2 easy steps to take for financial success

2 Easy Steps to Take for Financial Success

Erik Basics, Financial Education, Thoughts of a Mastermind 4 Comments

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Welcome to the 12 Days of Personal Finance! This is day 2. In the spirit of the holiday season, and inspired by the 12 Days of Christmas, I’ve put together a series of 12 posts all dedicated to the topic of personal finance. The 1st day of personal finance was a post about what I believe to be the #1 rule of personal finance. The 2nd day of personal finance is about the 2 steps to financial success.

On the 2nd day of personal finance, my true love gave to me! 2 steps to financial success, and the #1 rule of personal finance! (and a partridge in a pear tree?)

In the 1st day of personal finance, I outlined why personal finance is personal, and provided you with a number of questions to ask yourself about your life and financial situation.

With your why in mind, now it’s time to get to work. You know what you want, and now it’s time to take action. Ideas and thoughts are worthless unless they are put in to action.

For the 2nd day of personal finance, I’m going to share with you the 2 steps to financial success: tracking your income and expenses, and why consistent learning and growth is the key to personal finance.

Step 1: Track Your Income and Expense

What gets measured gets managed – this quote exemplifies exactly what this step is all about.

Knowing where you are financially is so important to financial success.

Consider the following example: person A tracks their income and expenses every month, and person B doesn’t track their income and expenses. Person A wants to retire in 15 years, and has identified that by saving $500 a month, they will reach their goal with average market gains.

Person B also wants to retire in 15 years, but doesn’t know they need to save $500 a month, and as a result, are only putting $250 into their retirement account each month.

Person A saves $400 a month right now, but has identified that they can cut $100 out of their food spending each month and put that towards retirement. Person B spends $300 a month on random shopping expenses (which they don’t know the dollar amount), and doesn’t realize that they don’t need these random shopping expenses.

Who do you think will be successful? Person A, who tracks their financial situation? Or Person B, who doesn’t track their financial situation? I’m going to guess Person B will be disappointed at the end of the 15 year period.

income statement balance sheetHow to Track Your Income and Expense Each Month

Each month, I pull all of my transactions from my Mint account into my Income Statement Spreadsheet. I categorize my transactions and see exactly where my spending and saving rate landed during the month, and look to see if there are any trends forming.

You could download these transactions from your bank directly, you could use similar tools to Mint, or you can analyze your income and expense through your online banking application – all are acceptable.

For me, I see the importance of tracking my income and expenses by looking at my spending in various categories. I typically spend $300-400 on food and drink a month. I know this as I’ve spent $300-400 a month for the past 18 months consistently. Some months are worse than others, and in those months, I may spend closer to $500 on food and drink.

If I didn’t know how much I was spending on food in a given month, maybe I’d continue to spend that amount month over month. Now, all of a sudden I could spending $700 a month on food, or an additional $300*12 = $3600 a year on food and drink than before! If I wasn’t tracking my expenses, I wouldn’t have this mental trigger to keep my spending down on food and drink.

In day 6, I will share with you a number of tools and apps you can use to track your income and expense. Otherwise, if you aren’t already tracking your income and expense, and you can’t wait for day 6, I have a spreadsheet for download on The Mastermind Within, which you can get by putting your email into the box below.

Step 2: Be Consistent, and Look to Improve through Books, Blogs, Podcasts, etc.

prioritize and track financial goalsI’m a big advocate of consistency – working, learning, and growing a little bit each and every day on the way to your goals.

Earlier this year, I read the book, The Slight Edge, and realized how important consistency is to success.

It’s not enough to invest $100 one time and let it sit. It’s not enough to cut expenses one month, and then revert back to your previous spending habits. I can guarantee that short term success will not lead to long term success unless the short term actions are internalized and made in to long term habits.

Consider this example: would you rather receive $1 million dollars today, or would you rather take a penny, but double it every day for a month? The first day, you have 2 cents, the second day, you have 4 cents, the third day, you have 8 cents… two weeks in, you have $81.92. Well, guess what? At the end of the month, you end up with over $10 million dollars. You only started off with a penny, what happened?

