Did you know that cattle are probably the oldest form of money? Using cattle as money dates back to 9,000 B.C., and they are still being used in some parts of Africa. When I heard this fact I immediately thought about the saying, “big hat no cattle”. This saying refers to people who look like they have it together financially (big hat) but who actually have nothing to show for it (no cattle). Well, I don’t want us to have big hats and no cattle, so let’s get started learning how to increase our cattle.
In my introductory blog, “Greetings”, I pointed out five essential moves to make to better your personal finances.
- Spend less than you earn
- If debt is your problem, stop adding to it
- Know where your money is going
- Save something
- Give something
In this post, I will discuss more about three of those five essentials and provide you with the tools to grow in these three areas. The information provided along with these tools can be used to assess where you currently are financially and get you on the road to financial freedom.
Know where your money is going:
My first point above is spending less than you earn. But before you can do that, you must figure out how much you are spending and what you are spending it on. Online, there is a free tool called Mint that will help you determine this. If you do online banking and bill paying, you can enter in your user ID’s and passwords into Mint and it will automatically update with your latest activity in these accounts on a daily basis. You’ll be able to see all of your accounts (if supported by Mint which most are) on one page. I love this tool! You can set-up a budget and it will compare your budgeted amounts to your actual amounts. You can also set-up goals in Mint and attach the goals to specific accounts and Mint will track your progress. Mint provides basic categories for things we spend our money on like housing and kids, and you can customize by adding your own categories. This free tool with help you know where your money is going on a monthly basis, help you get started on cutting back, and get on track to better spending. If you don’t bank and pay your bills online, you can still know where you are spending you money, it’s just going to take more time and effort.
Spend less than you earn:
Now that we know where we are spending our money, the next step is to see where we can cut back. A Personal Cash Flow Statement is a tool that can be used to help you spend less than you earn. This statement shows your income for the month, your expenses for the month, and how much is short or left over after you are done, net cash flow. It’s similar to a budget except that it uses actual amounts, and a budget uses planned amounts. The key is to take your personal cash flow statement and create a budget that will give you a positive net cash flow. You cannot, and I repeat cannot build wealth and achieve financial freedom if you are running a deficit each month. There are only two ways to increase cash flow: spend less or make more. I will be discussing this issue to death in later posts because I really do think it’s key to financial freedom.
How much? At least 10% is the number I aim for with my clients, but it doesn’t matter if it’s $10 a month, just save something. If you have a checking account at a bank, which we all should, you should also open a savings account at that bank and save at least the minimum required to avoid paying fees on the account. After you get to the minimum, open a high-yield online savings account so you can get a better interest rate. Most of these accounts require no minimum balance, no fees, and allow free transfers from your checking account. For me, the easiest way to save is to make it automatic. Each month I have a set amount transferred from my checking account to my savings account to avoid any temptations to not save. Below are interest rates on some of the accounts as of 9/11/12.
By definition, savings are funds set aside that are not being used for current consumption. Savings can be used as an emergency fund, for vacations, large purchases, and the list goes on. It is another key to building wealth, but really shouldn’t be used for wealth building, that is what investing is for. The two are not the same. Savings is short-term, it has lower risk and you get lower returns. Investing is long-term, you have greater risk but the returns are greater as well. I don’t know anyone who ever became rich from savings alone.
I’ll also cover this more in another post.