The next step in your financial preparation for your journey is to understand how much you are spending each month and how much you are generating in income each month.  It goes without saying that saving money when you are spending more than you are earning is extremely difficult.  This process is going to be one of the most difficult because it’s going to take you face to face with what you are actually spending and bring you to the reality of the difficult choices you are going to need to make.

ASSETS VS. LIABILITIES

The Basics part of this blog is an introduction to finances that will include words and definitions you absolutely need to know.  The first two big financial concepts are Assets and Liabilities and the definitions are pretty straight forward:

• Assets are things the generate money
• Liabilities are debts and things that cost money

That seems pretty simple doesn’t it?  So what are examples of assets?

• You (assuming you have a job).  Yes, you are an asset and you generate money for yourself and/or your family
• Stocks and Bonds.  Stocks in companies especially ones that generate dividends are assets.  Stocks can increase in value and generate money from dividends
• Investment Real Estate.  A home that you purchase for purposes of renting out and that generates more money in rent than it costs is considered an asset
• A Business.  If you own a business and people work for you and the business brings in more money than it costs to run, it’s an asset

All of the above examples are considered assets because they generate money coming in each month.  So, what are examples of liabilities?

• Credit cards.  Credit cards provide a way for you to borrow money to pay for items.  If you don’t pay off your credit cards, you are getting charged, in many cases, 17% – 25% in interest.  That is a lot of money and your balance on your credit cards is considered DEBT or a liability
• Your primary home.  While you might consider a home an asset, if you are spending money on a mortgage every month, it is considered a liability.  You have a DEBT you have to pay every month.  This is not to say you shouldn’t own a home or purchase a home.  There are many tax benefits of owning a home and the value will increase over time.  However, this is an example of a liability because it costs you money.  That said, if you rented out a room and/or constructed an add-on granny flat (Accessory Dwelling Unit – ADU) in your backyard and rented that out to someone, it could turn your liability into an asset
• Car loan.  Your debt that you owe on a car and your monthly payment is a liability
• Any other loan.  If you like to purchase toys like boats or trailers or other items like payment plans for braces, furniture or pelotons, these are all liabilities
• School loans.  This is a debt you owe and considered a negative with a monthly payment
• Monthly subscriptions – this is a big one people get caught in.  Many companies realized they could get a lot more customers by providing very low monthly payments for products or services.  In many cases, people don’t even realize how many subscriptions they have

In the examples above you can have liabilities that can turn into assets.  For instance, if you purchase a boat and owe $300/month in payments, but you rent that boat out when you’re not using it and you receive $400/month in income, that liability becomes an asset.  You would need to factor in the repairs as an expense since more people are using the boat but again, if the rental money you receive per month is more than loan payment plus the repairs, you’ve got an asset.

CASHFLOW VS. WEALTH

Like I mentioned, it is vital that you understand your current starting point and your net worth, but understanding your cashflow is just as important.  Your net worth is the amount of money you are worth at any given time.  Your cashflow is your monthly income minus your expenses and allows you to determine how much you have to spend or save.  The more expenses you cut out, the more you have to save toward your goal.  Conversely, the more money you earn, the more you can save (assuming your expenses don’t go up).  This is the hard part for many people.  If they get a raise or a bonus, the first thing people think about is “what can I buy with this new found dineiro???”  For a millionaire, you have a couple of choices:

1. Spend it all
2. Spend some and save some
3. Save it all

To be honest, I’m a #2 kind of guy.  If I get a big bonus or raise, I will buy something small as a reward and save the rest.  Again, this is new found money.  You were doing just fine before the money came in and if you put it all in savings, it wouldn’t change your life today, BUT it will add to the steps up the mountain on your expedition.  The more you put away, the faster you can reach the pinnacle.  Because I am a #2 type of guy, my journey might take longer than the FIRE people who put 70% or 80% of their income away.

Throughout this process, the goal is to figure out how to both increase your monthly income AND decrease your monthly expenses.  The point of this post is to understand where you are at today to get started.

