Free Money Finance

30 Steps to Great Finances: Steps 28 through 30

Today we are finishing our list of the 30 steps anyone can take to have great finances.

If you are new to this series, please read through the steps we've already covered, starting with 30 Steps to Great Finances: Steps 1 through 3, before reading this post.

If you have been taking action since the beginning of this series, your finances are probably in much better shape now than they were earlier. 

The last three steps focus on some final ways to improve your finances. Take these steps, and you will be able to keep all of the good habits you have developed.

Let's get started.

Step 28: Automate Your Finances

You may think to get ahead financially, you must continuously make smart money decisions. Of course making smart money decisions is necessary. But you don't have to make great moves continually; many times you just need to make them once. One way you can take some of the burden off your shoulders is by automating your finances.

So what should you automate? Let's begin with the pay from your job. Contributing to an employer-matched 401k is the first no-brainer for an automatic deduction. Then have money taken from your check for things like flexible spending accounts, health savings accounts, and the like. From there you can send the rest of your check to your bank where it can be dispersed as you like (I have funds that go from my bank to Vanguard each month where they are automatically invested there.)

You can also save yourself a boatload of time (and potentially money -- you will never pay late fees) by automating payments of your monthly bills -- anything that's a recurring cost.

You can also fund any number of accounts automatically. You can build up your emergency fund, save for your next car, or put money away for your kid's college costs.

So try to automate as much of your finances as you can. It will make saving, investing, and managing your money much, much easier. And after a while, you won’t even notice that the money is not in your paycheck and is quietly growing your wealth through no further work on your part.  How sweet is that?

Just don’t be lazy. Don't "set it and forget it." You will still need to occasionally check/manage your accounts to make sure there are no unauthorized charges or other errors.

Step 29: Develop Long-Term Goals and Plans

Now that your finances are solid, you can develop long-term goals and plans. 

This isn't to say that you didn't have goals back when you started this process because you certainly did. But those were likely more along the lines of "get my finances in order" sort of goals. Now that your finances are in order, you're looking at a whole new world of possibilities.

So what do you want to accomplish? Don’t be afraid to dream big. Do you want to retire at 50? Do you want to buy that "special" car you've wanted since you were 13? Do you want to create your own non-profit to help disadvantaged youth in your area? Do you want to do some special things with your family (like take a cruise)? Do you want to completely fund college for your kids?

Whatever you'd like to do, write down your plans.  Trust me, you’re much more likely to accomplish goals when you write them down instead of just thinking about them. Once you have them written down, be sure to review them regularly to make sure you keep a focus on your priorities.

Step 30: Establish Regular Tracking and Review of Both Your Net Worth and Spending

Way back in Step 1 we discussed computing your net worth.  Now that your finances have improved, you should calculate your net worth at least every year. (Personally, I compute it monthly, but I'm a bit anal about money management.) 

Why?

Because it's a measure of your progress. You can see how healthy your finances are (or aren't) and make adjustments accordingly. Hopefully you can watch your financial situation improve every year -- which will likely motivate you to make them even better.

In addition, review your spending plan once a month. Take the time to reconcile how much you have spent to make sure you are on track and not overspending.  Over time you will develop a feel for your spending plan and will know if you are over, and you can review your plan less frequently (I moved from monthly to quarterly to semi-annually to annually to whenever I see something on Quicken that I want to check into.) Whatever time period and method works for you, be sure to keep a handle on how your money is spent. Otherwise you risk letting valuable savings/investments simply slither out of your hands without any notice at all.

There you have it.  Thirty steps to improve your finances. 

If you haven’t yet started your journey to better finances, what are you waiting for?

Have you had success with following these steps?  I would love to hear your feedback!

30 Steps to Great Finances: Steps 25 through 27

Today we are going to continue listing the 30 steps anyone can take to have great finances.

If you are new to this series, please read through the steps we've already covered, starting with 30 Steps to Great Finances: Steps 1 through 3, before reading this post.

So far we have covered 24 steps, and if you have completed them all (which will likely take several years), you’ll be in a great place financially.

But like life, improving your finances is a journey, not a destination.  Once you become financially secure, you need to learn how to remain secure -- and that's what today's tips are about.

Let's get started.

Step 25: Guard Your Health

“You have nothing without your health” is a cliché, but it is true.  You have worked hard to improve your finances, and good health can help you enjoy your life more now.  I am not going to be preachy, but taking care of your health is just as important as taking care of your finances. In fact, I think it's MORE important.

The healthier you are, the more you can help others, give generously, serve as a mentor to others, and ENJOY your wealth.

Step 26: Get Educated on How to Handle Finances

We have all heard of or known someone who lost a great deal of weight, maybe 50 or 100 pounds or more, but then gained it all back, often within a relatively short period of time. 

Why?

Simply put, they didn’t change their long-term behavior.  Sure, they changed their behavior long enough to lose the weight, but then they reverted back to their old habits. 

The same can be true of money management.

Since the start of this series, we have talked about how to get out of debt, invest, save and the like. If you have done/lived these tips, it's likely that you already have a pretty solid financial education. That said, you still have more to learn -- and if you haven’t changed your core beliefs about money, you may find yourself back-slidden rather quickly.

So how do you change your behavior? 

Become educated about money. Read blogs, websites, magazines, books (free at the library!) and so on. Listen to podcasts. Maybe take some classes.  Find some like-minded people and become financial accountability partners. Do whatever it takes to fully educate yourself about money. After all, no one cares more about your money than you!

Step 27: Get a Financial Mentor

One of the best ways to encourage your new behavior is to find a financial mentor who can help you make smart choices that will support good financial habits. 

A mentor can be a trusted friend who is good with money, a financial planner that you respect, or someone else in your life that you seek to emulate financially.  He or she can also serve as a sounding board as you become more confident managing your money.

I have been lucky enough to have several mentors contribute to my life. Each has added something to my life that has helped me move to the next level of understanding and managing my money. I hope to be a mentor to others (both personally as well as to larger numbers through this blog) including my children as they grow and face the ever-increasing money challenges associated with getting older.

Stay tuned. Next time I will be back with the last three steps as we wrap up this series.

Update: Click here to read steps 28 to 30.

30 Steps to Great Finances: Steps 22 through 24

Today we are going to continue listing the 30 steps anyone can take to have great finances.

If you are new to this series, please read through the steps we've already covered, starting with 30 Steps to Great Finances: Steps 1 through 3, before reading this post.

We are reaching the home stretch, which means our steps now will focus less on growing wealth and more on maintaining and protecting it.  Growing your wealth can take a lifetime, but one accident or other event may be all that is needed to wipe out your financial security.  Don’t let that happen! 

Let's get started.

Step 22: Avoid the Worst Money Mistakes

Making the wrong money mistake can be a financial disaster -- something that can wipe out years of hard work, discipline, and financial self-control. And while recovering from most money mistakes is possible, it's a long, hard process that's simply best avoided in the first place.

