Whether you realize it or not, there are numerous few factors that separate the rich from the poor. These include opportunity, information, discipline, and habits. We’d all like to have more money, and the way we approach each of these factors plays a major role in our financial success. During your lifetime, you must have come across a good number of money tips. However, there are likely still some groundbreaking tips you have yet to put into action and here are seven that will take your finances to the next level!
Tip #1: Set A Target Savings Rate, Not A Target Savings Amount
One of the surest ways to always have money is by saving. Most of us know this by now however, in the quest to be financially free, you will need to have a better understanding of different saving patterns. To see your finances grow via savings, it is advisable to set a target savings rate, and not a target savings amount. Here’s why. Let’s say you earn $2,000 per month, and you set a target savings amount of $300 each month, it means you will have $3,600 saved at the end of 12 months.
This is good, but as your earnings increase, so will your expenses. You could get a better car, send your kids to better schools, buy a bigger house, etc. As your earnings and expenses go up, do you still think it’s wise to keep saving a fixed amount of $300 each month? It is much better to set a target savings rate, and not a foxed amount. What this means is that instead of saving a fixed amount of money monthly, you should have a fixed percentage from your income which should be put away for savings.
Ten percent is the standard benchmark for saving, although more aggressive savers aim to save up to 20% of their earnings. For the person that earns $2,000 per month, a 10% savings rate would mean putting away $200 each month. That’s $2,400 saved per year. Yes, it’s lower than the $300 in savings mentioned earlier, but what if the person’s earnings increase? Let’s say you begin to earn $4,000 per month, and maintain a monthly savings rate of 10%, it means you’ll start saving $400 per month or $4,800 per year. As your earnings grow, you would find yourself saving more when you have a fixed savings rate, as opposed to a fixed savings amount.
Tip #2: Be Aligned To Your Partner’s Financial Goals And Habits
No two people are the same, especially couples who live together. If you have a partner, then being aligned to, and understanding their financial goals and habits is very important for monetary growth. Your backgrounds may be different, and certain aspects of personal finance that may seem strange to you may not feel the same to your partner. He or she may have been born and raised in a wealthy home and you were not. Your partner may be the extravagant type, while you’re the type that spends only on necessities.
Without a proper understanding of your partner’s financial habits and goals, it would be very difficult moving forward as a couple. Both of you need to sit down and discuss money matters. These include asking him or her about their 5-year plan, their estimated time for purchasing a home, how much they’d be willing to save per month, how much they’d be willing to invest out of their savings etc. These plans need to be written down so it can serve as a monthly reminder. You can have meetings once or twice a month to discuss all your financial concerns as a couple.
Besides your partner’s financial goals, you also need to observe your partner’s financial habits, as this is an important factor that could be the difference between being wealthy and living in poverty. As I mentioned earlier, your partner may be the extravagant type who likes to spend on liabilities rather than assets. If this is the case, then you need to find a way to explain to him or her the reasons why such habits would hurt your financial future. You also need to do this in a loving way, so your partner can absorb the message positively.
Tip #3: Automate All Savings And Bills
There are so many things you would like to do with your money, and some are way less important than others. It’s easy to draw up a savings plan, but not so easy to stick to it. The temptation to spend your money on other irrelevant things that weren’t originally part of your financial plans can be very high. For this reason, automating your savings is a wise choice.
Automating your savings makes it a lot easier for you to pay yourself first. When a portion of your money is automated, you save time in spreading it into certain accounts and you would be spared of the temptation to spend it on something else. Once your monthly salary is paid into your checking account, the percentage you have set for savings is immediately diverted towards your emergency fund or savings account in line with a pre-determined schedule. If you’re self-employed, you can also automate your savings. As long as you have set your savings rate and not amount, then you’re good to go.
You should also automate your monthly bills. The truth is, spending your money on other things doesn’t make the bills go away, they will still be there! When your savings and bills are automatically diverted to the relevant accounts, you can be at rest, knowing the cash left in your checking account is “truly” yours.