TOOLS YOU CAN USE

In order to determine your monthly cashflow, there are quite a few tools you can use.  The following will give you a start on how to determine your monthly expenses and your income.

• TD Ameritrade Cashflow Calculator:  Click Here
• How Stuff Work Cashflow Calculator: Click Here

As you can imagine, these tools require a lot of numbers.  Many of these should be easy to input like your monthly rent or mortgage, your income from your job or easy monthly expenses like childcare or your phone bills.  The harder numbers are going to be things like travel, shopping and miscellaneous expenses.  This is where people start getting a little confused and disillusioned with this process.  To make this part easier, I recommend the following:

• You don’t need the exact numbers for every one of the categories but you really do need some idea of what you are spending
• I recommend using one credit card is possible for all of your transactions
• If you are using Mint.com, it will pull in all of your credit card transactions and automatically assign them to categories.  All you have to do is go through the transactions and make sure the transactions are in the right categories.  Once you are done and the transactions are in the right place, Mint.com will give you summary reports of every category of spending and how much you spend each month
• This could take a little time, but I recommend you do the categorization for at least the last 9 months.  When you take all of the categories and spending and average it out, you will get a great picture of what you spend.

By the end of this exercise, you will have completed the preparation phase for your expedition!

 

By now, you have read the first few posts and you’re thinking to yourself, “I am ready to make a change.  I am ready to change some habits and focus on a plan to make myself wealthy and generating enough money to retire.”  AWESOME.  You are changing your mindset to put out in the universe that you are going to create a goal and make choices to reach that goal.

SO WHAT’S THE NEXT STEP?

You can’t start an expedition or a journey if you have no idea where you’re starting.  Every expedition has a starting point and your starting point is your current financial situation.  Some of you might be further along than you think and some already understand that it will be hard work to get out of debt and will take time to get on a path to success.  The most important aspect is that you ready to make the leap and focus on a better outcome.

The next step is to find an online resource you can use to organize and update your financial status as you move along the journey.  There are a number of personal financial applications you can find online, but I personally use Mint.com (www.mint.com).  This is a web site that ties in all of your accounts into one place and will organize your finances, accounts, loans and spending habits.

If you can imagine that your life and your family is a business, you need to know some simple things to be successful:

• How much money does the business generate (on a monthly basis)?
• How much money does the business spend (on a monthly basis)?
• How can we limit spending and increase the money coming into the company?
• What are the things the business owns and what are the business debts?

If your business makes $100,000 a year but you are spending $110,000 per year, that business has two options, 1) it will go out of business because it spends more than it generates to pay the bills, or 2) it will have to borrow money to cover the additional expenses.  A business is just like your life.  If you are spending more than you are making, odds are you are borrowing money from credit cards to cover the increased spending.  In this scenario, you will not only hurt your chances of being wealthy, but more likely you will head for bankruptcy.

What a personal web site like Mint will do is give you an overview of your current financial situation:

• How much money do you have in the bank?
• How much money do you have in investments like stocks?
• How much money do you have in retirement accounts?
• How much is your house worth?
• How much do you owe on credit cards, mortgages, car payments, etc?
• How much are you spending each month and in what categories?

Overall, when you subtract what you owe (your debts) from the things you own, you will get a big, giant number called NET WORTH.  This is one of the most important (if not the most important) number you will follow when it comes to your wealth.  Basically this is the number that adds up all of the money you have, the value of your property and your investments and then subtracts all of the money you owe and that is what you are currently worth.  The following is a very small example:

CASH/INVESTMENTS

• $15,000 in the bank
• $10,000 in investments like stocks
• $350,000 house value according to Zillow
• $15,000 current value of car
• $5000 – bitcoin value
• TOTAL ITEMS OWNED: $395,000

MONEY OWED

• $5,000 owed on credit cards
• $280,000 owed on home mortgage
• $10,000 owed on car
• $25,000 – School loans
• TOTAL DEBTS: $320,000

NET WORTH

$395,000 – $320,000 = $75,000.  In the example above, this person’s net worth is $75,000.