Yes, you started off with a small amount, and for a long time, you didn’t have much, but 30 days later, boom, $10 million bucks – much more than $1 million!!!

This is the same concept as the power of compounding over time. If you save $10,000 a year for 30 years and achieve a 7% rate of return, you will become a millionaire. This is a mathematical fact. It’s the power of consistency and compounding at work.

Applying Consistency and Learning in Your Life

The example we just we through above can be applied to not just investing or savings, but to your knowledge base on personal finance.

I’ll be the first to admit, I’m not a personal finance expert. I have no idea the intricacies of ROTH IRAs, 403(b)s, or how 1031 exchanges work in real estate. That being said, I know that I could learn any of these things if I wanted to. There are millions of words published in text and voice out in the world and on the internet.

This 12 Days of Personal Finance series will be a great start for you, but there’s so much more out there. You can turn to books, blogs, podcasts, or videos – all of this I will cover in days 12, 10, 5, and 8, respectively.

If you want to become an expert on the stock market, take a step today. Maybe you want to build your understanding on different forms of debt – take a step today.

For you, if there is anything you want to accomplish this year, or in life, just take a step. That’s all you can do initially. No one goes from 0 to 100 in an hour or a day. But, by going from 0 to 1 to 2 to 3, you can get there over time. It’s about taking baby steps to start and as you get more comfortable, you can increase the pace – in other words, you sometimes have to slow down to go fast!

What you do today matters. What you do every day matters. Successful people are those who understand that the little choices they make matter and because of that they choose to do things that seem to make no difference at all in the act of doing them, and they do them over and over and over until the compound effect kicks in.

Conclusion

Tracking your income and expenses, and having a hunger for knowledge will get you on the path to financial success. Start with why, as outlined in the 1st day of personal finance, track your income and expenses with a spreadsheet or a tool online (I’ll cover these in day 6), and continue to learn about personal finance, investments, and building wealth!

Having these 2 steps in mind will guide you on your path to your financial goals.

And that’s that for the 2nd day of personal finance! Now you know the 2 steps which are necessary for financial success! The 3rd day will look at managing the 3 big expenses: housing, transportation, and food.

Make sure to come back Monday and the next 10 days after to continue to receive the gift of personal finance.

At the end of the 12 Days of Personal Finance, I’ll be combining all 12 days of content into a free eBook for subscribers. Make sure to subscribe now to get on the list and you won’t miss out on this amazing offer.

Until Monday,

Erik

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Comments 4

  1. Erik, I totally agree with you. I use a spreadsheet to budget/track and have for many years. I look out on a monthly basis for about 12-18 months.
    After each month end, I then adjust the budget to actual so I have a record of all expenses by categories that are meaningful to me. I know how much my wife and I spend each month and each year by expense category. Having this type of history at my fingertips then allows me to plan long term for retirement or other life changes. I don’t have to rely on retirement planning rules of thumb that you need 80% of income or can afford to withdraw 4% of your assets each year, etc. etc. I know how much we spend and then can adjust it for expected changes in our lifestyles as we get older.

    1. Post
      Author

      Nice Tom – that’s really great what you do. You really don’t need to estimate anything if you know exactly what you spend and make 🙂

  2. “What you do today matters. What you do every day matters. Successful people are those who understand that the little choices they make matter[.]”

    Quote of the week, my friend. When anyone asks me what one piece of advice I would give to someone trying to escape a financial funk, I simply say, “track expenses.” This one exercise, faithfully done day after day, is a total game-changer. You see where the leakage is coming from. You see if your spending aligns with your values. And you now have the data your functioning brain needs to make adjustments and solve your financial woes. Great stuff, Erik. Can’t wait for the remaining 10 days of personal finance.

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      Author

      Thanks Mr. Groovy 🙂 I love how self improvement feeds in to personal finance.

      Tracking expenses is the best tip!

      Looking forward to getting feedback on the next few days of PF!

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