Many people I talk with earn a high wage or business income but if they quit working, the income quits too and soon (in a matter of a couple weeks for many) they are broke! You saw all the stories during the last recession – even if just one of a two earner family gets laid off and they’re in default on that big mortgage.
Most, like me, were never taught how to become wealthy. Instead we were instructed to go to school and get a good job and keep our nose to the grindstone for 30 or 40 years and we’d be fine in old age.
First, We Have to Figure Out the Rules of the Money Game…
Sometime during that 30 or 40 year career, the rules changed. In the 1980s, just as we were starting to build families and careers, the corporate raiders looted the pension plans and we were told to “do it yourself” with a 401k or IRA. The stock brokers and wall street bank saw this as an opportunity to skim millions and billions of our hard earned income and savings as we wandered the investor terrain all alone with no guide.
Some of us figured it out (eventually), most barely had time to do the work employers piled on (productivity increases – yeah!) and see our kids at night after the daycare center closed.
Learning the ins-and-outs of asset classes, diversification and sector rotation? Snoozvile!
Am I Just Weird? Probably.
But, for some strange reason I enjoyed learning about business and finance – I think I started reading Forbes while still in high school. In the early 1980s, when the IRA was introduced, I opened my first investment account. But then I discovered that, unlike a savings account, I had to “make it grow” by picking investments – mostly Mutual Funds at first.
Over the years I made a study of it mostly through the school of hard knocks. In fact, I keep the worthless stock certificate (back then you got an actual certificate showing the number of shares you owned) of my first stock purchase to remind me of the lessons learned.
So here’s my take on what high earners (or anyone) does if they want to be truly wealthy; they:
- Set Long-Term Goals
- Using the SMARTER system
- Set Short-Term Goals (Milestones)
- Track (and Audit) Expenses
- Develop and Follow a Spending Plan (aka budget)
- Automate Finances
- Savings and Spending
- Review and Revise Progress and Plans
All six are necessary to become (and remain) wealthy.
We Can Play it SMARTER!
You’ve probably heard of the SMART goal: Specific, Measurable, Achievable, Relevant and Time-bound (credited to Peter Drucker). But let’s add two more: Evaluated and Reviewed to get a SMARTER goal.
One reason many people have a harder time setting and achieving their goal to retire financially free is that they don’t use the SMARTER system. You need a specific number, that’s relevant to your lifestyle, and you must set a deadline and check your progress often. I went into more detail on how to do that in the “What’s Your Magic Number” post (click on title to read it).
If your long-term goal is to be wealthy (or what I often call financially free), you’ll need to define what wealthy is to you. My favorite is:
“Your passive income from invested assets equals or exceeds your living expenses.”
Milestones should be what you can realistically accomplish in the next 6 – 12 months to move closer to the long-term goal this year. Maybe you want to focus on increasing your net income, decreasing expenses or both – set some reasonable goals and work toward them.
Let’s Do a Little Math –
That’s a SMARTER goal – it has a specific outcome (your income will rise to $52,800) and a date, 12 months from now.
Now brainstorm ways to earn more money: get your employer to pay you more, do some consulting or freelancing, increase the interest and dividends from your savings and investments, learn a new marketable skill and start a side business, you get it?
Pick one or two that seem most doable and make a plan to implement them. Take the first action immediately after deciding on what you want to do. That gets you moving towards your goal and makes it WAAAAY more likely you’ll accomplish it.
Which Way Did That Dollar Go?
You’ll only know how much progress you’re making if you track your income and spending. You can do that with just a pen and journal, a computer program like Quicken, an online service like PersonalCapital.com or an app like Mint.com.
However you track (probably a combination of 2 or more methods), schedule time to record and review your spending and compare it to your budget. Many people coordinate their tracking, banking and budget review with their pay days (or the weekend after).
You Knew It Would Crop Up Eventually – That Nasty Word: BUDGET
Knowing what you spend lets you make a realistic budget. But, don’t just go with the flow – evaluate your purchases and make conscious choices about your spending.
Say you find meeting friends at the bar on Friday evening a great stress relief and a good way to kick-off the weekend. But, you notice those drinks and snacks are eating up your dining-out/entertainment budget so when you want to take a friend or date out on Saturday you’re feeling stressed.
Brainstorm ways to get the benefit of Friday “Happy Hour” without wrecking your budget. Could you leave earlier? Order well drinks instead of call drinks? Skip the fried pickles? Maybe you skip it entirely once a month and go to the gym instead!
The point is, when you have a spending plan, and you compare actual spending to the plan, you make better decisions about how to allocate your resources.
From Zero To Millionaire the “Old Fashioned” Way
Paying yourself first (savings) via an automated system has a long history of being the bedrock of financially successful people. It’s certainly been the foundation for my success. I can almost guarantee that if you wait until after the bills and expenses are covered to save what’s left over you will never amass enough savings to become an investor and fund a comfortable post-work life.
Now, with free automated bill paying at almost every bank, paying late just should not happen. Get your recurring bills set-up on auto payments, schedule a couple sessions during each month for paying the variable bills and voila you can spend what’s left in the checking account without guilt!
The last item, review and revise can be done as you audit your spending and pay your bills or you can schedule a separate session. Compare spending and saving to the plan, progress on your savings and investment goals and add to or change the plan to match your current reality.
New Years is the traditional time but you can (and probably should) review your plans semi-annually or quarterly to really know what’s going on with your finances.
Once you’ve got these 6 points working, you’re ready to move on to actively managing your retirement accounts and delving into other ways to create income that last the rest of your life.
Live Long and Prosper, Leah the MoneyDiva.com