This is the starting point on this person’s journey!

WHY IS THIS SO IMPORTANT?

In my previous posts, I outlined the importance of putting your goals and dreams out into the universe.  By creating a system to track your current situation and your progress, some things will start to happen.  You will start to put $5 from that Starbucks coffee you didn’t order into savings or investments.  You can have your bank account or other investment company automatically take some money out of your paycheck and put into investments that will grow.  Then, the really cool thing starts to happen.  The Net Worth number will start adjusting up.

On your expedition, your upward climb in your net worth mirrors your upward climb up the mountain.  The one thing I will tell you is that seeing your numbers increase will give you more and more incentive every day to change your choices, save more and climb the mountain faster.  It’s simply human nature and the biggest incentive at all to see the progress you are making and want to succeed even more.

After you have signed up for a personal financial software platform, go through and connect your accounts and see where you stand.  If you have a ton of credit card debt and no house and your net worth is negative, DO NOT FRET.  Does it suck? Yes.  The goal here is to change your attitude, your choices and your financial situation to move the negative to positive and then through the roof and over the moon.

The first step on your expedition is to get prepared.  You need to understand what you need mentally to gear up for the trek ahead.  So, in order to retrain your brain, you need to erase some of the things you thought you knew.

WHAT YOU WERE TAUGHT GROWING UP

I grew up in a middle class household in California.  My dad worked full time and my mom did jobs here and there like accounting or selling real estate to bring in extra money.  When I grew up, I was taught a few simple things: you need to go to school, get good grades, go to college and get a great job so you can support a family of your own.  From my earliest days, that’s what I thought I needed to do to be successful.  It makes sense that, back then, people who worked for a company received a pension and when they were done working for that company for decades, they were set up for life with a monthly pension payment.  That system is great if a company is around forever and constantly makes more and more money, but the reality started settling in.  As more and more people would retire over the years, the financial commitment to the pensions got higher and higher and became a drag on companies financially.

Over the past 30 years, companies with pension commitments started declaring bankruptcy and all of those people who had worked their entire lives for the chance to receive monthly payments were now out of an income steam in retirement.  In addition, the average age of Americans started to increase thus requiring even more pension fund money.   Obviously, the system was broken.

WHAT DOES THAT HAVE TO DO WITH YOU?

The concept of “get good grades and get a job” was taught to all of us, but really, it goes against the grain of how the United States has provided opportunities for people to succeed through business ownership for centuries.  The good old USA was born on free trade and entrepreneurship.  People came to the US to fulfill their dreams and participate in a society where anyone can be successful and most came here and started small businesses such as dry cleaners, landscape businesses, painting and more.  The more ambitious people who came here grew their companies and their wealth.  They didn’t make their fortunes at a call center for AT&T working 9 to 5 jobs.  The US is the land of opportunity.  It’s time for you take advantage of it.

JOBS VS. COMPANIES

The first retraining you need to understand is this: the idea that 9 to 5 jobs can generate money to support your family and you will also become wealthy is not realistic.  When you have a job, there are 2 problems; 1) the government is taking 30% of your money every paycheck and 2) you are working for someone else and you are not making any decisions on your future or your salary or your position at the company.  The people above you on the corporate ladder or in business management are making decisions about your future.  Many people have a popular misconception “I have been here for 5 years and I am invaluable.  They can’t fire me.  They won’t find someone to replace me.”  LOL.  If a company has a bad year or the economy starts to fizzle or even if the company’s products or services become outdated, they can replace you, fire you or lay you off in a heartbeat.   There is no emotion in a corporate or business environment.  They have to do what they do to survive, they have to make tough decisions and your future and financial security are in their hands.

Owning your own company puts the decision in your hands.  You make decisions and you are in control of your own destiny.  You can change services or products to appeal to a larger audience and the tax benefits you will get from the government as a business owner are immense (more on this later).