That's why I named my list of the worst money mistakes anyone could make. They include (in countdown order):

10. Not having an emergency fund.
9. Neglecting to make a will.
8. Not having enough insurance.
7. Marrying the wrong person.
6. Not saving.
5. Buying too much house.
4. Waiting to invest.
3. Being deep in debt.
2. Not working to maximize your career.
1. Over-spending.

If you have been following this series and implementing the steps we have discussed, you will avoid many of these mistakes -- but not all of them. That's why this list is worth reviewing and taking to heart. Because any one of these mis-steps can put a huge damper on your best-laid financial plans. 

Step 23: Get Proper Insurance

Most people hate to think about buying insurance.  Some consider it a waste of money -- you pay for something and then hope you don't need it. But if you do ever need it, it could be a lifesaver. That's why insuring yourself properly is one of the most important steps you can take to protect your assets and your potential earning power.  

Here are the types of insurance I think most of us need:

• Auto
• Homeowner or Renter's
• Life
• Disability
• Health/Medical
• Umbrella

FYI, one type of insurance that is not yet on my list but likely will be soon is long-term care insurance. I don't have a solid opinion on it at this point, but my initial research seems to be pointing toward it being a "must-have."

Step 24:  Make Out Your Will and Estate Plan

If you die without a will, the state will determine what will happen to your assets and who will care for your children, if you have them. 

Scary thought, right? 

Yet there are millions of people who have not yet created their wills. 

We don’t like to think about it, but we are all going to die some day, so for those we love, it is best if we are prepared.  Take the time to create your will and other estate planning documents so you can dictate where your money goes, not the state.

You should also make a list of all important financial information that your family needs to know such as your bank accounts, credit card numbers, investment funds, basically anything related to your finances.  If you need help thinking of things to include for your family,  check out 12 Critical Things Your Family Needs to Know.

Next time we will look at three more ways to protect yourself, because, after all, protecting your wealth is just as important as growing it.

Update: Click here to read steps 25 to 27.

30 Steps to Great Finances: Steps 19 through 21

Today we are going to continue listing the 30 steps anyone can take to have great finances.

If you are new to this series, please read through the steps we've already covered, starting with 30 Steps to Great Finances: Steps 1 through 3 before reading this post.

Today we'll be talking about saving, debt reduction, and giving. Interesting combination, huh? :)

Let's get started.

Step 19:  Begin Saving for Larger Events and Purchases

Once your surplus increases and your debt is paid down, keep working to increase your income and decrease (or at least hold steady) your expenses. By doing this you will be churning out more and more positive cash flow every month -- even after you save for retirement. This is the perfect time to start saving money for life's bigger purchases: a home, cars, and even college for your kids.

Of course you may or may not want any of these (some prefer to rent, many city dwellers don't need cars, and some parents leave college expenses in their kids' hands.) That is up to you. However, if you do want to save for any, here's some advice on them from me:

If you don't already have a home, start saving so you can make the largest possible downpayment. 20% is a minimum IMO. I'd prefer to see you begin with 30% or more down.

At this point you should NOT be buying a car with a loan. From here on out, it's cash only for vehicles, whether they are used or new.

As for college, the same principles that work for retirement saving work for college saving -- save early and often, and you will have enough when the time comes.

Step 20:  Pay Off Your Mortgage

Can you imagine a life with no debt?  No credit card payments, no car payments, no mortgage payments?  What would you do with all of that extra money that is currently servicing your debt? 

If you've made it this far in the process, you're now ready to go where few have gone before and become COMPLETELY debt free. Yes, this means paying off your mortgage.

There is no magic to paying off your mortgage.  Simply grow your gap and put much of the difference on your mortgage.  (That's how we did it -- and we've been mortgage free for almost 15 years now.) When it is paid off, your surplus will be even larger, and you can move on to our next step.

Step 21:  Give to Charity

Personally, I put this into practice well before step #21 in my own life. But for those who do not want to give from the get-go, at this point there's no reason not to. You are covering all your money bases and are doing quite well financially. Now is time to think about others -- those who are less fortunate than you and need some help.

Pick a charity (or a few) to give to. Volunteer to help out as well if you can. It won't be too long before you'll find out that even though you're giving money, you are wealthier because of your giving. Yes, when you bless others, you are the one who REALLY gets blessed.

When you are working on growing your finances, there is a time when you finally reach solid financial footing.  If you've taken my advice through step 21, you will be there.  In the next steps we will talk about how to protect the financial security that you have worked so hard to achieve.

Update: Click here to read steps 22 to 24.

30 Steps to Great Finances: Steps 16 through 18

Today we are going to continue listing the 30 steps anyone can take to have great finances.

If you are new to this series, please read through the steps we've already covered, starting with 30 Steps to Great Finances: Steps 1 through 3, before reading this post.

Today we'll be talking about making good investing moves as well as begin to get rid of all that debt (if you have any).

Let's get started.

Step 16: Get the Full Employer 401k Match

What if you had an investment that gave you a 50% or even 100% return on your money guaranteed? Wouldn't you put all the money you could in it? I sure would.

Well, that's what a 401k does. You put in money and your employer matches that with a given percentage. You're "up" by that percentage before your money is ever invested. Then, if you invest it properly for 20, 30, or 40 years, you'll be up BIG when you retire.

Great deal, right? And yet every year employees leave $30 billion on the table in matching funds that aren’t used!

Don’t be one of those people.  Don’t let that free money slip through your fingers. Contribute enough money to your 401k to at least get the full employer match amount.

Step 17:  Pay Off All Debt but the Mortgage

One of the best ways to increase your surplus is to pay off debt.

According to Morningstar the average American will pay over $600,000 in interest over his lifetime. Wouldn't you like to save yourself $600k? Me too.

If you are tens of thousands of dollars in debt, you are likely paying out at least several hundred dollars in minimum payments every month.  Get rid of that debt and your gap will increase significantly -- which will help you grow your net worth.  

If you don’t know where to start or you are overwhelmed by the process, take a look at my posts Seven Steps to Get Out of Debt. This article will take you through a step-by-step process for getting rid of all debt except your mortgage (we'll work on that one in a later post).

And even though you aren’t going to tackle mortgage debt at this point, you may want to consider refinancing your home to give you more cash flow to get rid of your other debts faster.

Step 18:  Invest for Retirement Using Index Funds

The key to retirement investing is to invest as much as you can for as long as you can while getting a good return rate. It's as "simple" as that.

I put "simple" in quotes because, like with personal finances in general, investing success is simple to understand but not easy to implement. The reason is that it requires discipline, patience, and persistence, three qualities that many American's seem to lack these days.

More than any other factor, the amount of time you save/invest is the variable that most impacts your investing performance. So start saving NOW -- and save as much as you possibly can.

