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What is the Key to Financial Success?

By Tara Conti, CFP®

Many people think there is some magic bullet or “secret” information that will help them achieve financial independence. (They also keep looking for the magic pill that will keep them thin or the miracle cream for beautiful skin.)

We all want easy answers without having to work at it or make any changes. My experience has shown me that this is not how it works. You do have to make changes and take some consistent positive action to achieve a goal.

Even when things are dropped in your lap, like winning the lottery, it rarely solves the ongoing problem. This is because the behavior pattern over the long term will eventually take you back to the same situation again and again.

The key to financial success or financial independence is living within your means.

Spend less than you make and save money for the future and you can achieve financial independence.

It is that simple. Even a little bit of savings will accumulate and grow into significant savings over the long term.

It is the trend over the long term that makes a difference. It is called the magic of compounding interest for a reason!

You don’t have to know everything about financial planning or investments to be financially successful. You can pay an expert to help you with the challenging questions that are specific to your situation and help you with investing. The harder part is to have savings that continues to build and grow. Unfortunately, there is no “hot” stock tip that is going to make you millions.

The “hot” tip or key to financial success is to pay attention to your cash flow and create the habit of saving.

Yes, it is simple but it may not be easy to spend less than you make.

Cash Flow = Money Coming In – Money Going Out

Basically you want to have a positive cash flow and save this excess money.

So how can you improve your cash flow situation?

Please note that there are two variables in this equation – money going in and money going out.

You can increase your money coming in and / or decrease your money going out.

Many people don’t think about increasing their money coming in (except when they dream about winning the lottery). Although it may be more challenging, you can increase your money coming in. A few examples of ways to accomplish this are: taking another job, getting a higher paying job, having your own business or wise investments that brings in more money.

The other variable, money going out (what you spend) gets more attention.

If you are struggling with your cash flow I recommend that you try something (maybe a few things) and see what happens. You need to find actions that work for you so keep trying things until you find actions that do.

Also, do what you can now; don’t keep procrastinating with your finances. There is never going to be a better time than now.

Here are a few ideas to try…

1) Start automatic savings as soon as possible.

Put your savings somewhere that isn’t easily accessible to you.

Try to view savings as a requirement in your budget or spending.

Savings is a requirement if you ever want to live without having to depend on working and earning money. The younger you are when you learn this important lesson the easier it is to do.

I recommend that when young people start their first job they sign up for the retirement plan as soon as possible. I understand why companies have a waiting period but I also wish it was more common to start putting money away immediately at new jobs because it is so easy to spend the money we have or see.

If they don’t see the money in their paycheck or bank account most people will adjust their spending to match that level. (It is similar to time management. Most of us will use the time we have allocated to a job. (Please see the Big Rocks story.)

Even if it is a small amount, start saving something because it will gradually build.

2) Only Use Cash

There are some people who overspend and it doesn’t matter how much money they have or what the bank statement says. This is one of the issues with credit cards. You are allowed to charge something and you do not have to have the money to pay for it. This can get you into trouble.

If you have this issue, I recommend that you get rid of your credit cards or stop carrying them around with you and go to a cash system. Studies show that a different part of our brain is activated when we have to give cash in exchange for buying things. It makes you think twice.

Take out the money you are allowed to spend each week and / or put money in envelopes for each spending category (food, fun, gas, etc.) to help control your spending.

3) Track your spending

I expect that you have heard this before. Yes, it can be an effort but if you are truly struggling with your finances this does make a difference. Just like keeping a food diary does for those who want to lose weight.

Most of us are “unconscious” about how we spend our money. We honestly don’t know where it goes. It is easy to track the big ticket and consistent items (rent / mortgage, insurance, food, going out to eat etc.). The miscellaneous expenditures add up.

I have recently started tracking my spending on Quicken to see what I learn. Part of the reason is that I have been told that once you have kids, your money just evaporates. I will soon be having my first child so I am interested in seeing how this occurs for me and what I can do about it.

I cannot tell you how many times a client has presented their budget to us and it shows they should be saving a large sum of money. We ask what they are saving anything and the answer is nothing or much less than what their budget says they should be. So money is going towards things that are not listed on that budget. The way to get answers is to track your spending and go back and see what you actually spent money on over the past year.

There are various ways to track your spending –

• paper and pencil with a cash notebook or spreadsheet
• online tools like mint.com, budgettracker.com, or budgetpulse.com
• software like Quicken, Mvelopes or PearBudget or MoneyDance

The important thing is just to do it.

The only way to fix this is to take the time and effort to become conscious of your spending and see where your money is going.

With spending information comes power. With this information you can make wiser, more conscious spending decisions.

When you see that you are spending $3 a day for coffee it doesn’t seem like a big deal yet when you see the cumulative numbers it becomes much more real for you. $15 per week on coffee is $780 per year. Can you think of a more worthwhile way you would like to spend that money? You may love your coffee and don’t want to make a change, but it helps to have the information so you can make better decisions.

Saving the $780 per year for 30 years growing at 7.2% will become over $76,000. This is just from saving your $3 per weekday coffee.

Conclusion:

As a financial planner I believe cash flow is one area that is not given enough attention. This may be due to the fact that it is challenging for an advisor to provide assistance with it since spending is such a personal decision and outside an advisor’s control.

I do not mean to present this as something that is easy to do. It is not. We all have our own deeply established habits and beliefs around money so be patient with yourself.

I cannot say it enough--

Your cash flow is the key to financial success or achieving financial independence. So start right now. Take some actions now to get your cash flow and savings moving in the right direction.

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