Are you earning a decent income but still feel like you aren’t getting ahead? You are not alone. It is surprisingly common to find people making two, three, or even four hundred thousand dollars a year who are still broke because they do not manage their finances properly.
Whether you make $10,000 or $10 million a year, taking a systematic approach to budgeting is the most important aspect of personal finance.
Here is a simple strategy to manage your money, run your finances like a business, and build a better future.
1. Find Your “Why”
Before opening a spreadsheet, you must understand your reasoning for wanting to save money. Simply saying “I want to save money” is often too vague to keep you motivated. You need to dig deeper to find the drive to reach your goals.
Your “why” might be:
• Saving for a wedding.
• Funding a year-long trip around the world.
• Retiring early at age 35, 45, or 50, rather than the average retirement age of 63.
2. Run Yourself Like a Business
A crucial mindset shift is to view your personal finances as if you are running a business. A business cannot be profitable without writing down expenses and tracking income.
However, 90% of people try to run the numbers in their heads. They guess they can afford a purchase because of their monthly salary, but without writing it down, they often end up in a financial hole. To avoid this, you should utilize two specific financial sheets.
The Personal Cash Flow Statement (Monthly)
This statement tracks money coming in versus money going out.
• Income: List every source of money coming into your possession, such as salary, pensions, social security, or dividend payments.
◦ Pro Tip: To smooth out your income tracking, take your total annual salary, divide it by 365, and multiply it by the number of days in the current month.
• Expenses: Analyze where your money is going. Many people have “holes in their boat”—expenses they don’t even realize they have, like an old subscription they signed up for years ago and forgot about.
Your goal is to have a positive number at the end of the calculation. You want a budget surplus (more income than expenses), unlike the federal government, which frequently runs a budget deficit. You don’t have to live in a cardboard box to save money, but you should try to get your surplus as high as possible without sacrificing your quality of life.
The Personal Balance Sheet (Net Worth)
While the cash flow statement is monthly maintenance, the balance sheet tracks your wealth over time. This can actually be fun and motivating to update on the 1st of every month.
• Assets: List everything you own of value, such as cash in bank accounts and investments.
• Liabilities: List everything you owe, such as student loans, car payments, mortgages, and credit card debt.
• Net Worth: Subtract your liabilities from your assets.
3. Confronting Reality
Many people avoid creating a balance sheet because of the psychology of debt. They know they have student loans or car payments and are afraid to see a negative number.
However, you must confront reality to fix the problem. By tracking this monthly, you can see a graph of your progress. Even if you start in the red, watching that line increase over time is incredibly motivating. It helps you hold yourself accountable to goals, such as saving an extra $200 a month or $8,000 by the end of the year.
Watch the Full Video
For a visual guide on how to set these spreadsheets up and to see the templates mentioned, watch the full video by Nate O’Brien below:
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