As for getting a good return on your money, I am a big fan of index funds.  Their beauty lies in the fact that they perform better than most actively managed funds once adjusted for fees. In addition, they are VERY easy to manage and require little over-sight. Little time + good returns = an investment I like.

So, those are the tips for today. They should give you plenty to work on, right? 

Stay tuned -- the series continues with the next post.

Update: Click here to read steps 19 to 21.

30 Steps to Great Finances: Steps 13 through 15

Today we are going to continue listing the 30 steps anyone can take to have great finances.

If you are new to this series, please read through the steps we've already covered, starting with 30 Steps to Great Finances: Steps 1 through 3, before reading this post.

Last time we discussed ideas for making extra income. Today we'll shift gears and begin focusing on the second part of the wealth-building equation, cutting expenses.

Let's get started.

Step 13: Have a Trusted, Financially Successful Friend Review Your Cash Flow Plan and Make Suggestions

Early on in this process, I had you create a cash flow plan. You've had a chance to do that as well as tweak it a bit based on your actual spending (which you're likely still working on -- writing down every penny you spend for 30 days.) But now that we're entering the phase where we'll concentrate on cutting expenses, you're going to need some help.

Find someone you know, trust, and respect who is doing well financially and ask them to look over your cash flow plan. Specifically ask for them to help you identify places where you may be spending more money than you need to.

When my wife and I used to do financial counseling, we would have couples bring us their budgets (we provided the forms in advance to make sure they covered everything.) Almost every time we ended the session with a laundry list of how they could save money -- based on our own personal experiences. For instance, one couple had two vehicles that were much older than ours and yet they paid twice what we did for car insurance. When we asked where they got their insurance, they said it was from a family friend, someone the wife's dad had always used, so that's who they used. We told them to quote it out. They came back the next time with a cost that saved them several hundred dollars a year for the same coverage! This is what an experienced mentor can do for you and your budget. 

So find a mentor to help you identify cost savings. I'm betting he or she will come up with a lot of suggestions you have never considered.

Step 14: Reduce All of the Expenses You Can

You can add to the cost savings list your mentor creates by developing your own. And lucky for you, I have a ton of suggestions to get you started.

Look in the FMF archives and click on "Saving Money". There you'll find plenty of ways to save a ton of money.

Step 15: Create an Emergency Fund

No matter how well we plan for events in our lives, emergencies happen, and if you aren’t prepared, you will probably have to pay for those emergencies with credit and go into debt.

An emergency fund cushions you from these unexpected expenses.  It is not optional if you plan to be on sound financial footing—it is essential. 

Even if you can only set aside $20 a week, start doing that.  The earlier you start your emergency fund the better.

The rule-of-thumb guideline for the amount of an emergency fund is six months' worth of living expenses, but I actually carry closer to nine months' expenses because I prefer an extra margin of safety. If your job situation is at all shaky, you're paid on commission, or you are paid at variable times and amounts, I suggest you have a higher amount as well.

As your emergency fund grows, make sure you have it in an account that offers 1) safety and 2) easy access. While it's nice to earn at least a decent amount on your money, income is not your primary objective with these funds. Be sure that are in an account that is 100% safe (like a checking or savings account) and that you can get to the money quickly if (or should I say when) you need it.

Well, that’s it for now.  Stay tuned for the next piece in this series when I’ll be back with more ways to improve your finances, one step at a time.

Update: Click here to read steps 16 to 18.

30 Steps to Great Finances: Steps 10 through 12

Today we are going to continue listing the 30 steps anyone can take to have great finances.

If you are new to this series, please read through the steps we've already covered, starting with 30 Steps to Great Finances: Steps 1 through 3, before reading this post.

Last time we offered some suggestions for making extra income and we continue with that line of thinking today.

Let's get started.

Step 10: Use Credit Cards Strategically

I look at rewards credit cards as offering what I call opportunity money. This is extra money I can earn if I simply chnage my behavior a bit. And no, the change is not "spend more", it's simply "pay with credit rather than cash and get a reward for buying what you would have purchased anyway." I love earning money for doing something I was going to do anyway, that's why using rewards credit cards are one of my multiple streams of income.

I generally earn a couple thousand dollars a year doing this. Yes, I have some large expenses that help me out, but even if you "only" earn a few hundred dollars a year doing this, isn't it worth it?

Of course you need to manage your cards properly. You must pay them off in full every month, avoid all fees, and not make purchases you wouldn't have made anyway. If you do any of these, you'll cost yourself far more than what you'll make. I've never had a problem in 20 years, so if I can do it, you can too.

Develop a strategy that works for you. Look at where and how you spend your money and get cards that make the most of this spending. Also consider the right mix between using cards for rewards and getting cards simply for the bonuses.

IMO if you are not using credit cards strategically, you are leaving easy money on the table.

Step 11: Sell Your Clutter

Take a look around your house. If you are like most people, there is a lot of “stuff” you aren’t using on a regular basis that you can sell and make some extra money.  Consider clothes, kids’ toys and clothes, and other items you just don’t use. Not only will you earn some extra money, but you'll also declutter your life.

And if you are renting out a storage unit for your “stuff”, you can also save yourself some money by having a sale.  It's a double win!

Step 12: Rent Your House

I don’t mean move out of your house, but instead, rent some of your extra space.  You could rent a spare room to someone like a college student or recent grad. Or you could renovate your home and open a bed and breakfast.  (Ok, this example is a bit extreme and not everyone will have the desire or funds to do this, but it is an option for some. Then again, maybe I've been watching too many episodes of Income Property.)

If you don’t like the idea of sharing your home, try renting your space for storage. The self-storage industry is a $17 billion a year behemoth. Maybe it's time for you to get yourself some of that pie by renting basement or garage space to others who need a place to keep their stuff.

Or, if you have a two-car garage but only one car, you could rent the space to a neighbor for parking, boat storage, or something similar.

The original Frugal Zealot, Amy Dacyczyn, even once suggested renting part of your freezer chest to a single person so they could buy food in bulk and save.
 
As you can see, you are only limited here by your creativity. :)

So there you have them -- three new ways to make money and improve your finances.  Take a stab at some of these strategies to see if they can work for you. And stay tuned -- we're not even halfway through our list of 30 steps to great finances. There's still a lot more good stuff to come!!

Update: Click here to read steps 13 to 15.

30 Steps to Great Finances: Steps 7 through 9

Welcome to the third post in the series 30 Steps to Great Finances series!

If you missed the first two posts, you can find them here: 30 Steps to Great Finances: Steps 1 through 3 and 30 Steps to Great Finances: Steps 4 through 6.

Today we'll detail steps seven through nine that will take anyone from financial zero to financial hero.

Let's get started.

