Any time you turn on the TV or open your web browser, we’re peppered with ads and promotions about self-improvement. “Eat this miracle food to lose weight fast.” “This man made 6 figures working 3 hours a week.” “How our lives got better after changing this one habit.” The gimmicky clickbait ads rarely turn out to be anything more than websites wanting clicks.
Instead of trying to short-cut our way to success, what if we took a disciplined approach by building the future we want for us and our family through taking charge of our personal finances?
As mentioned in a previous personal financial post The Psychology of Money, money is hard. Read any relationship guidebook and see that the #1 topic couples fight about is money. In a recent WSJ article, 40% of Americans surveyed said they don’t have enough cash on hand to cover an unexpected $400 expense.
We also explored the idea of viewing your personal finances as a “business,” in that living below your means will provide net income to further the lifespan of your business. Let’s dive deeper into what that means and what steps are necessary to build our financial future.
There’s two ways of looking at the same equation (accountants call this your Income Statement):
These are the switches we can pull every day to better our future. Successfully managing our personal business will build our financial future.
The Basics
The easiest way to get on track is by monitoring and tracking your financial inflows and outflows. We suggest using Personal Capital. This free service connects to your accounts (bank, credit cards, etc) and provides you an aggregated view by category. This takes all the hard work out of manually downloading your statements and makes your analysis that much easier.
Disclaimer: I am not paid to advertise Personal Capital. I have been a customer for years and these opinions are solely mine.
Occasionally monitoring Personal Capital will help you in the long run. But if you’d like to take it to another level, we’ve provided a spreadsheet that will assist with tracking your income and expenses over the course of a year. Create a budget and track it each month to see how it fluctuates. Keep yourself accountable. Appropriately managing your finances will improve your confidence and spillover into other aspects of your life.
Income
It’s easy to get carried away with how to manage our expenses (we’ll talk about this more in Part 2), however many overlook how valuable increasing our income can be over our lifetimes. Perhaps it’s due to risk aversion or partly because our salaries are thought to be out of our control. In other words: I’m comfortable with my job, make a decent salary, and don’t want to look for a better opportunity because I’m afraid of rejection or the uncertainty of changing companies.
Taking control of our careers can be extremely lucrative, but let’s look at an example of a “typical” (we use this term ironically) career progression to better understand how much can be left on the table.
Ron Swanson graduates from a state university with a well-paying job paying him $50k his first year. He’s loyal to his company and stays with them for 30 years before he retires (early, we might add, because he continually takes our personal finance advice). His company appreciates his loyalty and gives him a 2% annual salary increase as his reward. By the end of Year 30, Ron is making $88k for a total of $2.0 million over the course of his career. Not bad!
Andy Dwyer graduates from the same university with the same degree and gets a similar job to Ron’s starting at $50k. He works hard, learns the ropes at his company, and through a combination of promotions and changing jobs every 5 years he increases his salary by 5% every time. His salary is $106k by Year 30 with total career earnings of $2.2 million. Andy makes over $186k more than Ron for being proactive with his career choices.
April Ludgate, having met Andy in college and fallen in love, takes the same path as Andy. However, given her steely resolve, she commands a 10% increase with each change of job or promotion every 5 years. April’s ending salary is $140k with total career earnings of $2.6 million. That’s $350k more than Andy’s lifetime earnings and $537k more than Ron’s!
Here’s what these results look like graphically:
This example paints an appealing picture to those willing to work hard and be disciplined towards progressing their careers. That being said, our example is inherently flawed by failing to account for yearly inflation. In Ron’s case, his yearly 2% raise would likely only cover the cost of his dollars becoming less valuable (this is largely assuming inflation remains relatively low, or around 2% per year, over the 30-year horizon). In other words, Ron’s “yearly raise” is nothing more than keeping his salary barely above the steady decline in purchasing value of his money every year.
But whatever happened to employee loyalty? Our response is mixed. Yes, being loyal to your employer is important
and can lead to progressing your career.
However, our world is increasingly evolving into one of “journey-men” vs
“career-men.” We live in a society that
is increasingly looking at the financial bottom line compared to decades ago,
leading to layoffs process improvements where nonessential employees aren’t
needed. Bottom line: if a company is
willing to let you go at any moment, then don’t hesitate to return the favor.
Side Hustles
We’ve talked about furthering your 9-5, but what about the other hours of the day? This can be time you spend increasing your monthly income to pay off debt, helping diversify your income, or just saving up for your next trip.
Here are some side hustle ideas:
- Completing surveys
- Tutor
- Start a blog
- Provide lawn care assistance in your neighborhood
- House sit
- Uber/Lyft driver
- Become a photographer
These are just a few of the ideas you could do in your free time to boost your monthly income without sacrificing the other aspects of your career.
While it may be easy to focus on cutting expenses, don’t forget the other side of the equation. Continually building your income can make crushing your net income that much easier!
In next week’s post, we will dig into managing expenses and what to do with your leftover net income. Thanks for reading and let us know what you think! Do us a favor a share with a friend who hasn’t heard of us!
Nice article
Thank you!