Know What You Pay For: Step One on the Path to Wealth
Warning: if you’re looking for the secret way to get rich quick or get your dream sports car or that baller apartment you can’t even contemplate affording, and especially if you’d even consider taking out a serious amount of debt to do so, then I regret to inform you this article is not for you. If you want to get rich quick, the only advice I can offer you is to have a brilliant, world-changing, rapidly scalable idea that helps people, combined with the ability to ruthlessly execute and an unparalleled work ethic to bring it to life, backed by the ability to convince the world why it needs your idea. Or start another hard seltzer company.
Do you know where your money goes?
To be completely honest, I didn’t have a clue for more years than I care to admit. In my early 20’s, I went about doing things in my day-to-day life and, well, I wasn’t broke or going into debt, so everything seemed OK. And really, it was OK. I was even able to scrounge enough away to take the occasional nice vacation or buy myself some nice things, but by no means were these transactions stress-free. I was getting by, even having fun, but not really getting anywhere. And I just couldn’t seem to see any way that I could get anywhere without sacrificing any of the fun.
That was before I opened my eyes and got clear on my relationship with my money and how I choose to use it. That was before I made a real commitment to myself. Now? I’m doing more things that I love to do than I was then, still traveling and seeing the world my way, and saving and growing my money on a path to long-term wealth that’s visible at the far end of the rainbow — getting where I want to go, while living on my terms. And it all started with a step back to look at how I use my money.
So I ask you: do you know where your money goes?
No, really — do you know where your money goes each month? That money you work hard for every day and seem to never have enough of to put away and reach your big goals.
I’m not talking about having a rough idea. You’re reading this because you want to get serious about your financial future, right? Then it’s time to get serious about understanding exactly how and where you spend your money.
Before we go any deeper, I want to let you know now that this isn’t going to be about creating some strict, categorized budget that’s impossible to stick to. Lord knows I’ve tried that, and failed, so let me save you the waste of time, effort and headspace on your path to wealth.
So. Assuming you’re reading this because you’re earning enough to have some disposable income, and you’re wondering how to start turning your income into real wealth, let’s start with a simple question: what are you spending your money on?
Seriously. The very first step that all of us need to take before we can start creating wealth is to put on some nice music, turn off the TV for an hour or so, and figure out where the hell our money goes every month. The great part about this first step? You should only have to do this once, now, and then only occasionally throughout your life as your circumstances change.
I can’t overstate how simple this first step is, and yet so many people never take the time to do it until later in life, years after they could have started building. And in the universe of compound interest (we’ll get to that in another article), those lost years are most certainly bound to be the difference between you achieving your goals and not.
I’m going to walk you through this first simple step, exactly as if I were giving the same advice to my best friend, and then I’ll provide a step by step exercise at the end of the article. And believe it or not, I’m not going to try and sell you on anything. Just some straight up easy explanations and steps to follow.
Uncovering Your Opportunities
This section is all about understanding the take-home money you have coming in, your basic expenses and commitments, and ultimately (and most importantly) how you’re spending what’s left. If it sounds like an obvious thing to do, that’s because it is. But so many people never take this first step, afraid that they won’t like the results.
So, how much do you really need to cover your basic expenses and commitments? Things like rent, utilities, car payments, insurance and basic meals and groceries.
Now, how much do you have left over after you subtract your basic expenses from your take-home pay each month? We’ll call this your disposable income.
For example — if you bring home $3,000 a month (after tax withholding, benefit contributions, and the like) and spend $2,000 on your basic expenses each month, you’re left with $1,000 of disposable income, or the money you have left for other things.
Take a hard look at that number.
For a lot of people who have never done this exercise and consistently struggle to save, thinking there’s just not enough money coming in to do so, realizing the amount of disposable income you’ve actually had before mindlessly spending it all can come as a little bit of a shock.
You, right now: But, Benjamin — everything is so expensive, I need all of my disposable income if I want to have any fun. I love my morning walk to get a cup of coffee at the local shop and it’s not my fault that it costs $4 for a latte, I love going out to eat with my friends, and what about all of the fun trips I take?
I want to be very clear — it is none of my business to tell you that you need to change anything about the way you live your life. I’m not passionate about forcing people to do anything; what I’m passionate about is helping open people’s eyes to the choices they make, and the habits and behaviors they’ve formed, that are hiding in plain sight as opportunities to create a path to real independence.
I also want to get clear with you that I am not here to tell you how you’re going to make a lot of money fast — though I do think it won’t take long for you to start feeling wealthier and more comfortable with your finances, and that’s really the most important thing. I can’t tell you how many people I know who make a lot more money than I do, who are a lot more stressed out about their money month-to-month than I am because they’re not clear on the effects of their choices — overextending themselves for a car lease that eats up all of their disposable income, being OK with credit card debt (eek!), stretching themselves for apartment or home payments in areas they can’t afford, and the list goes on.
I’m going to get into the myths we tell ourselves about making money and about what will make us “happy” that I see hold all kinds of people back in another post. But for now, I’ll just say that your life, now and 20 years from now, is all about choices. If you think you want to own your own home one day, have kids that you’re able to put through school, retire comfortably, or anything that increasingly seems to require an unattainable amount of wealth unless you mortgage the hell out of your life, and you have a decent amount of disposable income after you cover your basic expenses, then you need to realize the only reason these things seem so unattainable is because you haven’t gotten serious about your choices.
But fear not! I’m here to let you know that if you’re reading this, and your ready to take a good look in the mirror (i.e. at your money), then you are doing the most important thing you can do, and that’s taking the first step.