Step 7:  Grow Your Career – Other Opportunities

In addition to the career-related tips we've already suggested (over-delivering, networking, being likeable), there are several other ways to advance your career (and thus increase your income.) Here are three of the best ones IMO:

• Get educated. Take classes to learn more about your field or to become a better manager (or potential manager).  Showing the initiative to learn more says a lot to your supervisors about your dedication to the job.
• Get certified in a skill important to your field.  This may set you up to be a specialist in your department, which makes you more valuable.
• Apply for awards. Don’t sit around waiting for recognition, awards and praise to come to you—look for the opportunities yourself. You may be surprised how few people do this, and if you are the best of those who applied, you get recognition by winning the award. Awards look great on a resume and also reinforce to your current employer what a great asset you are.

The more you can gain recognition and experience in your field, the faster your career can grow, and, often the more money you can make.

Step 8:  Develop a Side Business Using the Skills You Already Have

Once you take steps to make the most of your day job, it is time to focus on additional income streams. And one of the easiest ways to do this is to use the skills you've developed over your career and freelance at night and on weekends. A few examples of how you might be able to do this:

• If you are a teacher, you can tutor students on the side. As a homeschool parent, I hire teachers all the time to teach my kids subjects my wife and I can't (Spanish, chemistry, etc.)
• If you are a computer engineer, you might offer consulting. Know anyone who needs their computer fixed? Me too.
• If you are a business executive, you could advise small businesses on how to grow their sales, market their services, save money in operations, etc.

Any way, you get the idea. Take what you already do/know and turn it into an extra money-maker.

And who knows? You might find that you enjoy your side gig so much that you can eventually quit your day job and run your side gig full-time.

Step 9: Turn Your Hobby into an Income

What do you do for fun?  What do you enjoy?  Make a list of your hobbies.  Then think how you can turn your hobbies into money making opportunities.  Some ideas:

• My son and I both love soccer, and we have made decent money refereeing soccer games. 
• I know a painter who is an animal lover, so she draws portraits of people’s pets and makes a tidy profit. 
• I used to do quite well as a freelance writer.

Think about it: many hobbies could also be money making ventures. 

Love to garden? Grow organic produce and sell it to stores or at farmers' markets. Play the piano?  Why not give lessons to those wanting to learn? Like to bike? How about a side business repairing and maintaining bikes for others?

There are almost as many money-making ideas as there are hobbies if you just open up your mind a bit and consider the possibilities.

Stay tuned for the next steps coming up soon.  If you have been following along in this series so far, what success have you had following the steps I’ve given?  Share them in the comments.  I’d love to hear them!

Update: Click here to read steps 10 to 12.

30 Steps to Great Finances: Steps 4 through 6

Welcome to round two of my 30 Steps to Great Finances series. If you missed the first post, you can find it here: 30 Steps to Great Finances: Steps 1 through 3.

Today we'll detail steps four through six that will take anyone from financial zero to financial hero.

Let's get started...

Step 4:  Grow Your Career by Over-delivering. 

For the vast majority of us, our careers are our largest sources of income. Furthermore, small differences in earnings over the course of a 40-year career can mean millions of extra dollars in your pocket. That's why focusing on your career and taking specific steps to maximize it is the #1 thing we all can do to grow our incomes. And the #1 way to grow your income is to over-deliver.

Over-delivering is simply going above and beyond what is expected in your job. But it just doesn't happen -- you have to plan to make your extra effort pay off for you. To be as successful as possible at delivering more, you need to follow these three steps:

1. Determine the expectations for your position. Talk to your boss and make a written list of what he expects from you. Make the items as quantifiable as possible so there can be no disputing whether or not you reach them. Agree on the list so you make sure you're on the same page.

2. Work to over-perform. If your expectation is to save the company $100,000, work to save it $150,000. If you need to grow sales 5%, work to grow it 10%. If you need to get three new customers ordering your product, work to get five.

3. Document your success. On a regular basis, let your boss know how you're progressing versus your expectations. Eventually, the update will speak for itself -- that you've over-performed.

These three steps help you establish what is required, beat the requirements, and then get credit for it. Those who get credit for over-delivering get more and higher salary increases and promotions -- which will significantly impact your earning potential during your career.

Step 5: Grow Your Career – Develop and Expand Your Network

Many people think about growing their network when they need something (like a job lead), but this approach isn’t productive.  Instead, you must grow your network before you need it -- so it's ready when you do need help. 

Here are some ways you might be able to do this:

• Take business contacts out to lunch once or twice a week and make time to connect. 
• Get involved in activities that you already enjoy and socialize while you are there (examples: charity committees, church activities, recreational leagues, etc.) 
• Sign up for LinkedIn (a must!), Facebook, Twitter, and maybe even your own blog. But be careful and assume that everything you post will be seen by a potential employer. Yes, especially your drunken party pictures.
• Talk to people you meet every day while waiting in line for coffee or dropping your kid off at school.  The more people you can connect with, the bigger your network. 

Approach your network with the intention of being a giver -- a resource that will help others out. Then when you're in need, your network will be there for you.

Step 6:  Grow Your Career – Become Likeable

Here is the hard truth—you may be doing a great job at work, but if you aren’t likeable, you may not be getting the raises and recognition you deserve. The good news is that you can become more likeable. Yes, experts have developed a list of what makes a person likeable. The characteristics:

• Be honest.
• Be humble.
• Show empathy.
• Laugh often.
• Be positive.
• Control hostility.
• Be polite.
• Act smart.
• Appear attractive. (dress well and proper hygiene.)
• Listen more.

So simply follow it and you'll be set. :)

Ok, it isn't that easy. But let's face it, being likeable is pretty much common sense. We all know how we like to be treated, right? So simply act that way towards others and you should get most of the way home in the likeability category.

That's it for this time around. I’ll be back with the next steps tomorrow, so stay tuned...

Update: Click here to read steps 7 to 9.

30 Steps to Great Finances: Steps 1 through 3

Are you overwhelmed thinking about all the work required to get your finances in great shape?  Well the good news is that you can do a complete financial overhaul (or if you're in less dire straits, a tune-up) in 30 simple steps. Yep, that's it. In 30 steps you can go from a financial zero to a financial hero.

To get this new year started on the right foot, FMF will be posting a series called 30 Steps to Great Finances. It will be running the first several days of January and is designed to take readers from the very basics of money management to the point where they have set themselves up to become wealthy.

No matter your age or stage in life, it is never too late to improve your finances, and the 30 steps I will share over a series of posts will show you how to improve your financial well-being. If you're deep in debt and don't know how to make it to next week, these steps will help (a lot). If you're a millionaire and want to make your finances even better, these steps will give you an extra boost. If you're just starting out after graduating from college, these steps are perfect for you -- apply them now and you'll do very well financially over your lifetime. And if you're older and looking for a way to slide into retirement financially healthy, these steps will get you there. No matter what your financial situation, using the tips I'll be sharing will make it better.

I understand you may be skeptical at this point. All I ask is that you read along and see for yourself. I know the power of these steps because I've personally taken them over the past couple of decades and my finances are much better off as a result. I hope the same for you -- that you'll apply the steps I share and you will be able to reach the financial goals in your life.

