Gaining Control Of Your Finances Part Three

Posted on August 27 · Comments

This is the third and final part of the series about the steps to take to gain control of your finances. If you haven’t already, check out part one and part two of the series.

So far I’ve looked at examining attitudes to spending and recognising and adjusting spending habits; understanding your finances; setting financial goals and using a budget to meet those goals by systematically reducing expenses; and taking a look at your debt position in order to reduce your debt.

7. Building Your Savings

Cash flow is the money “flowing” in less the money flowing out (including debt repayments). At the end of the month, any surplus money is savings. I usually draw up my budgets as a cash flow budget and include all cash flowing in and out, so I can monitor my savings.

Is it a good idea to save money? Some like Robert Kiyosaki, the author of Rich Dad, Poor Dad, argue that ‘savers are losers’. The reason, they argue, is that the cost of inflation outstrips any interest earned on savings and there are better vehicles for building wealth than a savings account. While this makes sense, I would be surprised if these authors don’t have significant cash reserves.

Building savings in the form of an emergency fund gives you a buffer against tough times and enables you to make significant purchases or pay for unexpected expenses without going into debt.

Building savings is a way of reaching your financial goals.

Building savings enables you to take advantage of investment opportunities as they arise – without cash reserves this would be a lot harder to do.

There are many reasons why you would build your savings – as many reasons as there are financial goals, and each one is as valid as the next. You might be saving for a deposit on the house, or for an overseas holiday.

The key to building savings is to just do it. No matter how small an amount, save what you can because every dollar adds up.

As you save your money, track your progress. There are many ways to do this, some people make a chart to colour in and making it visual and accessible is a great way to keep motivated. I keep a spreadsheet as part of our budget that tracks our savings account. We have a single high interest account, but I break this up on a spreadsheet into different categories such as saving for a new car, saving for up coming expenses like the rates, saving for a holiday and saving for investment.

Remember that one of the keys to wealth building is to pay yourself first. Saving for the rates and the car registration means that we don’t have to put these bills on credit, but it’s still paying someone else. I try to make sure that part of our savings always goes to our “investing” category (which we then invest) to ensure that we are always paying ourselves first.

8. Building Wealth

Building wealth will mean different things to different people depending on your values. Building wealth might mean living off a passive income generated by shares and property. Building wealth might mean living debt free so that you can work less and spend more time doing the things that you love. Building wealth might mean investing in solar power or a vegetable garden or investing in education. Or it might be a combination of all of these things. All of these definitions are valid.

Whatever your concept of building wealth, it is grounded in spending less than you earn and investing your savings.

For a variety of reasons, a lot of people shy away from the concept of building wealth. Our society demonizes being wealthy. We equate wealth with deception and greed and exploitation. I disagree. I would like to build wealth so that I can convert our house to solar energy. I would like to be able to afford to buy a small property and raise chickens. I would like to be earning enough working from home doing the things that I love so that I can be at home to raise our children. And I would like to do all of this without exploiting others.

Some would say that wealth building is diametrically opposed to being frugal. I guess that would depend on your definition of what being wealthy is. Being frugal isn’t about being cheap or being poor, it’s about being wise with your money. Without being able to live on less than you earn (no matter how much you earn) , building wealth will be difficult if not impossible.

While there are those who advocate a ‘no money down’ approach, for most of us, building wealth begins with saving money. Don’t underestimate the power of compounding – wealth building is an option for everyone. Read up on different investment options and get as educated as you can before diving in. Beware of trusting your money to someone else without understanding what you are investing in and what they are doing with your money. Having said that, if you’re anything like me, you might wait too long and miss opportunities by being afraid to have a go. Education is really the key to reducing the risks of investing.

The principles of wealth building are actually quite easy, the devil is in the detail.

9. Monitoring Your Progress – Celebrate Victories

How well are you progressing towards your financial goals? The only way you will know that for sure is by tracking your progress.

Use your budget to monitor whether your spending is staying on target. Your financial goals are your destination and your budget is the map to get there. Your budget will tell you each time you sway off the path of your goals.

Track your savings account and watch the difference between your actual savings amount and your target savings amount shrink as you get closer to your goal.

Monitoring your progress is both a validation of the effort you are making to reaching your goals and a motivator to keep going.

Celebrate your milestones and celebrate your arrival. Having a vision for the future and working towards it is not the easy path – it’s easier to live in the moment and not think about the consequences or the future. It’s easier to just obey the social directive that we are bombarded with everyday to buy, buy, buy. It’s easier not to make your own, cook for yourself, remember to turn off the light, or pay off your debt quicker. But the easy path is not always the best path. Choosing otherwise, well, power to you! Celebrate this, it’s a victory!

The underlying principle of this three part series is that the key gaining control of your finances is to empower yourself with information. Know your spending habits. Know your finances. Know your values and your goals. Know your financial position and your debt level. Know what you are saving towards and why. Educate yourself about investing.

It’s about choosing to be responsible for yourself, to understand the consequences of the everyday decisions that we make and by being responsible, take control.

There are days when we spend $30 on KFC. There are days when we say “oh, blow the damned budget!” I just try to aim for having less of those days and more days where I know where I’m heading.

Did you like this series? Did you find it helpful? Do you have some points to add? If you do, please feel free to leave a comment below. I would love to hear from you.

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Category: budgeting and finance, money matters · Tags: budgeting and finance