What is the single greatest predictor of building long-term wealth? Income.
Check out the income calculator here and see where you land.
What are you doing today to build your earning capacity?
It could be an investment, education, training, side hustle, or earning an additional certification.
Whatever it is, keep reaching.
Knowing where to start is difficult, especially when it comes to changing your relationship with money. Alright, maybe you intuitively understand your spending is a little out of control, perhaps you are only just starting to pay attention to your savings, or maybe a friend disclosed how much they have stashed away for retirement (and it is a lot higher than yours). Any of these scenarios might lead you to dig a little deeper into this whole personal finance thing. So now that your interest is peaked, where do you begin?
For anyone new to the world of personal finance, I always suggest coming up with a vision of where you want to be. Naturally, that starts with an assessment of where you are today. The first step in understanding where you are is to list out all of your checking, savings, investment, and retirement accounts.
Below is a list of accounts that you can print out. Fill out all of the relevant accounts with their individual balances. If you only have one account, do not panic, this is only the beginning.
Now that you have all of your accounts and balances listed out it is time to assess where you stand. Let’s take a look at your Total Balance. How are you doing? Well, that depends on how much you earn throughout the year (your total taxable income). If you earn more then you should have more saved and if you earn less then you need to have less saved. This is because the metric for savings is a ratio of income to savings, or what I like to call your Flash Savings Number (Flash Savings Number = Total Savings/Total Taxable Income). This ratio gives you a quick view into your financial savings health. And a great rule of thumb is to have 2-3X your salary saved by the time you are 30 years old, or a Flash Savings Number of 2-3.
Below is a list if salaries with a recommended corresponding savings number ranging from two to three.
There are two types of readers at this point. One is breathing a sign of relief and the other 99% are screaming Holy Shit! If you are in the group with the anxiety attack setting in, do not worry. You can now leverage the fact that you know you are behind on your savings to insert positive habit changes into your financial life. With persistence, you will be able to turn your finances around in a matter of months.
Whether you are hitting your total recommended savings or not, now is a perfect time to come up with some short-term and long-term goals. By creating this list of goals, you will give yourself a metric to judge performance and, from time to time, you can look at back at your progress. Fill out your goals in the chart below (seriously, get out a pen and write them down – don’t just think about them).
Now that you have completed your financial self-assessment, evaluated your savings, and set short-term and long-term goals it is time to get to work. But what are the next steps? Over the next couple of articles, we will investigate how to create a budget, which will allow you to pinpoint areas of financial strengths and weaknesses. After evaluating your budget, we will create an automatic money flow system that will allow you so save money while you sleep.
For now, you are at the starting line. Knowing where you currently stand will give you the visibility to determine exactly where you want to go.
For some people, the prospect of turning around their finances is absolutely terrifying. The task seems too big, too difficult, or too complex. And taken as a whole, they are right. It can seem quite intimidating. But the debt eliminator, the cash stasher, and the investment accumulator all know that success comes by breaking down large goals into achievable steps.
Writers start out with the novel in mind, but they break down each book into chapters. Those chapters are subdivided into shorter stories, and the writer begins by focusing on specific scenes within the chapter. Over time, the writer has stacks of short stories on their desk that they later weave into a story. Eventually, a manuscript is created, and with careful editing, a book is born.
Your journey starts with one dollar. As the writer of your future, focus on improving one scene, or area of your finances that needs work – savings account, credit card loan, car note, investment account – the choice is yours. Concentrate on fixing that one issue. When that task is complete, move onto the next area of improvement. Over time, you will accumulate small wins that will begin to shape the story of your financial success. One chapter will lead to another and, with professional advice and refinement, another success story will have been written.
Focus on one dollar at a time. Your story is waiting on you.
Engineering financial success is the best way to get rich. Millennials need to learn this formula. The problem is that it runs dangerously juxtaposed to the ingrained social values of consumption and hyper spending. Raised in a world where having the latest phone, car, or clothes is the proverbial choice, it comes as no surprise that savings and delayed gratification are becoming extinct concepts. And why have it any other way? Millennials were raised during a time when having the latest and greatest toys and taking expense vacations was normal. But times have changed. The key to getting financial ahead is to realize that, as a generation, Millennials are economically behind their parents. So how do you catch up? The answer is by what I like to call – socioeconomic downsizing.
Millionaires through this blog have spouted tidbits of wisdom on how to save, where to spend, how to invest, and the freedom in financial savings. The quickest way to get rich, as Chris Sacca shared earlier, is to live well below your means. This choice, to actively live below your purchasing power, or to socioeconomically downsize, is the key to getting rich.
By definition, socioeconomically downsizing is the active choice to live one or more rungs lower on the economic ladder than your current incomes allows. Let’s look at an example. Jane and Bob, a happily married couple from Dallas, Texas, each earn $50,000. With a combined total household income of $100,000, they are in the top 28% of household incomes. They have two choices, to live high on the hog and spend like they are making $100,000 a year (which they are) or they can choose to socioeconomically downsize and only live on $50,000, or just Jane’s salary. With this choice comes a major lifestyle change in the amount they can spend on rent, food, transportation, and fun. This choice to downsize completely changes their day-to-day life.
Instead of living in the nicest part of town, paying a monthly rent of $1,100 (or roughly 20% of the monthly take home pay) the couple will now pay $580 – if they choose to downsize. Instead of spending $600 per month on new cars, Jane and Bob will now pay $200 a month – if they choose to downsize. Instead of taking two ski vacations this year, they will stay in town and enjoy a staycation – if they choose to downsize.
So why would anyone choose this masochistic path?
Because this choice will allow Bob to save roughly $30,000 per year (his after-tax income). Over time this will allow the couple to accumulate roughly $150,000 in savings in just over five years. Now instead of living “within their means” for five years, with the conscious choice to economically downsize, they will have accumulated 1.5X their household income in savings. Put another way, Jane and Bob have saved more in 5 years than the average 50-year-old.
Once the initial curtailment of spending is engrained into their daily habits, Jane and Bob will become remarkably acclimated. And as the savings for retirement, a rainy day fund, and an emergency fund are accumulated, Jane and Bob can start the process of looking for their dream house, a new car, or start savings for their future child’s college tuition. They have already put in the sacrifice early to accumulate their base savings quickly and can take enjoyment in watching their investments grow for the rest of their lives. For them, the hard part will already be over. Of course, all of these wonderful results only come about if they choose to downsize.
Be Jane and Bob. Socioeconomic downsizing is the quickest way to get rich and ensure the future you want. Fight the urge to spend and downsize your tastes for now so that in the future you can do as you please.
Make this year different. Instead of joining a new gym, starting the ephemeral diet, or making false promises to yourself, decide to live with intent.
Think before you act. Question your purchases. Understand the investment completely.
Over the next several months, begin to observe your surroundings with a watchful eye. Live in the present and make yourself live with purpose. Make 2017 your year.