Today we'll be covering the first three steps.

Step 1: Know Where You Stand -- Calculate Your Net Worth 

You know the old adage, “You have to know where you are before you can figure out where you are going”?  That is true with your finances too.  The first step to financial hero is to determine where you stand financially. 

We've previously discussed the fact that your net worth -- how much you own after all your assets are sold and all your debts are paid -- is the true measure of your wealth. That's why step one on your path to financial prosperity is to calculate your net worth.

Simply list all your assets (investments, home, and so on), subtract your debts, and that's your net worth -- how much you truly own.

See, that was pretty simple, wasn't it?

Determining your net worth is so important because it gives you a quick snap shot of your financial health.  Plus, it will give you a benchmark to measure your progress against as you make your way through the 30 steps. So do it NOW, before you begin step #2.

Step 2: Track Your Spending for 30 Days

To get a handle on your finances, you have to know where you are spending your money and where all the slow leaks are—the pop you buy every time you get gas or your morning coffee shop coffee can add up more than you think they do.  Tracking your spending will show you this.

There are three main ways to track your spending, but those are for a future step. For now all you need are two simple items: a pen and some paper (I prefer a small notebook that fits easily into a pocket or a purse.)

For the next 30 days you are going to write down both the amount and the payee (where the money went) EVERY SINGLE TIME you spend money. When you pay your mortgage with a check, write it down. When you transfer money to your utility company via your bank, write it down. When you pay for a coffee with a credit card, write it down. When you put $1 into the vending machine at work, write it down. When you give your son a quarter to buy a gumball, write it down. Write down every single way you spend money for 30 days.

If you've never done this, believe me, it will be very enlightening. It will show you where your money is really going (versus where you think it is going.) I've had a few hundred people do this exercise over the course of the past 20 years and there are ALWAYS surprises -- even for those people who think they know where every penny is going.

So write down your spending (and if you're in a family, this includes everyone in the family who spends money) for the next 30 days. Don't question it. Don't dismiss it. Just do it. If for no other reason, simply humor me and do it.

Your financial well-being is worth the effort, right? I thought so.

Step 3:  Know Where Your Money is Going -- Develop a Cash Flow Plan 

Some people refer to this as a budget, but I like "cash flow plan" because it's more descriptive of what you're doing.  Besides, cash flow plan sounds less restrictive and more proactive, don’t you agree? :)

Quite simply, the gap between what you earn and what you spend is one of the most important financial numbers you need to know and work to expand. With a big and growing gap, you're on your way to financial security. With a small or (heaven forbid!) negative gap you are going nowhere money-wise. And the way you know and grow your gap is by developing and managing your cash flow plan.

To make a cash flow plan, figure out how much you make each month, and then use the information you gathered from tracking your spending in step 2 (as well as by looking at past records) to calculate the amount you spend each month. Subtract the latter from the former and what you have left over is your monthly gap (and hopefully it's a positive number.)

If your gap is negative, low, or simply in need of being increased to super-charge your savings, the only two ways to improve it are to increase income and/or cut spending. And that's what will follow over the next several steps -- ideas on how to increase income and decrease expenses.

That's it for this round. Get started on these tasks right away. The next steps will be coming soon...

Update: Click here to read steps 4 to 6.

Money 101: How to Create a Budget

This piece is part of a series I'm calling Money 101 and is designed for those who might not be as advanced in their personal finance knowledge and experience.

In my last post we discussed why you should track cash flow and how establishing a budget facilitates this. Today we'll cover the steps to creating a budget.

Step 1: Track Your Spending for 30 Days

The only way to get an accurate budget is to start with what you're actually spending. And if you haven't been tracking your expenses up to this point, you're going to need to record your actual expenses over a month to see what they actually are.

For the next 30 days you are going to write down what you spent, where you spent it, and what you purchased (i.e. "$30 at Target for a pair of pants") EVERY SINGLE TIME you spend money. When you pay your car payment with a check, write it down. When you transfer money to your credit card company via your bank, write it down. When you pay for a Big Mac with your debit card, write it down. When you put $1 into the machine at the car wash, write it down. When you give your daughter a dollar to buy a brush, write it down. Write down EVERY SINGLE PENNY you spend -- whether it's cash, credit, check, or anything else -- for 30 days.

If you've never done this, believe me, it will be very enlightening. It will show you where your money is really going (versus where you think it is going.) I've had a few hundred people do this exercise over the course of the past 20 years and there are ALWAYS surprises -- even for those who think they know where every penny is going.

So write down your spending (and if you're in a family, this includes everyone in the family who spends money) for the next 30 days. Don't question it. Don't dismiss it. Just do it.

Your financial well-being is worth the effort, right? I thought so.

Step 2: Collect the Rest You'll Need

During the 30 days you're tracking your expenses, begin to collect the other information you'll need including the following:

• Income -- Gather all your pay stubs, deposits from side businesses, and documents detailing any other regular source of income you have.
• Expenses -- Review your accounts (checking, credit cards, etc.) and look for irregular expenses that your 30-day tracking won't identify. Some examples: annual insurance premiums, real estate taxes, water bills (we get/pay ours quarterly), and vacations. You're looking for expenses that may not happen every 30-day period but that will sometime in the year.

Step 3: Put It All Together

At this point you're ready to develop your first budget. I suggest one of two methods for doing so: spreadsheet or paper. They both have their pros and cons and which one you use is simply personal preference.

The process is simple now that you have all the information. In one vertical column write down the names for the various sources of income (first) and expenses (second). For income you might write "work", "second job", and/or "side business". For expenses you'll include "mortgage", "taxes", "food", and the like.

Label the next 12 columns to the right of this one with the names of the months -- January through December.

Now that you have the basic format, fill in the information from the data you've collected. Add in the income you'll get from each source in each month as well as the expenses you'll have each month. Once that's completed, add up the income monthly and the expenses monthly. Subtract the expenses from income and list a number at the bottom of each month as "surplus". This number then gets set aside for savings/investment.

Step 4: Evaluate the Budget

Once you get all the information in the right place, you're now ready to evaluate the data.

The first place to start is whether or not you have a surplus over the course of the year. While you may run a deficit in a month or two, over 12 months you should have a net gain. In addition, you want to make sure that number is where you want it to be (are you saving enough to meet your goals?). If the surplus is negative or if you're not saving enough, you're going to need adjustments. And even if you are doing ok in your mind, you need to give the information a closer look.

Look at your income first. Are there things you could do to increase it? Work more hours, get a second job, start a side business, something else? Take some time to think about how you could grow your income.

Next look at which expenses can be cut or decreased. For some general guidelines, you should be spending no more than the following on these major categories (except for savings, of course):

• Housing (35%) -- Mortgage or rent payment, taxes, insurance, utilities, repairs, and any other cost of living there.
• Transportation (15%) -- Car, gas, maintenance, and insurance.
• Debt Repayment (15%) -- Not including your house and car payments.
• Saving (10%) -- Self-explanatory.
• Living (25%) -- Everything else -- clothing, food, charitable donations, entertainment, gifts, travel, etc.

