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The following is a guest post written by Wayne at Young Family Finance, where he helps young families understand the importance of everyday finances like the cost of owning a dog.
What makes a person successful with their finances? Is it making a lot of money? Investing it wisely? Or, properly managing it? While there may be a variety of legitimate responses, this question seems to highlight another important question that I have when it comes to managing my finances: What is the most important aspect of successfully managing your finances?
In other words, if you had to narrow it down to one thing, what would it be and why? I want to suggest that the most important aspect is found in finances 101. In fact, one of the most basic lessons is the most vital thing to being responsible with your finances. Here’s why.
Why Going Back to the Basics is Important
If you have been responsible for your finances for years, you may think that you have your bases covered. You are probably more concerned about getting a large bonus from your employer or maximizing your investments for retirement as opposed to budgeting or reducing your expenses. Anyone who has experience with managing their finances is likely to think this way.
The more experienced individuals have been around the block more than a couple times and know everything about getting good deals on this item or this or that. Yet, the problem with thinking this way is that it assumes that once you learn something about finances, you don’t need to cover it again. This view sees finances as knowing a list of items, that immediately leads them on to the next more exciting thing. What tends to happen, however, is that these individuals start to forget some of the basics. For example, some start spending more than they should. They forget the importance of budgeting and then hit a downward spiral.
More experienced individuals tend to forget that managing your finances takes discipline and consistency. Finances is all about staying in control of your finances. It requires continuous work and attention. It isn’t something that you can ignore without consequences. Being reminded of financial basics prevents even the most experienced financial expert from failing.
Going Back to the Basics
As I hinted above, the most frequent mistake of the people that have a lot of experience managing their finances is getting a complacent and starting to spend too much money. This often results from earning too much money and feeling entitled. Another term for this is lifestyle inflation. As you earn more money, you naturally tend to increase your spending because you feel that you deserve to treat yourself. I have seen this happen in both of my older brothers as they get raises or better-paying jobs. Instead of putting more money towards retirement or their investments, it often leads toward more expensive cars or more expensive gadgets. Getting back to the basics of financial management will help both the experienced and beginner control this urge.
Perhaps more important than controlling your expenses, specifically, spending less than you earn is a fundamental element of any financial advice. Here are several reasons why it is one of the most important aspect of managing your finances.
- If you are spending more money than you are earning, not only will you fail to save money for retirement, but you will also be going in to debt.
- It doesn’t matter how much money you make – if you can’t control your spending, you will always fall short.
- No matter how great you are at investing, if you are spending more than you make, you won’t have any money to invest.
Another way of communicating the importance of controlling your spending is to compare your finances to a stream of water. You can think of your job as the source or the spring of water. From here, the water runs to the areas that it is directed: mortgage, car payments, utilities, insurance, retirement investments, etc. You need money coming in in order to allocate it towards certain expenses or funds. If you are spending more money than you earn, you are essentially re-directing water away from the necessary paths that need water (like retirement). People often go into debt and spend more money than they actually have because they fail to understand the limited amount of money that they have or the later repercussions that they will face.
How to Spend Less than You Earn
Spending less than you make is easier said than done, right? If you find that you are spending too much money and want to get a handle on your finances, here are a couple ways that my wife and I use to keep our spending in check.
- First, we live by the ‘is it necessary’ rule of thumb. In other words, for every purchase, we force ourselves to ask whether it is absolutely necessary. Just by asking this question, I have found that we can avoid many major purchases.
- Second, we limit the number of times we dine out to once per month. While it is hard at times, this little step goes a long ways to keeping us from going overboard on food. I find that food is one of the easiest ways for busy individuals or families to overspend. While these strategies work for my family, you will need to find what works for you.
When it comes to successfully managing your finances, it starts with controlling your spending. There are more things that are involved in being completely responsible with your finances (like saving first), but without this first step, you will have a difficult time getting anywhere in life. If you are looking to get a grasp on your finances, start by getting control of your spending. Stay diligent with this as you progress to more complicated issues because it is something that you have to keep in check.
How about you all? Do you have trouble managing your spending? What are some ways that you have limited your spending?
Share your experiences by commenting below!
Jacob’s Thoughts – Listed below are my random thoughts as I was reading this article.
- Great post here Wayne! Thanks so much for sharing it with us today!
- @ What makes a person successful with their finances?
- Let’s see…This is a tough question. But, if I had to say what the one thing was that defines a person’s success in their finances, it would be that they are able to use their finances in order to live out their life dreams and life values. In other words, they are able to use their money to accomplish what they want to achieve in life at a core values level.
- @ What is the first and most important aspect of successfully managing your finances?
- I would also have to agree with Wayne on this in that I believe controlling your spending is probably the most important aspect of managing your finances.
- I believe in this because until a person starts to control their spending, more sophisticated goals cannot be realized.
- For example, until you stop overspending, you cannot pay off debt, save for retirement, save for putting your children through college, or save for the awesome vacation you want to take. You are essentially stuck in the mud, and won’t be able to go anywhere fast.
- So, even if you don’t make a lot of money, the first step to getting on track financially is to stop overspending.
- @ The importance of reviewing the basics from time to time –
- This is a very important reminder here Wayne, as it was something I was reminded about the other day.
- As a personal finance blogger, I sometimes have the tendency to thoroughly research a topic once, write a post about it, and then simply take for granted that I don’t need to learn anything else about it because I have “already learned it before.” This can get me in to trouble since I would potentially miss out on hearing about specifics I missed before or new developments that pop up.
- A good example of this occurring happened the other day when I was responding to a comment about Roth IRAs. I had thought that I knew pretty much all their was to know about Roth’s – the contribution limits, withdrawal rules, tax treatment, and penalties.
- However, what I found out was that when I initially learned about Roth IRAs in 2009 or so, I was thinking that withdrawals of contributions and investment earnings were treated the same. As it turns out, there is a huge difference!
- Anyhow, the point of all this is that once you learn something once, keep an open mind to learning about new details any chance you get.
- @ The best way I know of to make controlling your spending sustainable –
- As Wayne mentions above, a person can learn a TON about managing their personal finances well. But, if they don’t keep up these effective habits, any progress that was made can be reversed quickly.
- As such, the best way I’ve found to keep up the habit of controlling your spending is to make frugal living a lifestyle, not just something you practice from time to time.
- If you can get yourself to the point where controlling your spending is second nature (ie you derive no added satisfaction in life from spending excessively), the practice will truly become sustainable.
- Unfortunately, adopting frugality at a lifestyle values level is not something that comes quickly or easily. The best ways I’ve found to encourage people to begin adopting this type of lifestyle is to 1) do it gradually by scaling back your spending in stages and 2) to adopt savings/investing as a hobby.
- This would actually be a good topic for a future post since it is a pretty involved topic.
- @ The best way I’ve found to control spending –
- For me personally, the best way I’ve found to control my spending is to limit the amount that I buy food from restaurants to about 1 time per week. This includes breakfast, lunch during the work day, and dinner.
- Furthermore, when I cook at home, I try to buy generic brand items to save some money as well.
***Photo courtesy of http://farm5.static.flickr.com/4049/4258961182_376cf29b36.jpg