Please note, I am not saying that you need to quit your job and start a company.  On the contrary, if you have a job and you are supporting your family, absolutely keep that job.  Do not put yourself in a position where you jump off the ledge with no parachute and you have no way of supporting your family.  As I have said, this is a journey and before you make any major moves, you need to be prepared.  You aren’t going to the middle of the mountain in a day.  The BASICS section of this blog will give you a financial foundation and understanding for your journey so you can see where you are and then provide resources to make better decisions moving forward.

For now, the purpose of this post is to get you to retrain your brain that having a job is one part of your journey, but the path to wealth is hard if you are only focusing on your job as a single source of income and that a job can be taken from you when you least expect it.

CHOICES

The next area you need to train yourself on are the choices you make.  An entire life is made up of thousands of choices and numerous decisions every day.  Do I go to Starbucks and spend $7 on a coffee and bagel?  Or do I make coffee at home for basically $0.25 and my own bagel for $0.50?  Do I take the money from my raise and buy a new purse or do I put all of the extra cash away in savings? As you move along your journey, retraining your brain to make consistent choices about saving will help you reach your goals faster.  The more you spend on things like cars, clothes and material items, the less you have to invest and the less you have to climb the mountain.  Your choices determine if you are going to stay at the base longer and slowly climb or if you can climb higher faster.

RECONFIGURE YOUR LIFESTYLE

This is the area that is going to be hardest for everyone in the beginning.  As I mentioned above, you have choices you make that can help you save faster and complete your expedition faster.  However, many times, those choices result in a change of your lifestyle.  If you constantly need to buy a new car or you have to buy the newest video games and spend your entire paycheck the minute it arrives, your journey will be more difficult.  Over the course of this blog, my goal is to show you that can have what you want, but you will need to make some sacrifices in the beginning and live within a certain means to achieve your goals.

LIVE WITHIN YOUR MEANS

There is a book I read called “The Millionaire Next Door.”  The book details interviews and analysis of 100 millionaires including their habits and choices.  Many of the people they interviewed were immigrants who came to the United States to pursue a better life for their families.  Most of the people had started small businesses like mini marts or dry cleaners or service oriented businesses.  As I read the book, the common theme was that these people spent as little as possible on cars, eating out, travel and material items, but used the money to purchase homes for their families and reinvested the money from their business into their children’s education or other investments.  Unfortunately, what disinterested me was the fact that basically these people became wealthy by giving up many of the fun things in life and saved every dollar and used business tax advantages from the government to grow their wealth.

The FIRE movement (Financially Independence, Retire Early) basically follows the same path as the book.  Save 70% of your money, rarely eat out, travel cheap, learn to hike a lot and you can save enough to retire forever at 35.  I find some issues with this approach personally.  Why?

1. I like to go to restaurants with my friends occasionally
2. I LOVE to travel
3. I like to buy things when I want
4. I am not going to let life pass me by because I want to retire at 30.  I have no problem working a little longer

The main point to the above is that it’s okay to have a fulfilling life and reach your goals.  The FIRE movement isn’t bad, but I don’t want to lose 10 years by saving every single penny and miss out on some fun things because I am so focused on retirement.

The main message I want to impart here is that you can do all of the above in moderation.  If you want to eat out, just cut back.  You don’t need to eat out every other day.  If you can cut back to once a week, you will see an insane amount of money saved.  If you love to travel, there are many ways to maximize the days and places you travel to without spending a fortune (ie, never travel to Hawaii during New Years, but you can find flights half off during October).  You can buy things you want, but you don’t have to splurge.  You don’t need the most expensive car or house or clothes every week.  By spending in moderation and raising your income, you can become wealthy.

Based on where you want to be, you will make choices on your journey and while the more you save and invest, the faster you will reach your peak, don’t forget to LIVE LIFE AND ENJOY YOUR TIME WITH FAMILY AND FRIENDS.