Step 5: Have a Trusted, Financially Successful Friend Review Your Cash Flow Plan and Make Suggestions

Find someone you know, trust, and respect who is doing well financially and ask them to look over your cash flow plan. Specifically ask for them to help you identify places where you may be spending more money than you need to.

When my wife and I used to do financial counseling, we would have couples bring us their budgets (we provided the forms in advance to make sure they covered everything.) Almost every time we ended the session with a laundry list of how they could save money -- based on our own personal experiences. For instance, one couple had two vehicles that were much older than ours and yet they paid twice what we did for car insurance. When we asked where they got their insurance, they said it was from a family friend, someone the wife's dad had always used, so that's who they used. We told them to quote it out. They came back the next time with a cost that saved them several hundred dollars a year for the same coverage! This is what an experienced mentor can do for you and your budget. 

So find a mentor to help you identify cost savings. He or she will likely come up with a lot of suggestions you have never considered. 

Step 6: Update the Budget

Take the ideas you've identified yourself as well as those your mentor has suggested (and you want to accept) and update your budget. Assuming you have a positive annual surplus and are saving what you want, your budget is now set for the time being. If you are falling short on either of these measures, repeat steps #4 and #5 until the budget is where you want it to be.

If your surplus is negative, low, or simply in need of being increased to super-charge your savings, the only two ways to improve it are to increase income and/or cut spending. We will be discussing ideas for how to do both of these in days to come, so stay tuned.

Step 7: Establish a Way to Consistently Track Your Spending

Now that you have your budget, you'll need to use it to manage your money on a daily basis. In addition, you'll want to record how you're doing so you can adjust as needed. There are three easy ways to track your spending to control and manage your finances as follows:

• Envelope System – This basic system is great for those with a tendency to overspend.  Simply cash your paycheck and place the dollar bills in envelopes corresponding to your budget categories (such as housing, food, clothing, entertainment, etc.).  Cash is removed as expenses occur.

For instance, if you budget $50 for entertainment, put $50 cash in your monthly “entertainment” envelope.  As you entertain (attend movies, concerts, play sports), pay with money from this envelope.  When the envelope is empty, no more spending!  If you find yourself tempted to “rob” another envelope, re-evaluate your budget.  Put receipts from your spending in each envelope to later analyze your spending patterns.

• Ledger System – This system requires more accountability and time, but will give you better spending information.  Similar to a checking account, deposit your paycheck and use a ledger or a notebook (less than $5 at an office store) to record your spending.  On separate pages, write the monthly budgeted amount for each category.  Expenses are subtracted and deposits are added to this figure in a continual increase and decrease to the account.

Using the above example, “$50” is written on your entertainment page.  If you spend $10 at the movies, write “movies -$10”, leaving a balance of $40.  Do this with each expense.  Next month, write “deposit +$50” and add it to the current balance.  If you have a negative number, you need to re-assess your budget – are you spending too much in this area?  Can you spend less in another area to compensate?  If you can’t find a solution and you’re consistently in the red on several of your accounts, consider using the envelope system.

• Electronically – If you’re technologically minded and own a computer, tracking your spending electronically might just be your cup of tea.  Quicken is a good financial program that not only tracks your spending but also helps with extras like recording your household inventory for insurance purposes.  Or if you prefer a web-based option, Mint might be for you. Their versatility allows you to analyze your spending in a variety of ways, even providing a “net worth” graph as an incentive for saving and reducing debt.  And though you still need to record your data regularly, this method can be less time consuming than the ledger system.

Any of these three methods will help you track your finances and manage your money.  Choose one that works best for your temperament and lifestyle, and stick with it.  The payoffs will be a greater understanding of your spending patterns, freedom from worry, and ultimately the realization of your financial goals.

And that's it! You now have a working budget and a system for knowing where your money goes. You're now able to manage your cash flow and have much better control of your money. Congratualtions!

Money 101: Why You Should Track Cash Flow

This piece is part of a series I'm calling Money 101 and is designed for those who might not be as advanced in their personal finance knowledge and experience.

We've discussed the fact that you need to track your net worth, but there's another measure that you should keep an equally close eye on. It's your "cash flow."

Cash Flow Definition

Cash flow is simply income less expenses. It's the amount of surplus you have after you've paid all your bills. The difference is then what you can save and/or invest. If you remember my post on how to become wealthy, you know that it's a vital part of becoming wealthy.
 
This is why I will talk about the two parts of creating a strong cash flow -- maximizing your income and limiting your expenses -- so often. If you can grow the former and keep the latter in check, your cash flow will skyrocket, fueling your net worth to new and glorious heights.

The Budget through the Years
 
The budget is the method most used for tracking/setting/managing cash flow. It's an invaluable asset in my opinion, but the level at which you need to develop and use a budget differs based on your financial position:

In the early years of managing your own money (or when you're "starting over" with little to your name), a budget is invaluable. It will help you see where your finances are going and how they are spent. It will enable you to catch things that otherwise might not be noticeable and assist you in making good financial decisions. I highly recommend having a budget for people just starting out handling their money. I would make it as detailed as possible and review/update it on a regular basis (like monthly.) This is what we did for the first decade or so of our marriage, and it made a HUGE difference in how we manged our maonet and the financial results of those efforts.

After you become a bit more proficient in managing your money (and have developed a larger surplus between income and expenses), I think you can go to a less detailed and less frequently updated budget. If you've proven that you can manage your money (and especially control your spending) a budget isn't needed nearly as much to ensure your cash flow remains strong. I'd ease into this process but updating and reviewing a budget quarterly, then semi-annually, then annually. If you get really good at creating a surplus and watching your spending, you can eventually get to the point where you don't need an official budget at all -- you can simply review spending in real-time as needed. This is what we currently do. We look at spending in Quicken and make adjustments as needed, but we don't have a formal budget.
 
Finally, as you begin to approach retirement (or early semi-retirement), you'll need to go back to the basic budget. You'll want to be 100% sure that your income and expenses are where you want them to be before you make any major moves because once you do, it's hard to go back (for instance, hard to go back to work, hard to cut expenses that are now fixed, and so forth.) For these reasons, I suggest you do a very detailed, multi-year budget well before retirement to see if you can afford to make the changes you want to.

How They All Fit Together

Here's how all the financial pieces we've discussed so far fit together:

• A budget allows you to see where your money comes in (and how much and when) and where it's spent. It's the mechanism for determining and tracking your cash flow.
• Your cash flow reveals the surplus (income less expenses) that you have each year to be saved/invested.
• These savings/investments increase your net worth and, over time, allow you to become wealthy.

By tracking cash flow on a regular basis (with a budget) and using the information generated to make appropriate adjustments, you can take steps to significantly grow your net worth over time and ultimately meet almost any realistic financial objective you set for yourself.

