We hear from our clients quite often, “I’m good at making money, but not at keeping it.” This is a great problem to have and not at all uncommon. When you think about it, saving money is the real issue.
That probably sounds ridiculous because saving money is easy. Everyone knows how to save money. You just might not be disciplined enough to do it. Sure, you could do the bare minimum and save some cash in a basic savings account, but if you really want your money to work for you, you need to take saving to the next level.
What you see as a problem, I see as an opportunity.
The solution is a good cash flow management system. And then to fully take advantage of the opportunity you need to give your excess money purpose by saving and investing it.
There’s a lot of nitty gritty details we could get into, but it’s important to stick to an overview of the process to fully understand the solution from beginning to end.
Adjust Your Thinking
Well, the first step is to recognize and acknowledge the problem. Check.
Seriously though, recognizing the issue is harder than it sounds. It’s so easy to think you just have a lot of necessary expenses and making even more money will fix everything. Don’t fall for it. It’s a trap!
Second, realize that you’re not alone. Many people are in this same boat. It’s hard saving money that could easily be used for something right now. Look at how many rock stars go bankrupt! But you’re going to do things differently, because you already acknowledged the problem and you’re reading this post, taking steps to do something about it. Check number two. Let’s keep things rolling.
The third thing you need to understand and commit to is NOT increasing your lifestyle until you can actually afford to with whatever profits you have after going through this process. This commitment will help keep your spending from increasing with every extra dollar you make.
Check, check, and… check.
Update Your Cash Management System
If you don’t have an actual system in place to manage your cash, then you need to implement one immediately. At the very least you can use a basic spreadsheet and check on your money and reports monthly. Something is better than nothing.
The best cash flow management system we’ve found is Profit First. Profit First benefits your situation directly in two ways. First it sets boundaries around your cash in the form of multiple bank accounts to keep your spending in check. Second, some of the bank accounts can function more like a savings account. In the very least you’ll have an OWNERS’ PAY account, TAX account, and PROFIT account.
Basically you’re going to sit down twice a month based on a set schedule and allocate all your income into various separate bank accounts that each have their own specific purpose. You’ll have set percentages for each account, so you don’t have to decide every time how much to put in them. As mentioned, you’ll have an OWNER’S PAY account which is used to pay yourself a reasonable living wage for working in the business. The TAX account will simply save for your tax obligations so you never have to worry about how to pay your taxes again. The PROFIT account is where you’ll distribute extra personal income from once a quarter. Since you’re already receiving enough money to live off of, this is bonus money to use as you wish.
And please, please use the OWNERS’ PAY account and pay yourself. Our economy needs you to stay in business and if you don’t pay yourself, you will get burnt out and your business will have a higher risk of failing. So, please, pay yourself, and keep your business running.
Say for instance you are putting about $10,000 a month into your OWNERS’ PAY account. You sit down with your significant other and decide you need about $5,000 a month to live comfortably. Set a flat rate, in this case $5,000, and commit to living off of that. Ignore the excess. Transfer $5,000 each month to your personal account and leave the extra $5,000 in the OWNERS’ PAY account.
Now you see your OWNER’S PAY account is working like a savings account for you. Once a quarter, or once a year, whatever works for you, take that excess money and invest it. This is where we’ll take saving money to the next level.
Level Up Your Savings Strategy
Investments are not without risk, but there are a lot of options available that significantly reduce some of the risk and will increase your wealth over time. Let your money work for you instead of you working for money.
You can invest in stocks, retirement, even a house. Just invest it somewhere to start saving for your future.
I’d begin with retirement. Think about what your retirement goals are, then research retirement plans that fit with your goals and decide on the best one. And most importantly, start today! Even if you think you’ll never retire, put some money away just in case. You know what they say – Plan for the worst and hope for the best.
Consider investing in stocks. The stock market doesn’t have to be as risky as people make it out to be. Using the principle of Dollar Cost Averaging reduces a lot of the risk over the long run.
The dollar cost averaging method is investing the same amount of money in the same asset on a regular basis regardless of what the asset is worth each month. This can be a stock or applied to any investment that you feel will grow over the long term. It doesn’t have to be a lot of money, just some amount that you can commit to and do it consistently.
Lastly, take advantage of automation. You can have portions of your paychecks or income to savings accounts. You can do the same with most investment accounts. Set it up so a portion of your income goes straight from the source to an investment account. Or set up automatic transfers. Whatever works for you. It takes some of the work out of it and also keeps you from seeing it as income and risk spending it before investing it.
The point of all this is to leverage your strength to limit your weakness. You’re good at making money, so let’s take advantage of that by applying it to your weakness of not saving money for any significant amount of time.
- Change how you see yourself and your money.
- Manage your cash.
- Invest your excess cash.
Be intentional and commit to this process. You’ll have more than enough to live a comfortable lifestyle and your wealth will continuously grow to make sure it stays that way in the future.
We have a ton of tools and resources that go into more depth about Profit First and cash flow management as well as help with debt, bookkeeping, tax strategies, and more. Click below for FREE access to our wealth resource page.
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