The Second Step to Cleaning Up Your Finances

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Publish date August 22, 2007 Views: 547 Comments: 0

The Dough Roller tagged me to write about my one piece of money-related advice if I had to choose just one. I’m not at advisor, so I don’t consider my ramblings advice, but I can share what has worked for me.

Recently, I shared my favorite tip and the first step to cleaning up your finances, start paying attention. Writing everything down and using software is what worked for me. Since I’ve written about that recently, I’d like to mention what I’ve determined to be the second step to getting in financial gear. Once you can take a look at your actual spending and earning, you can move onto this step.

broomIt’s a simple concept in theory, but depending on the individual, it can be the most complicated and difficult in execution. The second step is to commit to spending less than you earn. There are several parts in this step hidden in that seemingly-benign statement. The first part is to realize the importance of having a positive cash flow each month or each year. Why is this important? Spending less than you earn each month means that you have money left over. That money can go to paying down outstanding debt, saving, and investing.

If you have negative cash flow, spending more than you earn, you will go deeper into debt. Early on, it might seem like there are no consequences to increasing debt, but you will pay for it down the road in the form of interest payments, foreclosure, debt collection agencies, non-qualification for mortgages… and you may even end up on the street in the worst-case scenario.

The next part is to commit to changing your behavior — not because someone tells you that’s what you need to do, but because you understand that it is the only way to get ahead. You have the tools — your spending log on paper or on the computer that tells you where you can cut back your spending. Perhaps it’s the daily cappuccino or a new-car-lease-every-three-years habit. Either way, the goal is to get your expenses less than your income.

After some tightening, you may find you might be able to expand your income without a lot of effort. Sometimes it’s as simple as asking for a raise (if you deserve it, not just because you’re trying to improve your finances). Perhaps a hobby can turn into a money-making opportunity. The options are limited only by your own desire.

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