Now that you’ve figured out where you stand financially, we’ll double-click into Cash Flow, Assets, and Liabilities. If you’re new to this, we’ll start with BABY STEPS. We’re not going “total money makeover” here yet - we’re just dipping our toes into the shallow end of the pool.
When you look at the balance sheet you created, which area feels the easiest for you to do something about first? We’re looking for a quick win here, because it’s pretty hard to tackle everything all at once.
Cash Flow
Mathematically, there are exactly two ways to affect cash flow:
Make More
Spend Less
Immediately it’s usually easier to spend less first, with the added bonus that every dollar you save is 100% yours to do with as you please. Nobody taxes your lack of spending, so you can do something else with that whole dollar you saved.
On the other hand, generating additional income typically takes time. Time to negotiate the raise, time to get the new job, time to do the work and wait two weeks until payday comes around. Furthermore, when you earn an extra dollar, Uncle Sam and your state/city taxmen come knocking to get their cut. Your extra earned dollar may only give you 50-80¢ of spending power.
Having said all this, you WILL need to find ways to earn more income sooner or later because you can only improve cash flow through savings so far. Unless you’re already a highly compensated individual with a rock star spending habit to tame, bringing more income in will be vital to hitting financial independence, regardless of the tax burden (which can also be managed for that matter).
For now, let’s focus on the “spend less” half of the cash flow equation. You can probably identify a few quick and dirty ways to spend less. There’s the famous “Latte Factor,” coined by financial expert and author David Bach in one of my FAVORITE personal finance books, The Automatic Millionaire back in 2003. Basically, Bach hypothesized that if instead of spending $5 per day on a latte, you invested it into the stock market, after 40 years of doing this you’d have a $961,260 balance ($72,960 of unbought lattes plus $888,300 of investment growth, assuming the ~10% annual growth the stock market has historically produced).
2003 is the year Starbucks introduced their pumpkin spice latte, and stores could hardly keep up with the demand. Google is failing me, but I believea grande was ~$4.50 back in ‘03; they’re now $6.10 where I live. For what it’s worth - using today’s latte price, if you were to sock that amount away daily, you’d reach $1,172,737 after 40 years. That’s simply by changing a coffee habit - what if you found three other small daily expenditures to mix up?
Either way, that expensive coffee (or other quick-service food restaurants) can be costing you dearly in the long run. You could make coffee or meals at home, even with the “expensive stuff.” Look for quick and easy ways to identify even just a few of these sneaky expenses, because $1.17MM is an awfully expensive coffee habit.
After you’ve identified the easy items, you’ll need to dig deeper into your actual spending and consider putting a budget in place. Before you groan (like I historically have) at the idea of budgeting, remember that setting a budget doesn’t necessarily mean you can’t do whatever you want. It simply means being intentional about how much you need to support whatever goals you have, and making sure you allocate the right funding so you can make it happen. Budgets should be a positive thing, especially when you’re in charge of your own. We’ll hit on budgeting next time.
Remember, achieving financial independence is a long-term process. By taking small steps and making progress, you'll be well on your way to reaching your goals.
Stephanie Brooke Lennon is the author of Family Bank Blueprint, GoldQuest, and What Would Water Do? Simple Strategies for Navigating Life's Obstacles. Her titles are available in Paperback and Kindle on Amazon.com. Follow Stephanie Brooke on Facebook, Instagram, TikTok, YouTube, Twitter, Amazon, and at BrookeLennon.com.