The last 18 months were rough on the financial system. The global pandemic forced businesses to close for a long time, and workers were laid off. Some of us managed to keep our jobs, while others were forced to rely on government programs to pay for their bills.
As we see some day light ahead of us, several financial experts believe that the financial impacts of the pandemic will be felt in the years to come. At the moment, the economies of the world are being artificially supported by the governments, as billions and billions of dollars were injected in the markets to keep local economies afloat. But governments can’t spend at these levels indefinitely.
At the corporate levels, some companies will thrive past the end of the pandemic. Companies with solid balance sheets and business models will survive the crisis. On the other hand, companies with weak balance sheets (low cash balance, high debt level) might fade away.
What about households? Just like companies, some will survive and thrive in years to come, while others will have financial issues. Once again, financial health will drive the faith of households around the globe. The past 18 months reminded us of the importance of financial health. But how can we improve our financial strength to face eventual crisis that will occur in the future? The short answer is: By accumulating wealth.
Wealth accumulation, or becoming rich, is the dream of many households in the western world. The ability to finance our lifestyle without any financial stress is an ideal that fuels the dream of tax payers around the world. But how can we get there. If we ask citizens around the world, here are some answers we would get:
· Work hard
· Get a high paying job
· Invest wisely
· Be lucky and win the lottery
All of these answers can make you rich. However, not all of these “solutions” are within your control. While you can control your desire to work hard, you may never have the opportunity to be a top executive of a large company. Investing wisely will eventually work out for you, but again, you do not control the financial markets. And winning the lottery is a long shot.
One key item is missing from the list above, but it is paramount to accumulate wealth: Financial Control and Discipline. In other words: Spend Less.
Spending less is an obvious solution to keep your money in your bank account. But how can you cut on your spending if you are having a hard time paying the bills? You won’t cut on your rent, as you need a roof above your head. You won’t cut on food, because you need to eat. You won’t cut on electricity, because you need to keep your home or apartment warm during winter.
Let’s look at it differently. Can you save money by reducing your spending in restaurants? Are you spending too much on items such as 3 memberships for streaming services, or a gym membership that you barely use? Can you reduce your grocery bills by reducing your consumption of meat, or other expensive products? Can you save money on cigarettes or alcohol? Can you save money by reducing your spending on clothing or shoes? What about saving money by spending less on all of these items?
The answer to all of these questions is: Yes you can. But how much would you save each year? This is probably the question you are asking yourself because you do not have control on your finances in order to introduce financial discipline in the management of your money.
Financial Control and Discipline
Think of your household as a small business. You have incomes (salary, dividends, etc…), and you have expenses. Most of us know how much we earn pre-tax in a year. A large percentage of those who know how much they earn pre-tax also know how much they earn after-tax. We can then conclude that most households are aware of their incomes.
Where it becomes interesting is when you ask people around you how much they spend in a year. Most of them do not know. And if you ask them how much they spend on housing, food, transportation, utilities, entertainment, etc…, they have no idea.
If these people would be managing a company, they would probably be fired. The reason is that every well managed company works with an operating budget. So why so many households do not prepare and work with an operating budget?
In order to inject some financial control into your every day life, you need to know how much you spend, but also HOW you spend it. Once you know how and how much you spend in a year, you will have the information you need to increase your financial discipline and save money by reducing your spending on unnecessary items, or nice to haves. Saving money is a very good solution to accumulate wealth.
In the following posts, we will discuss how you should prepare your personal budget, and how you should track your spending habits.