Every time that we enter into a brand-new year, there are a few rites of passage that consistently occur.
- We get a little too excited about a 12,000 pound, glowing ball falling from the sky
- We reflect on our lives, our goals, and our future
- We vow to lose some weight…again.
A new year also symbolizes a fresh start with your finances. This is the year to banish your credit card debt for good…OR the year to get your emergency fund in place…OR to finally kick start your 401K…OR this could be the year to free up enough cash to give generously to those in need.
Well, if you’re trying to accomplish any of the above tasks in 2013, you’re going to need every penny you can get your hands on. Luckily for you, there’s one super simple trick to improve your finances that all financially savvy people know well. Are you ready? Here it is…
Produce a reality show about rich, foolish people doing things that rich, foolish people do. The more ridiculous the better.
No, I’m kidding, of course. Although that method has worked REALLY well for far too many people.
Here it is for real. The truth is that financially savvy people know that your expenses should NOT increase just because your income increases.
You see, another event that often takes place around the new year is that your boss (hopefully) gives you a raise…however meager you may think it is. Whether it’s a “cost of living” raise of 2% – 3% or something more substantial, raises are traditionally applied around this time. That means that your next check may look a little fuller than it did last Friday.
A raise can be quite exciting. More money means more toys, more lavish vacations, and more trips to the shoe store. OR a raise can mean financial flexibility and freedom.
Ok, which sounds like more fun? I know…the first one. But, the first one leaves you still living paycheck to paycheck. It’s a very temporary lifestyle that WILL come crashing down at some point. It’s only a matter of time. The second one can lead to long-term financial stability and the ability to afford those lavish vacations (or whatever you choose) for years to come.
So, here’s the key. When you create a budget for 2013 (you do make a budget, don’t you?), continue to use last year’s income figure. Or just immediately put the extra income into a debt reduction, savings, or investment category in your budget. Don’t even consider adding it to the “entertainment” expense. Make that money work for you, so that soon you won’t have to work so hard for it.
But, it’s such a small raise!
Let’s say that you currently make $40,000 annually and you receive a 3% raise. That equals $1,200. You probably won’t have the local news knocking at your door, wanting to speak to you about your recent windfall. However, $1,200 can make a big difference in your finances when correctly applied.
1. You could pay off a $1,200 credit card.
Did you know that if you only paid the minimum payment on a $1,200 credit card (2% or $15 – whichever is higher), it will take you over 15 years to pay it off! It will also cost you an additional $2,000 in interest. So, if you’re not thrilled with your $1,200 raise, what do you think about a $3,200 raise? That’s essentially what you would be doing.
2. You could put it in your savings account.
If you put $1,200 into a savings account (assuming a 0.25% interest rate), in one year you’ll have an extra $3! Wait…I guess that isn’t quite as dramatic as I was hoping for. But, a savings account is still important because stuff happens. An Uh-Oh account can be a lifesaver because it will keep you away from the credit card balances mentioned above when life happens and you need some quick cash. And life DOES happen.
3. You could invest it.
There’s a lot of debate over what the average return on investment is for the stock market. It depends on what period of history you’re talking about and what you take into account. However, whether you’re talking about a 4% return or a 10% return, intelligent long-term investing is still a better idea than spending your hard-earned cash at Burger King.
If you achieve a ROI somewhere in between (let’s say 7%), you can double your money in 10 years.
By the way, there are many ways to invest. The stock market is only one option. I prefer to invest in myself. I call it active investing. Start a small business where your hard work can be rewarded. Turn that $1,200 into tens of thousands with a good idea and a little elbow grease. No matter how you do it, persuade your money to bring back more of its friends.
Live Below Your Means
Whether your income shot up like a rocket or trudged up the hill like a slug, the key to living below your means is to be content with your current lifestyle. Adjusting your budget every time your income gets a jolt will only lead to trouble. I have seen MANY families with 6-figure incomes live paycheck to paycheck until it was too late.
I admit, this is not rocket science. You probably already knew that you should live below your means before reading this article. However, this is the time of year that we all need a reminder. You may have just received a raise. You may have gotten a bonus. You may be tempted to work that new found income into your 2013 budget. Don’t. Let the gap between what you earn and what you spend widen this year. Leave a little breathing room in 2013. In fact, that should be your first resolution this year:
Remember to breathe.
P.S. Speaking of expenses, I’ll be revealing my 2012 expenses next week. Every penny will be accounted for. What do I spend my money on? We’ll find out.
U.S. Dollars image courtesy of Satit Srihin / FreeDigitalPhotos.net