Building wealth: reduced spending and income growth – the perfect one-two combo!
December 6, 2013 by Editor, InvestingForMe
In the world of boxing, the one-two combo is a nickname for the winning combo of the jab and cross. Well, when it comes to building your family’s wealth, there’s a winning financial knockout that works just as successfully. It’s the winning combo of reducing your spending and increasing your income in your budget and net worth statement.
After all, building up your family’s wealth is the ultimate payoff for all your hard work in building a budget and creating your net worth statement. You want to make more money, be less dependent on the banks and credit card companies, and become richer than you are today. While this sounds like pretty simple advice, not too many Canadians are winning the financial fight as we hear on the news, and sometimes for good reasons, but more often than not it’s because we don’t sustain that fighting pressure.
Keep up the fight!
Guess how many boxers win fights by throwing only a single one-two combo? None! Champion boxers use the one-two combo repeatedly, eventually wearing down their opponents and winning.
It’s the same when it comes to building wealth. Simply completing a budget and net worth statement once with no follow up is a losing combo. You need to use your budget and net worth statement repeatedly – and consistently.
You and your team need to set regular dates throughout the year to review, update, and manage your budget all the while looking for expenses that can be reduced or eliminated. At the same time, you should regularly review and update your net worth statement setting targets for decreasing your debts and increasing your assets. Both decreasing debts and increasing assets will help to build up your family’s wealth.
Remember: Your budget helps you to find extra money and your net worth statement helps you decide how best to use that extra income (i.e. pay down your debts or add to your assets like RRSPs, RESPs, TFSAs, etc.) to build your wealth. And if you want to win the fight, then use this financial one-two combo and repeat, repeat, repeat … and don’t stop until you win.
How to reduce your spending
Start with your budget and set a goal to decrease your expenses by a do-able dollar amount, say $50, $100 or $200 per month. But whichever amount you choose, it’s important that you experience the thrill and satisfaction of success right away so that you see that reducing your spending is possible and can lead to greater things to come. With each success set new goals yet again. And pretty soon you and your family will quickly see the truth in that old saying … work with the pennies and dollars will take care of themselves.
Most people, however, just don’t take the time to do the math and see how reducing your spending each month can make a big difference to your bottom line. So let’s look at what can actually happen if you decide to reduce spending in your house by $100 / month or $200 /month, just as a couple of examples:
If you reduce your spending by $100 each month, and then
- invest it, earn 5% per year, you’ll have $15,093 after 10 years! (or $39,679 after 20 years and $79,726 after 30 years) Hey, that’s one undergraduate degree paid for!
- pay down your credit card balance (assumes $5,000 @18%) with it, you’ll pay off the balance 3.5 times sooner and save $4,423.45 in interest expense. That’s like free money!
- put $1,200 towards your mortgage each year (assumes $190,000 mortgage @5.24%), you’ll pay off your mortgage 4 years sooner and save $24,478 in extra mortgage interest payments! That’s after-tax dollars you’re saving!
If you work even harder and reduce your spending by $200 each month, and then
- invest it, earn 5% per year, you’ll have $30,186 after 10 years (or $79,358 after 20 years and $159,453 after 30 years)! How would you like to have an extra $159,453 going into your retirement?
- pay down your credit card balance (assumes $5,000 @18%) with it, you’ll pay off the balance 6.0 times faster and save $5,002 in interest expense! That’s like even more free money!
- put $2,400 towards your mortgage each year (assumes $190,000 mortgage @5.24%), you’ll pay off your mortgage 7 years sooner and save $41,547.31 in extra mortgage interest payments! That’s a savings of $2,308 each and every year where for every dollar you pay down on your mortgage, the bank gives a dollar for free! That’s a 100% return on your savings! WOW!
Kind of makes cents, doesn’t it!
How to grow your income – after-tax
Usually when someone says they want to make more money, they almost always mean they want to get a new better paying job, a promotion, or maybe even just a pay raise. All three of these options would be great, but they’re probably hard to make happen. If they work out, wonderful, but how can you grow your income if they don’t?
I’ve always been a big believer in managing those things that I have control over. So if my goal is to increase my income, I’ll view my family’s spending as the first place to look for that extra income. That’s right. I actually twist my thinking around so that I think of every dollar spent as a dollar of after-tax income. And if I can keep an extra dollar in my pocket then I have just grown my income by a dollar. So, if I can reduce my family’s spending by $200 a month, then I just got a pay raise of $2,400 after-tax, which is the same as your boss giving you a 3.83% pay raise (for the average Canadian). And in today’s world a 3.83% pay raise is nothing to sneeze at!
I’m certainly not suggesting that you give up on finding that new, better paying job, or that you stop trying for that next big promotion or pay raise. Keep pursuing these options to grow your income for sure! I’m just saying you don’t have to tunnel vision your quest to grow your income. You can simply view your spending closer to home by examining your budget as another possible and perhaps easier way to grow your income, after-tax.
(This article was first published by Troy Media)
Read the 1st article in the series - 76% of Canadians must be idiots when it comes to saving and planning for retirement!