2 Steps to Master our Financial Situation
After explaining the concept of the SMP, let us talk a bit more about money, one of the factors of our SMV.
It is not necessary to be millionaire, even if that would make things a lot easier. Taking care of our financial situation is still an important topic to tackle.
For example I wrote that if we have problems to get our foot in the door, due to a poor SMV, moving to another location could offer an improvement. However, what do we need to change locations? Right, money. Money gives us freedom, safety and stability. We need money to buy necessities like a home, food, later on medicine, too. If a problem arises that we can’t solve on our own, money can buy us a solution.
For example, I personally don’t know how to install a stove. I could try to learn and invest time into it. However right now I don’t have this time available. So, I buy the service of someone who knows how to do for me. Knowing that I have money in my bank account, that I can use once a need like this arises, gives me a feeling of comfort.
I know that in reality, not everyone can easily move away. In an ideal world we would have to first travel and test different places out. We have to broaden our view and make experiences in our targeted new location. Jumping out of desperation, head over heels, into something unknown is not an intelligent move after all. We have to do it in a smart way. Like apes in the jungle jumping from branch to branch. They will only let loose of the old branch, once they have a firm grip of the new one.
Furthermore, past decisions can bind a lot of capital, like buying a house and its mortgage costs. Expensive luxury items like cars can eat through our monthly income like a hot knife goes through butter. Maybe there are already kids involved from an old marriage, that we can’t leave behind that easily. This would be a non-financial factor. Maybe we even lost a lot of money due to divorce or a bad investment.
I can’t take all factors into account. In the end it all comes down to each person’s emotional investments, as well as financial decisions and situations. Hence, I will talk more about a general idea of accumulating more free money. This free money can be used to buy more or to grant freedom, safety and stability. It can also be used to make more money.
I will keep it simple and don’t go too much into confusing details, since this post will go more into the direction of taking our first steps. So, how to improve our financial situation? In the end the definition of your financial situation is rather simple, like gaining or losing weight:
If we eat more than our body needs we will gain weight, while if we eat less we will lose weight. If eat exactly as much as our body needs, we will hit break even and therefor zero gains or losses.
Let us transfer this concept to finances:
If we earn more money than we spent we will gain capital, while we go into debt if our spending exceeds our income. Any money we gain above our personal break even will improve our financial situation.
Income / month – Spending / month = free available money / month
Therefor we have two adjustment screws we can use to improve our financial situation: We can reduce our spending and / or increase our income. While this is easy to understand, the hard part of the equation, like it is always in life, is actually to take action. To put the gears into motion so to say.
Let me begin in asking another question: Do you know how much money you spend each month? No?
Then your first step is to create a database. A table where you write down every single spending. See how high your spending rate/month is. Notice where your money goes. Add your monthly income and see how much is left each month. This data is crucial for our two adjustment screws. By the way, your new database is called “household book“. Pretty old concept, but it still does the job.
Checking your old bank statements or your online transactions can give you the needed data to fill your database asap. Once you have built a good database, it is rather easy to answer the following questions:
- Do you really need all of your spending each month?
- Can you get a better deal for a spending, e.g. a better internet or mobile phone provider?
- Do you spend money to make more money or do you spend money to buy toys like new TV, Video games, etc.?
- In the worst case, did you buy your toys on credit aka consumer debt?
Answering these questions should already give you a good idea of how to increase your available money per month. However, your first goal should be to pay off all of your credits asap. Those are debts where you pay someone extra money, aka interest, to usually buy something, that in a worst case scenario even costs more money per month. Therefor credit is usually a bad deal unless you use it to actually earn (more) money. Yes, the costs of borrowed capital can be leveraged, but this would go into too much detail right now and is not what most people are actually doing.
Also, be aware of the following, high financial spending risks that will cut into your finances a lot:
- Buying a home in a bad location on credit
- This will probably root you to this place, due to high pressure on your financial situation and emotional investment
- Buying luxury items that you can’t actually afford on a monthly basis
- This will cut heavily into your income, reducing your free available money and investment capital
- Marriage and divorce
- This can ruin your finances for the rest of your life, if you get “divorce raped”
- Children are very expensive, even if they can give you a lot of emotional satisfaction. Like buying a home they can root you to a place. I think at one point in life we want to take this risk, but think wisely about when the time is right.
Our next step is to answer the following questions regarding our income:
- Is your monthly income high enough to cover your monthly expenses?
- How many different sources of income do you have?
- Is there a way to increase the income you have right now?
Trying to increase income is a good idea to improve your financial situation. However, it is usually harder to do, than reducing your spending or preventing the high financial spending risks I have mentioned.
One more thing I want to draw your attention to, is the common believe, that one source of income is safe. Let me tell you that it is not. It does not matter if you are an employee or self-employed. Putting all your eggs in one basket can backfire heavily if shit goes south. In an ideal world you want to have several sources of income. At best those sources do not rely on each other and / or generate money, even when you do nothing or very little at all.
After we have reduced our spending and increased our income, what to do next? What have we actually achieved?
Well, what we have done is that we have accumulated more available “free money”. Now what to do with this extra money?
In my opinion it is a good idea to have always 2-3 monthly salaries saved in your account, that will cover all of my expenses and/or sudden incidents, like e.g. a car repair. Money that I have at my disposal at all times. It is a safety net so to speak.
For example, if I suddenly lose my workplace for whatever reasons, my safety net can cover some time until I find a new place to work. This is what I call “Fuck You” money. If I get really frustrated with my work, my employer or whatever, I don’t have to fear getting fired as much as before, because I have a safety net. Not that it is always a smart move to fight with our superiors, but at least this safety net will reduce fear in us. Reduced fear leads to a more confidant behavior. More confidence can lead to a better income too, because it improves our appearance towards others and our actions at work in a positive way.
Furthermore, we can use our increased free money for investing. Invest into a new source of income. Buying or building something with it, that can generate more money. Working towards an even better financial situation. This will widen our safety net and is improving its durability. Maybe we can even reach financial freedom. For example, we can start with an investment into a stock portfolio. We can establish a saving plan for e.g. ETFs, that will generate dividends on a regular basis.
There are lots of investment opportunities, once you dig deeper into this topic. Of course, do it smart. Read about it, inform yourself first. Dip your toe into it, but don’t jump in head first. Try it out, but don’t go immediately all-in. Like the example I made in the beginning with the monkey and the branches. Yes, this concept has actually a name, it is called “monkey branching“.
While the concept originated in regards to women, why not learn from it and use it for other situations too? Right, we analyze, understand and evolve from it! That is the whole idea of this blog.
Money is an important factor in our life. It gives us freedom, safety and stability. Handling our spending and debt is one way to not be rooted to a place. At least in regards to our financial situation. A place cannot only be a city or country, but also an employer.
At first, we make money with our time, since we have more time than money. Once we have extra money saved, we can use it to make more money and keep our time.
I hope I could inspire you to think about your own situation and to read up more about this topic. There are lots of sources for more knowledge. Just try to google it up, e.g. “financial freedom”.
All what is left to do now is taking action. The hardest part right?