3 Simple ways to Positively Change how you Look at your Finances

Here are the top 3 ways I changed how I looked at my finances for the better that you can start doing immediately

Make spreadsheets

Ok for the non-number cruncher this can seem boring, but it is not as bad as it sounds. Using Microsoft Excel, or the freeware equivalent (google spreadsheets works well as a free replacement) is one of the best ways to start building your wealth. Most successful people I know have spreadsheets that document all their finances.

Why do they work? Because information is power, and when you start to understand your finances better you can take steps to improve or correct shortcomings. Figuring out what your true net worth is by listing your liabilities (debts) and your assets (stocks, saving, bonds, cars, property etc.) can give you a good idea where you stand and if you need to make changes. Some people who appear wealthy with fancy cars and big homes really have terrible debt to asset ratios. And likewise many who appear to have modest lifestyles have strong asset to debt ratios making them the wealthier party.

Another important component to writing up your finances is to understand exactly where your money is going each month. You can see what comes in every month and what goes out and get a good grasp on whether you really are moving ahead or maybe even sinking into further debt. Seeing exactly what goes where will allow you to make changes to your life to reverse sinking into debt or improve your savings to help reach you financial goals sooner.

Having control over your finances like this can feel empowering even if we are struggling, and can help reduce stress around our money. Our financial lives can often feel overwhelming and for some people out of control, but having a visual representation of our finances can help us regain that control.

The reverse latte factor

So we always hear about the “latte factor” the idea that we nickel and dime our wealth away. This concept is another good argument for the spreadsheet. However just as you can nickel and dime your money away you can also add to your savings in the same manner. When I was a kid I often would ask to clean up people’s cars for change lost in the seats. It didn’t take long before people realized that I could save up a substantial amount doing this.

For example, using a cash back credit card can earn you $300 or $400 a year (do this carefully, NEVER hold a balance and only use credit cards this way if you are very disciplined and pay off the balance every month!) OK big deal right? only $300 in a year, but let’s say you add some dividends from a stock you bought. You then add $200 month from a blog you write or crafts you sell in the evening. Individually people often ignore small sums like these but combined together they add up fast and if you invest this money then it can add up all the more significantly, especially when it is reinvested.

Understanding Value

This is a simple concept lost to many people, including myself in my younger years. This involves understanding what you obtain in your life as an asset vs a depreciating item that is unnecessary. I am not a financial adviser so I do not go into detail about what are or are not good investments. But I would advise that investments are better than non-investments, let me explain.

Take for example a traditional investment such as a blue chip stock, bond, or maybe a piece of gold or silver. Contrast that with the impulse to buy a new big screen TV. Even if in a time period those investments do not perform, they still maintain a value, and even a reckless stock purchase of say a speculative penny stock which is lost at very least had the potential of value (Speculating on penny stock should be avoided by all but professionals) What we know is that a large electronic item such as a TV will inevitably be worth very little, such as the large and now cumbersome TVs of 10 or 15 years ago. Unfortunately this is often where people spend their extra money.

Now let’s take something not as obvious as a traditional investment. I like to use my home gym as an example. I have an interest in strength training and have competed in events like powerlifting so a home gym is something I get a lot of use from. Looking at quality equipment in the form of dumbbells, benches, olympic plates, etc. several things become clear. To buy new weights average about $1.20 a lb. and they can be expected to bring a minimum of $.70 cents per lb in used condition. This type of equipment is used in gyms 24hours a day for decades without being damaged. The point being is this investment (and I always stress investing in your health is smart) will hold its value no lower than .70 cents per lb. and will generally be an asset to me for my lifetime. While a gym is not likely to become more valuable or even keep up with inflation, it’s primary role is as an enrichment to my life that happens to also hold some monetary value over that lifetime.  In contrast that fancy TV will likely be a donation or worth say $50 as new technology replaces it. The idea is to think about the value and asset of your purchases, even non-traditional ones.

Where I stray from this idea is if you have a passion. Say for example you are a movie buff. You live and breathe watching movies and it brings your life great pleasure to watch them. In that sense, so long as it does not over extend your finances, buying a large TV or projector may be something to consider to enrich your life. This cannot be said for simply wanting something to impress others, or because you think it will improve your life in some way. Cars are another good example. Buying a sports car and the premium price it commands to impress others or for kicks is not a wise decision if you have limited funds. However those with a true passion for autos and or racing may find a  purchase like that worth the experience so long as they have the means. So consider the experience in life you wish to have. I personally never regret traveling after high school as I gained life experience and life long memories for my time and money spent. It is all about balance, the things you truly desire, not over extending yourself, and evaluating the things you bring into your life as assets for the future.

One last thing to consider is items that while likely depreciate in and of themselves, have a utility that can generate income on the side and otherwise be used as a productive tool. For example buying an DSLR camera and doing photography jobs on the side. Something I personally have done and made side income doing. I am planning to do a dedicated post about this topic later so I will leave it at that for now.