at restaurants now, compared to a third in the 1970s."
I like going out to eat. I love the idea of not having dishes to clean up afterwards. It allows me to talk with my wife and enjoy the night out, but not long ago we use to spend around $500 per month going out to eat! Imagine what I could have done with 500 dollars a month? Pay off high interest debt, invest in mutual funds, donate to charity, but I decided that eating at Cracker Barrel was better investment. I don't suggest to become an ascetic and never go out to eat, or buy lattes again, but I just suggest to cut back. We reduced our restaurant budget to 100 dollars, and with the extra $400 dollars we paid off our two credit cards.
In the 1960s, wages and salary income made up more than 50% of GDP. By 2011, it was less than 44%, as dividends, interest, and capital gains made up a growing share of the nation's income.
Who are the wealthiest individuals in the nation? I can tell you they are not wage earners, so what does that say to you? Pursuing a higher wage works out in the short term, but in an increasingly global environment wages will continue to drop. Why pay $20 per hour for an American worker while I can pay someone $5 for the same labor. Look on freelance job boards. People in other nations charge rates below the USA minimum wage for skills that would land an American a decent job, like programming. This all leads that the only way to retire wealthy is to invest, and do so constantly.
According to ConvergEx Group, "Only 58% of us are even saving for retirement in the first place. Of that group, 60% have less than $25,000 put away. ... A full 30% have less than $1,000.
This is self explanatory. The sooner you invest, the more rich you'll be later.
On a final note, don't rely on some government pension. Only you know what is best for you and your family.