We’re about to start on the path to building your wealth — your kingdom — in a way that will not only save you money but actually make you a lot more money over the course of your life (I promise I’ll be convincing you about the super sexy world of compounding interest soon!), so whip out your phone and order your favorite meal from your favorite local restaurant (try ordering directly from them, they’ll appreciate skipping the commission to the not-so-local food delivery behemoths and you’ll help out your favorite local spot along the way). Treat yourself. Not only do you deserve it for adulting so hard, but the amount you spend will pale in comparison to where you’re going.
When the food comes, sit back, relax, get out your laptop or smartphone and a notepad, and let’s get intimate (seriously, is it just me, or is there something so ridiculously attractive about a person taking their future seriously??).
Exercise: Get To Know Your Money
Now that you’ve got your meal, some nice music going in the background and maybe even a little glass of wine, it’s time to get to know your money.
- Make a list of ALL of your recurring monthly payments and expenses. For now, I don’t care if they’re the absolutely necessary things like rent and utilities, or the nice-to-have’s like your Netflix subscription and your gym membership. If it’s something you’re paying on a monthly basis, it goes on the list. Try to be as granular as possible — make a line for power and line for water, rather than simply utilities; car insurance and renters insurance, separately — you get the gist. For me, it’s helpful to comb through my credit and debit transactions over the last month online to spot everything I have linked or set up for auto-pay from those accounts. If you’re anything like me, you can make your list in a super simple spreadsheet (which will be helpful later on), but doing it in a word doc or even written on paper with the help of a calculator later will suffice. Just make sure you list EVERY recurring payment or commitment you can possibly think of and find in your accounts. Don’t omit anything because you don’t think it’s relevant. For things like groceries and gas that can vary, try and find all of these transactions over the last few months to come up with a conservatively high estimate of how much you should consider yourself committed to spending on a monthly basis. For example, I noticed I fill up my tank about 2.5 times a month on average, and if gas prices are making each trip around $35, well 2.5 x $35 equals $87.5 per month on gas. Well, I know that’s a rough estimate, so I set my own gas expense at $100/month. Do the same for your grocery store trips. And please don’t include your meals out or delivered in this part — although they’re fun and easy, these are by no means commitments.
- Next, write down your total take-home income. This is the amount of money that comes into your bank account from your employer every month after they’ve withheld taxes, elected benefit contributions and the like. Fair warning, this step is really only bulletproof if you have a fixed income, but if you’re hourly or a freelancer and have a good consistent income history month-over-month, you can figure out your take-home pay for the purposes of this exercise too. Just be sure to stay on the conservative side — if you estimate you’ll have significantly more coming in than you really end up with just to make yourself feel good, you’re not doing yourself any favors whatsoever.
- Now add up all of your recurring monthly payments/commitments and subtract the total from from your monthly take-home income. Again, assuming you’re here because you have some level of disposable income that you want to do better with, your result at this stage should be a positive number.
- Note: If your result was not a positive number, you’re going into debt, which is the complete opposite of building wealth. You need to either take a good look at your recurring expenses immediately and figure out which ones you can cut out or cut down to make sure you aren’t becoming a debtor, or figure out how you’re going to increase your income in the near term, or a combination both, to ensure you aren’t digging yourself further into debt and ideally to start chipping away at your deficit. There is no shortage of opportunities to add to your income, even in modest ways such as driving for a ride-share or food delivery company. Don’t be above drastic steps if you’re in position where your basic expenses are outweighing your income — this is your future and your freedom we’re talking about. Embracing the slog now will mean not enduring it for a lifetime. If you’re feeling helpless and like you don’t know where to start, please send me an email and we’ll figure this out. There’s a whole community here behind you.
- OK, so, by now you’ve hopefully got a really clear picture of what you’re bringing in and what’s automatically going out every month. As a final step to get to know you’re money, it’s time to turn your attention to the amount of money you should have left before you start spending it on everything else each month. At this point, I don’t want you to judge that number and figure out what to do about it if you don’t like it. For now, just realize that whatever the amount is, if you’re getting to the end of every month feeling like you don’t have money to put away and grow for your future, that means you’re spending the entirety of that amount. And up to now, you really don’t even have a good grasp on what you’re spending it on. Going back to our example of $3,000 income and $2,000 basic expenses, that left $1,000 to potentially be saved every month. I am not going to tell you that you should save the full $1,000 every month — I don’t even think that’s a healthy or sustainable lifestyle. But realizing how much potential you have to save before you make a series of small but impactful choices every month — a latte a day, or maybe a series of small online shopping splurges — can be a huge eye-opener.
- Finally, I want you to look at that amount of money that should be left over after all of your commitments, and realize it’s all yours. You worked hard for it. You earned it. Let that sink in. If you want to get serious about building wealth, then it’s time to create a fortress around what you earn and time to get conscious of who and what is taking it away from you, all while getting thoughtful about the things and activities that really matter to you and leaning into them.
If you’re living and spending on idle, then you’re not doing yourself any favors on your path to building wealth. And it’s never too early to start. Professional Financial Planners and Advisors I’ve spoken with all say the same thing: the majority of their clients come to them after they’ve built their wealth, when really the core of their profession is to help people attain wealth in the first place.
Be proud of yourself. By taking the above steps, you’re signaling to yourself that you’re ready to make a commitment to actively building your future self and attaining wealth. You’re not waiting for wealth as a prerequisite to more wealth (a lot of young, disillusioned people increasingly think it is). An exercise in self-awareness is just the first small step, albeit one of the most important ones you can take. When you wake up tomorrow, you’ll be clear on your money. If you don’t like the picture, I’ll be here to help you on your way to changing that. Don’t panic. You’ve got this.
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