Money 101: Becoming Wealthy is Simple, But Not Easy (Unless You Have These Characteristics)

This piece is part of a series I'm calling Money 101 and is designed for those who might not be as advanced in their personal finance knowledge and experience.

Many Americans believe that there is some great secret to becoming wealthy. They think it requires a combination of luck, vast knowledge, and a trick or two that only a few can pull off. However, the truth is that the simple “basics” are all you need to build wealth. If you read my post on how to become wealthy it's clear that simple actions lead to wealth creation.

That said, the reason so many people fail is that simple does not mean easy.

The dictionary defines "simple" as "easy to understand, deal with, use" and "not complicated." Becoming wealthy certainly is simple using these definitions. All you need to do is to spend less than you earn over a long period of time.

The dictionary defines "easy" as "not hard or difficult; requiring no great labor or effort" and "free from pain, discomfort, worry, or care." Unfortunately, this does not describe wealth-building because implementing even the simple tasks takes a few, vital charcteristics that most Americans find difficult to put into action.

The truth: The steps that lead to wealth are simple concepts that anyone can grasp. Actually putting them into action over the span of a lifetime is far from easy.

Key Charcteristics

Building wealth isn’t easy because it requires the specific traits of discipline, patience, and persistence. That’s the hard part – and where the work is done.

Discipline requires that you show a measure of self-control as you spend. Rather than buying everything you want, you need to prioritize your spending, and purchase only what is most important to you. Discipline is also required when paying down debt and saving money. Instead of using your resources for all fun things all the time, you need to exercise self-denial and discipline to get rid of your debt and build your savings.

Even earning money requires discipline. Growing your income means that sometimes you have to get up early and stay up late. Occasionally, you have to complete tasks you find unpleasant. Even knowledge and skills are acquired only after you exercise the discipline to study and to practice.

Dr. Thomas Stanley notes that most of the millionaires he's studied have become wealthy through discipline. He notes that "Nearly all [95%] of the top 1% of wealth holders in America reported that 'being well disciplined was very important/important' in explaining their socioeconomic success."

Patience is a rare trait in today’s world. We are bombarded with messages of instant gratification and entitlement. You deserve that expensive car now. You can put your vacation on a credit card – no need to wait until you save up the money. A 60-inch television can come home with you immediately if you qualify for in-store financing. The inability to wait to save up the money for the things we want leads to debt and financial insecurity.

Another difficulty is that few have the patience to wait for results. Your business ventures won’t yield results overnight. A good emergency fund takes months, or even years, to build. Dollar-cost averaging in your investment portfolio requires the patience of decades.

Persistence consists mainly of the ability to keep with your wealth-building efforts. It’s easy to give up when you don’t see instant results, or when you see your neighbors enjoying their over-leveraged lifestyles. However, in the long run, those neighbors are likely to have very little wealth, since most of the toys they enjoy now have been bought with debt. It’s hard to see that when everyone around you is having fun while you follow a more practical course.

Bottom Line

Follow the simple concepts of building wealth with discipline, patience, persistence, and you will eventually achieve financial freedom. Even though the concepts behind wealth are simple, it takes hard work to put them into practice.

Money 101: How to Become Wealthy

ESI Money is now offering a free ebook titled Three Steps to Financial Independence. Get your copy here.

Welcome Lifehacker readers! In addition to the piece below, here are some other posts you may enjoy at Free Money Finance:

• Millionaire Interviews -- Interviews with people who have net worths over $1 million.
• Reader Profiles -- Interviews with FMF readers about their personal financial status.
• Money 101 -- Basic personal finance tips for those just starting out.

The following is part of a series I'm calling Money 101 and is designed for those who might not be as advanced in their personal finance knowledge and experience.

As we learned the other day, you measure wealth by tracking net worth. Today we're going to focus on how to grow your net worth so you become wealthy.

Is Becoming Wealthy too Complicated?

If you read financial books and magazines, visit financial websites, and watch money-focused TV, you'll come to the simple conclusion that managing money is complicated. The issues associated with handling money are vast, technical, and can not possibly be accomplished by the average person.

At least that's what they'd have you believe.

As such, many Americans think that becoming wealthy requires a level of specific knowledge that they can't attain. They think that building wealth is too complicated and it's beyond their reach. So they don't really make an attempt to build wealth.

Then you throw in limited self-control and the "I deserve it and gotta have it now" mentality, and you get a financial disaster.

How bad is it? According to a survey of 5,000 people highlighted in the book The Difference: How Anyone Can Prosper in Even The Toughest Times by Jean Chatzky, 54% of Americans live paycheck-to-paycheck, barely getting by, and are one financial problem away from money trouble. Another 15% are what the survey calls Further-in-Debtors – people who are going backwards financially every month. So between these two groups – almost 70% of people are either struggling or going backwards financially.

Not That Complicated

And what makes these results so perplexing is the fact that the principles to succeed in managing your money are pretty simple. They are both easy to understand and few in number. You don't have to be Einstein to succeed financially -- anyone with normal intelligence and a bit of self-control can prosper.
 
You have probably heard of the 80/20 rule, right? Also known as the pareto principle, it states that, for many events, roughly 80% of the effects come from 20% of the causes. In finances that would equate to getting 80% of the results out of 20% of the advice or tips. But in money management, the rule is more like 90/10 or even 95/5. Following a few, key steps is all you need to become wealthy. 

How many steps? Can you handle two?

Two Equations that Lead to Wealth

Personal financial success ultimately comes down to two very basic financial equations. There’s no doubt about it – if you master these two equations alone, you will become wealthy and be far ahead of most Americans:

Income – spending = surplus

Surplus x time = wealth

Yep, that’s it. It seems pretty simple, doesn’t it? In fact, these seem to be “common sense.” But remember that these are two equations that 70% of Americans can’t get right.

If you look at these equations, you’ll see that all efforts to improve your finances come down to two things: increasing your income or decreasing your expenses. The more you do of each of these, the better.

Of course, there are a few more details to fill in the gaps. You need to understand the basic definitions of each term above and know the steps to take to ensure your success in each area. I'll be talking about these as well as sharing ideas to make the most of them as time goes on, but for now, here's a quick overview of each one.

Income

You need at least a minimum level of earnings just to survive. Any amount above that qualifies you as a person who can build wealth. And since the minimum in America isn't that high compared to what people earn (average household income is around $50,000, and you can start building wealth well below that level), almost everyone qualifies.

Your career is where most people get the vast majority of their income. As such, we'll spend a lot of time here talking about how to manage and grow your career so you can maximize your earning potential. The bottom line: even a small change for the better can mean hundreds of thousands in extra income over a lifetime.

In addition to your job, there are a whole host of ways you can earn extra money these days. If you're industrious enough, the money you make on the side can be quite substantial.

