From Making Ends Meet to Financial Independence
Budget is a dreaded word in North America, mostly brought up by well-meaning parents or on January 1st by people still reeling from the worst hangover of the year. However, being financially literate is the most important part of keeping your retirement and wealth management plans on track. Control your spending and you control your world.
Most people work for money, and spend all they make. That shows some awareness of the cash flow in your life, but it only works if you’re young, never plan to retire, spend anytime out of work, pass on anything to your kids, or face any sort of unexpected expenses. In other words, it only works in an ideal world.
Infinite Wealth is not a Scrooge McDuck Vault of gold coins you can dive into, and it’s not a bottomless pit of cash. Infinite Wealth is investing money in such a way that you can live off your investments, without needing to sell off assets and lessen your personal wealth.
The first step along the path to infinite wealth is understanding how much you earn, and how much you can spend while still investing – creating a cycle of growth for your wealth.
The Best Way to Grow Your Wealth
If you want to be wealthy, the first step is to understand the flow of money in your life, both incoming and outgoing – whether you make $50,000 a year, or $500,000. Household debt in Canada has hit a record at 167.8 percent of disposable income. That means for every dollar of disposable income, the average Canadian family has $1.68 in debt. Most people grow debt because they aren’t aware of the flow of money in their own life.
The American Vanderbilt family is the perfect case of how important it is to monitor your cash flow, regardless of wealth. The Vanderbilt family built their fortune as one of the railroad tycoons of the mid-1800’s. Think Bill Gates rich.
But their grandchildren chose to live extravagant lives with mansions, expensive cars, and parties – full on Gatsby-style. Which would have been fine, if they would have kept an eye on that cash flow. 120 Vanderbilts attended a recent family reunion and there was not a single millionaire among them. Their parents, and grandparents, had passed on wealth, but not the knowledge to build and maintain that wealth – and it cost them.
A pool of money does not create wealth. A steady cash flow, combined with a sound financial plan does. Below you see the start of the Infinite Wealth Diagram. It starts with where you could be today with understanding your money: you work for a living, earn and income, live within your means, and save a little cash. It’s the first step on the path towards creating infinite wealth.
A Simple Solution
Money is simple, you say. There’s no need for a whole blog post about not spending more than you’re making. And, you’re right – it’s simple. However, if the mass amounts of debt Canadians suffer under teaches us anything – and it should – it’s that we are completely unaware of how our income matches (or exceeds) our income. That’s not because we can’t do simple math; it’s because we’ve been taught bad habits all our life, or not taught anything at all, which has devolved into bad habits.
This isn’t about teaching you how to budget, it’s about a shift in how we think about wealth. Because North Americans are almost all wealthy – but most of us are bad money managers. Change that and you’ll change your world.
Know Your Wealth
You know how much money you make (or how much you can expect to make), and you have the ability to control the amount you spend. Understanding your earnings and spending habits is like an umbrella over your future plans. When you find the balance between spending and earning, you can fine tune your life to focus on the things you really care about, without building debt higher than your house.
By knowing how much is coming in and how much money is making its way into other’s hands, you can account for everything from your retirement savings to your Friday night movie dates. Then, you can build your slush fund for when things go sideways, or you find something that will legitimately make your life better. When you’re concentrating your spending on what’s important, and not on whims, your money is doubling it’s worth.
Here are six steps to understanding your spending habits, and balancing them with your income:
- Note your net income
- Track your spending
- Set your goals
- Make a plan
- Adjust your habits if necessary
- Keep checking in
If you’re more the app type, try these:
- Level Money
The good news is they are all free (at their most basic level) meaning they fit well within your budget (even if you don’t have one).
Plan for Your Future
What do you expect from your retirement? In the same way you need to be aware of your current cash flow, it’s important to have an idea of what your cash flow will look like when you retire.
Create a list of the things that mean the most to you – whether that is spending on the grandkids, travelling, or maintaining the lifestyle you have currently. If you know the cost, from there you can find out how much you need to save to make this future your reality. From here you can plan how to best create a sustainable income that’s ideal for your retirement.
What’s Sustainable Income in Retirement?
Sustainable income comes from assured sources that can generate reliable cash flow. This includes government pensions, private pensions and investments that, with a high degree of certainty, will continue to generate income. Check out Part 2 of The Path to Infinite Wealth: Investing in Your Future