Balance your books (or Earnings & Spending)

First of all, before you can become financially independent, you need to learn some very simple things about economy (most people find it rather boring anyway).

  • Add up all your income (salary, interest, etc). This is your plus.
  • Add up all your costs (rent, or mortgage, car, food, insurance, credit cards, etc). This is your minus.

So, in order for you to become rich, all you need is that your plus, is more than your minus. For all the money you don’t spend, you can generate additional income (interest, increase in value etc).

What if your minuses are larger than your plusses (a very possible scenario in todays recession)?

  • All your activities with regards to money need to be done in order to reduce the spending, and to increase the income.
  • First of all you would want to reduce your debts (credit cards, personal loans, mortage). Pay of the ones with highest interest rates first.
  • Second of all you would want to reduce the regular spendings (e.g. You pay for cable TV every month, or you subscribe to your favourite magazine, or you are member of the local gym). All these things cost money, and because you will be working on sorting out more income in your spare time, you will not have enough time to enjoy them (not at this moment at least, so get rid of as many as you possibly can; ohh that reminds me to cancel our subscription to Heat Magazine).
  • Third, by reducing the number of times you eat out, or eat take away food each month.
  • Fourth, by buying less ready made food, and checking out alternative places to do your food shopping, you might save a bundle. Some of the low-cost places can be okay, as they normally keep the prices down by selling a limited number of brands, thus improving their barganing power with those suppliers.  You can also grow your own veg if you are that inclined, but in general the savings are not that great compared to the amount of work you need to put in. (I do it for the pleasure of eating what I myself have grown).
  • Fifth, getting a cheaper and more economical car, or getting rid of your car altogether (very difficult for most people, and I am no shining light here as we have 2 cars). We do however drive fairly echonomical cars.
  • Sixth, sell all your old stuff that you don’t need on your favourite auction site (e-bay), or at your local car-boot sale. You will be surprised as to what people are willing to buy.
  • Seven, if you still have problems getting that extra money to balance your books, and to keep you in the black each month.  Get another job, maybe for the weekend, or every other weekend.
  • Eight, seriously re-consider your holiday plans.

The more you manage to reduce your spending, the faster you will be able to accumulate wealth. If living like a church mouse is not your idea of fun, reward yourself once in a while for saving well, but don’t over do it. Find as many free things you can do as rewards to you and your family, and use a free weekends to enojoy them.

Once your money starts growing (unfortunately it will take around 7-8 years at good returns before you start seeing the big effect of compounding), having the money grow even faster will be exciting.

I will be back with more ideas on how to balance your books. Until then.

/Fredrik