Spending

No matter what you earn -- whether it's $30,000 or $1 million a year -- you must keep your expenses below your income. You MUST spend less than you earn. If you don't, you will go backwards financially.

Consider two people:

• Jenny makes $30,000 a year and spends $25,000 a year.
• Jim makes $1 million a year and spends $1.1 million a year.

Which person is building wealth?

Of course, it's Jenny. She added $5,000 to her net worth while Jim went backwards (by borrowing) $100,000. Yes, Jim has more POTENTIAL to become wealthy (and much wealthier at a much faster pace) than Jenny, but unless he gets his act together, he's going to be in one big financial mess.

Think about this -- what if they each kept this up for 40 years? Jenny would have $200,000 even if there is zero growth in her savings (which there wouldn't be -- she'd actually have much more.) Not bad for someone making her salary.

Jim? He'd probably be forclosed upon or hauled into court after several years of losing $100k.

While having a high income can be a great asset in becoming wealthy, it certainly doesn't guarantee wealth. That's why we see so many Americans living paycheck to paycheck -- they simply spend more than they earn.

Why can't most people get the two equations above to work in their favor? Many would say it's simply because they don't earn enough money. And for a small portion of the population, this is true. But the survey above also identified why so many people are in tough financial shape: they spend too much. They can't control themselves and they simply over-spend. So they live paycheck-to-paycheck or worse, are falling more behind every month.

The key to spending less than you earn is to take steps to save money in areas that work for you. We'll talk about this issue much more as time goes on.

Surplus

The difference between what you make and what you spend is your surplus. Some people like to call it a "gap." Others call it "savings."

Whatever you call it, this is the fuel that fires your wealth-creating engine. It's the extra that you add to the pile that sets you up to grow your net worth.

Obviously, you want your surplus to be as large as reasonably possible. That doesn't mean you need to work 80-hour weeks and spend like a miser to squeeze every last penny into your surplus, but you do want a healthy (and growing income) and to keep expenses reasonable and under control. If you do these simple things, you'll grow your net worth automatically.

Time

Time does a couple things for you:

• It allows you to add surplus after surplus to your net worth each and every year. Over a long period of time -- 20, 30, or 40 years -- these can really add up.
• It allows your money to grow upon itself. For instance, if you earn 10% on your money (selected just to make the math easier), your $1,000 surplus becomes $1,100 in year 2. The next year it becomes $1,210 and $1,331 the next.

See how it's growing itself? This is called compounding and we'll talk more about it later. But for now you can see how powerful it can be over a long period of time. 40 years down the road and your $1,000 will be multiplied many times over simply by compounding upon itself.

This is why time is so important in growing your net woth.

Now let's say you're already 50 or 60 years old. You may think, "These tips won't work for me. I don't have any time left."

While it's true that you don't have the advantage of 40 years to save, the tips we will cover here most certainly will make you wealthier down the road than you would have been without them. So don't dismiss these tips simply because you're older. Applying them WILL make you better off financially.

Wealth

If you put all of the above together, here's the conclusion: you build wealth (net worth) when you spend less than you earn and save up your surplus over time. Yes, it's that simple.

No matter where your net worth is currently, you can improve it by taking the following steps (and the more you do of these, the better):

• Grow your income.
• Cut and/or control your spending.
• Start as early as possible and save your surplus over time.

As a wise man once summarized it: "Save as much as you can for as long as you can."

Money 101: How to Measure and Track Wealth

This piece is part of a series I'm calling Money 101 and is designed for those who might not be as advanced in their personal finance knowledge and experience.

One key to building wealth is to measure it and track our financial progress. Just like there's no way to tell what's happening in a sporting event without a scoreboard, you can't measure your success in wealth building without some sort of tracking.

Income is Wrong

In almost every article written by the mainstream media, "wealth" is used interchangably with "income." While the amount of money you earn each year (income) does have a major impact on whether or not you have the opportunity to accumulate great wealth (and how quickly/how much), the two are far from the same thing.

I believe this mix up occurs for two reasons. The first is ignorance. Most of the people reporting on personal finances know very little about the subject -- at least managing money on a day-in day-out basis. Sure, they might be educated or have read several books on the subject, but they are (generally) not wealthy and as such don't know the ins and outs of how to grow great wealth and track it.

The American public is no better. Most believe that someone making $100,000 a year in income is "rich" while someone making $30,000 a year is "lower-middle-class." But if they knew that the person making $100k spends $125k a year and the "poorer" person spends $25,000 a year, they might think differently. But Americans rarely consider the expense side of the equation (which accounts for the poor state of finances many have.)

The second reason is data availability. Income data is readily accessible in large amounts and thus easy to use in articles and posts. It doesn't make it right, but it's the truth.

True Measure of Wealth

There is one true measure of wealth -- how much you own. It's called "net worth."
 
Net worth in its simplest form is assets less liabilities. You add up the value of the assets you own: investment accounts, banking accounts, retirement funds, real estate, and the like. Then you subtract every debt you owe: mortgage, car loan, credit card balances, student loans, etc. The difference is called your "net worth". It's the amount you truly own. It tells how "wealthy" you are.

In my opinion, net worth is the single-most important financial measure to track. It not only tells you how much you own, but when looked at over time it lets you know whether your wealth is increasing or decreasing and by how much. It's an accurate and (unfortunately in bad times) ruthless measure of how you're doing in growing your wealth.

As such, it's vital that you measure your net worth on a regular basis.
 
Tracking Your Net Worth

There are different ways to track your net worth. You can use the old-school method of a simple sheet of paper, a more modern option like a spreadsheet, or an automated selection like Quicken. Which option you choose doesn't really matter. As long as you're consistent, you'll be able to determine if your actions are growing your wealth or not.
 
Personally, I track mine monthly. Each month in Quicken I update the performance of my investments, put in my income and spending, and run a net worth report. I then record it in a spreadsheet and compare it to the other months of the year as well as my status for the same month the prior year. (I know, this last part is a bit overkill, but I'm that kind of tracker.) Doing this gives me a quick report card on how I'm doing managing my money and highlights where I might need to make changes. In addition, I record my final net worth at the end of each year (and have done so since the early 90's.) That's how I know that my net worth has grown at a compounded annual rate of roughly 14.5% since then.
 
I used to update my net worth weekly, but that was simply too obsessive -- even for me. In addition, there were too many wild swings (up big one week, down big another) as the market went up and down, big bills were paid, etc. Looking at it only once a month seems to level the swings a bit. As such, this time frame works best for me.

Monthly tracking is probably the most frequent you'd want to monitor your net worth (any more frequently doesn't really give you enough time to see progress.) Others measure their net worth quarterly or twice a year. I recommend that you check it every three months at the very least. Whatever your timeframe, just be sure you review your net worth regularly. 

Bottomline: Tracking your net worth (and then responding based on what you find) on some sort of regular schedule is a must for any serious money manager, and doing so is a vital habit in the quest to become wealthy.