Tip #4: Create A Future Expenditure Plan
As the years pass, the things you spend your money on will change. Your kids may not be in college yet, but in the next couple of years they might be. You may also have a car which you wouldn’t want to use for more than a specific number of years, and you may be hoping to get a new one at the expiration of that time period. These are just a few examples of future expenditures, but simply “hoping” to pay for these things when the time comes isn’t enough. You need to create a solid plan ahead of time and stick to it.
The first step to creating a future expenditure plan is to actually list out the things you expect to pay for in the near future. It could be a house, a car, college tuition, household appliances etc. Once these are listed out, the next step would be to determine how much each of them will cost you. Knowing this would help you draw up the right plan for these upcoming expenses.
Of course, there is no better way to plan for a future expense than saving for it. Dedicate a portion of your earnings towards your future goals and be strict about it. Keep in mind that your projected expenses and savings plans have to be realistic. You can’t be earning $2,000 per month and hope to buy a mansion worth $4,000,000 in the next two years.
Tip #5: Increase Your Annual Expenses By Half Of Your Annual Raise Amount
Isn’t it funny that most people who get a raise in pay never see its impact in your bank account? Why do you think this is so? Well, it’s simple, the second most people receive a raise, they bump up their daily spending, mostly on things that raise their standard of living. This can be termed “lifestyle creep” or “lifestyle inflation”. In this case, the things that used to seem like luxuries to you are now perceived as necessities, all thanks to a salary raise.
The temptation to start visiting fancier restaurants, buying more expensive clothes etc. will arise when you start earning more. Rightfully so, you deserve a little treat for all your hard work, but there’s a smarter way to go about it and that’s by increasing your annual expenses only by half of your annual raise amount.
Here’s what I mean. Let’s say you earn $3,000 per month or $36,000 per year and you get a $300 raise, which would increase your annual salary to $39,600 per year. This means you’re earning an extra $3,600 per year. More money to spend right? Well, yes and no! Instead of spending the entire $3,600 extra, it would be wiser to only increase your annual expenses by half of it ($1,800) and save and invest the other half $1,800.
By doing this, you would notice significant changes in your standard of living, as well as improvements in your bank statements. Whereas if you spend it all, you would only notice a change in your standard and of living, but nothing as far as savings are concerned.
Tip #6: Assess Your Routine Expenses For The Value They Bring To Your Life
We spend money on several things, and they can be classified into things that add real value to our lives and things that don’t. Besides our major expenses, there are also routine expenses. These are the things we spend money on every day, week, or month. The big question is, are these things adding any real value to our lives? If they are, what amount of value are they adding, and is it worth the cost? Upon asking yourself these questions, you should begin to assess all your routine expenses and determine what sort of value they add to your life.
Illicit drug use for instance is a habit that adds no value to one’s life, yet it’s expensive. Alcohol abuse can fall within the same bracket. There are other unprofitable routine expenses that take from you a lot more than they give, and you need to dump those habits as fast as possible. These include spending too much time and money at bars, malls, etc. This is not to say you shouldn’t have some healthy fun, because you should. But it should be done in moderation, preferably as a form of reward for reaching a milestone or set target.
Routine expenses that can add real value to your life include the cost of eating healthy, regular workouts at the gym, going to seminars, buying educational books, re-investing in stock etc. If your routine expenses don’t add any value to your life in the short or long term, then you are simply wasting your money!
Tip #7: Get A Mentor That Earns 10X Your Income
It’s easy for one to go astray when there is no one to guide them along the way. This is why having a mentor is so important. But not just anyone should act as your mentor. If it’s your wish to become wealthy, then your mentor shouldn’t be someone who earns the same as you. On the contrary, your mentor should be someone who earns far more than you do.
If you’re currently making $4,000 per month, then your mentor should be someone who earns $40,000 per month. That’s 10 times what you earn. Trust me, there’s a reason why he or she earns so much, it means there are things they are doing right. You need to study their ways, processes, and habits of making money and see how you can infuse it into your own business, work, and lifestyle.
It would be best you pick a mentor who is in the same line of business as you, so you can grasp their ways faster. If you’re into fitness, then be mentored by a successful fitness trainer. If you don’t know one personally, then you can follow one on social media and subscribe to their YouTube channels to keep receiving their content. You should also buy their books and guides. Doing so will streamline your learning and overall wealth progression!