It’s that time of year again. The dreaded New Year’s resolutions, annual reviews and goal setting season. You know what I’m talking about.
This is the time of year when everyone either eats or spends too much… or — worse yet — does both! December 26 comes and there’s a huge cognitive dissonance (in plain English, that means they freak out).
When it comes to anything finance related, we usually say something along the lines of: “Yup, I’m going to spend less and live like a hermit next year.”
You get the idea…
In the personal finance space every financial expert and guru will strongly state that you must create a budget to achieve any money or savings goal.
Yet most individuals fail in sticking to a budget about two weeks after they’ve made their resolution. You’ll see the gym crowds dissipate and the healthy eaters give up, and the budgeting typically ends as well. I see it every year, like clockwork, on this very site.
I’m not a fan of creating a budget. Why? Because it makes you focus on the wrong goal.
In addition, the goal is too painful. Cutting down your lifestyle is like dieting by not eating.
It’s not a long-term solution you can sustain for the rest of your life. And it sets you up for failure and disappointment.
You should, however, know how much your expenses are every month, but you don’t need to keep track of each penny like a regular budget requires. For most individuals, it’s roughly the same amount per month.
The typical American has:
- Cable bill
- Auto loan
- Groceries and food
- Gas and car maintenance
You might have some variable expenses: dining out, entertainment, buying new clothes or other personal effects. But if you are not a shopaholic, these issues should be few and far between. The fixed monthly items listed typically take up 80%+ of your monthly expenses.
So while I’m not a fan of budgeting, it does NOT mean you shouldn’t know your expenses and where you’re spending your money. Au contraire! You should know approximately how much outflow you have each month, how much you’re saving and your buffer figure. If your personal finances were a business and you didn’t know your annual income and expenses, you wouldn’t last long.
Setting up a budget is pretty easy to do and should be a one-time deal. There’s really no reason to revisit it unless something changes in your life — like having a child, buying a new house, getting a new car or a new job, etc. You can easily do it on a piece of paper or a spreadsheet.
There are also many apps (including some we review here) that either allow you to manually enter your monthly expenses or automatically categorize them for you.
Many revisit and update this budget on a quarterly, monthly, weekly and, dare I say, daily basis. You might think by being anal you’re doing the right thing with your personal finances. But in reality it’s just busywork and spinning your wheels.
Instead of focusing on expenses, you should be focusing on ways to generate more income to have the lifestyle you want.
You want the freedom of a certain lifestyle without having to worry whether you can afford it.
This is one of the reasons why I personally recommend Personal Capital over Mint. Mint is all about the budgeting, whereas Personal Capital is about monitoring your investments — creating passive income.
There are only so many things you can cut from your monthly expenses without getting into quality-of-life issues. Granted, in the U.S. we’re way too focused on consumerism, but I suspect if you are reading this article you probably don’t have this issue.
So for your New Year’s resolution you should focus on increasing and diversifying your income by:
1. Investing in Yourself
Get a new job, position or raise. Become more valuable to your employer. Learn a new skill that’s hard to do yet in high demand in your field. As Wayne Gretzky once said, “I skate to where the puck is going to be, not where it has been.”
Figure out the trends in your industry and anticipate the future direction of the sector. If your existing job is a dead-end career, figure out another career to get into that you’ll enjoy doing. If can’t grow with your existing employer, find a new one that pays more or has better benefits.
2. Investing in a Business
Start a side hustle. Create a business while working full-time. In today’s internet age it’s easier than ever to incorporate and create a virtual business online. Unfortunately, I’m saddened by the fact many Millennials aren’t starting new businesses.
For whatever reason you can conjecture is the root cause, the fact of the matter is individuals are wanting to take less risk, when in fact working for someone else has more risk. A job is one income source.
3. Investing in Others
Save and invest more in the stock market. This resolution does imply you’re spending less than you earn, which you should be. Though, unfortunately, like dieting, many do not follow this simple principle. Every year, like clockwork, you should be saving and investing at least a small percentage of your income. Otherwise, you can’t deal with rainy days or plan for big goals like retirement. I suggest you save at least 20% of your annual income.
By creating these New Year’s goals, you’ll have a better chance of achieving the real end-goal you want: financial freedom.