Seven money strategies to master this year

It’s that time of year again. After several weeks of over-indulgence, people are coming to their senses and realizing it’s time to make changes for the better. Some — like me — have decided to improve their relationships with food and exercise. They’ve resolved to eat well, drink less, and move more. Others have decided that 2017 is the year they’ll take charge of their finances.

If you are one of those determined to make this the year you become the boss of your own life (or if you’ve been on that path for a while and simply need a shot in the arm), here’s an overview of seven smart strategies to improve your financial position.

These aren’t just arbitrary suggestions. I’ve been reading and writing about money for more than a decade now. Based on my experience — and based on thousands of conversations with other people — these are seven specific strategies that work.

  • Be the boss. Choose to manage your household like a business. Do what you can to increase income and decrease expenses. Try to approach things logically rather than emotionally.
  • Have a plan. Begin by getting clear on your purpose. What do you want out of life? If you know what it is you want to accomplish, you can manage your money to support that goal.
  • Dedicate time and space to managing your money. You can’t get better at something if you don’t actively strive for improvement. Money is no different.
  • Automate everything. Let’s be frank: You are your own worst enemy. (And I am my own worst enemy.) It’s in your best interest to automate good habits.
  • Pump up your profit. Here at Money Boss, I preach the power of profit. Nothing is more important to your financial success than the gap between your earning and spending. Nothing.
  • Be proactive. Instead of living reactively, take charge of your financial life. Prepare for the future, both the known and the unknown. Be ready for emergencies and be flexible so that you can seize opportunity.
  • Practice conscious spending. Don’t spend out of habit. Don’t buy into media hype or try to keep up with your neighbors. Spend on what’s important to you and cut back on everything else.

These seven strategies form the foundation of financial freedom. Do these things and you will master your money. Let’s look at each strategy in more detail.

Want more info? Check out my completely free Money Boss Manifesto, a 70-page guide to financial freedom. Or, if you want greater depth, consider purchasing my year-long Get Rich Slowly course.

Be the Boss

Here’s the number-one strategy you can use to improve your financial situation: Manage your household finances as if you were managing a business. Choose to become the Chief Financial Officer of an imaginary business called You, Inc.

Whether you hope to escape the chains of debt, to save for a one-year sabbatical, or to retire within a decade, you can have the financial freedom you desire — if you’re willing to accept the role and responsibilities that arise with becoming CFO of your life.

All of the other strategies in this article are based on the idea that you’ve agreed to become CFO of You, Inc., that you’ve decided to become a money boss.

  • Just as real-life businesses use mission statements to guide their decisions, you create a personal mission statement to help you manage your money.
  • Just as real-life businesses have office space and standard hours of operation, you set aside both time and space to work on your financial future.
  • Just as real-life businesses use automation to handle routine tasks and to guard against human error, you automate whatever you can to free your time (and mental energy) for better things.
  • Just as real-life businesses aim to earn a profit, you run your personal life in such a way that you earn more than you spend. (Preferably you’ll earn much more than you spend!)
  • Just as real-life businesses work to anticipate problems and opportunities, you make proactive moves to ensure success and fend off failure.
  • Just as real-life businesses are careful to spend only on the things that are important to operations and profit, you practice mindful spending so that you don’t fritter away dollars and cents on the unimportant stuff.

Your motto must be, “The buck stops here!” Don’t blame anyone or anything else for your financial situation, and don’t expect somebody else to rescue you. Your financial fate rests in your hands.

For more on this subject, check out my full article on why you should run your life like a business.

Have a Plan

Managing your money takes work — lots of it — and if you’re not clear on why saving and investing are important, it’s easy to lose your way. Before you get down to the nuts and bolts of funding your financial future, it’s important to plan what that future will be.

Perhaps you want to get out of debt, to buy a house, or to save for your daughter’s college education. Maybe you want to build a nest egg so that you don’t have to worry so much about getting sick or losing your job. Or maybe you want to quit your job completely to start a new business or travel the world (or both).

Whatever the case, it’s important to be clear about your purpose so that you’ll remain motivated when times get tough, and so that you’ll be able to make better decisions as the CFO of You, Inc.

To begin, you need a personal mission statement.

Companies use mission statements to direct their business operations. So too, you should use a personal mission statement to help you make decisions about money (and everything else).

  • Should you buy that new car? Yes, if it aligns with your personal mission.
  • Should you move to the big city? Yes, if it aligns with your personal mission.
  • Should you quit your job to travel the world? Yes, if it aligns with your personal mission.

You get the idea. When you have a clearly-defined purpose, it’s much easier to make tough life decisions. It’s easier to set goals that match your mission. Your mission provides a purpose, and your goals reinforce that aim by keeping you focused on what’s important. They organize your actions and give them meaning.

How do you create a personal mission statement? There are all sorts of ways to go about it. If you want a polished tool, check out the online Mission Statement Builder from FranklinCovey. If you’d prefer a simple exercise you can do on your own time, I’ve created a free PDF you can download and print: Your Personal Mission Statement.

Ultimately, it doesn’t matter how you create your mission statement. It only matters that you do it.

For more on this subject, check out my full article on how to craft a personal mission statement.

Dedicate Time and Space

After a decade of talking to people about personal finance, I’ve seen that one of the biggest barriers to financial success is how little attention is given to the work. The folks who master their money are the folks who actually spend time working with it!

The authors of The Millionaire Next Door found that as well, noting that two-thirds of the millionaires they surveyed admitted to spending “a lot of time” planning their financial future. People who prioritize their finances have greater success; those who ignore the job often struggle.

This isn’t surprising, of course. Whenever you dedicate time and attention to something, you get better at it. Would you expect to be able to play “Stairway to Heaven” without practicing the guitar? Could you fly an airplane without long hours of instruction? To do something well, you’ve got to work at it — and that includes money management.

As CFO of You, Inc., you must allocate time to build your business.

I recommend that you make an appointment with yourself to take care of business — and keep it. Just as you’d make an appointment with a doctor or a mechanic, schedule a regular time to review your accounts and pay your bills. I recommend blocking out an hour on Saturday or Sunday morning. Keep the appointment every week. Treat it as a priority. (JD, Inc., for instance, currently handles its accounts on Saturday mornings.)

It’s also crucial that you develop daily habits and routines to make things easier. Spending a few minutes every day to record transactions, for example, can reduce the workload at your weekly appointment. Plus, this constant diligence helps you become more aware of how you’re handling your hard-earned dollars.

Once you’ve scheduled time to manage your money, you’ll want to carve out physical space for your financial life. You’ll need a place to capture incoming paperwork (bills, statements, invoices, and receipts), a place to do the work, and a place to store your archives. For a business to run smoothly, a good filing system is essential.

Keep this process simple, routine, and — where possible — automated. It’s best to follow the old adage, “A place for everything, and everything in its place.” When everything has a place, organization becomes almost automatic. Because I know my wallet has a home by the front door, it’s easy to see when it’s missing. I know that bills live in the inbox, that bank statements live in the filing cabinet, and so on.

After you’ve set aside space and time to manage your money, it’s time to discover the magic of automation.

Automate Everything

Sad but true: Most of us make choices that prioritize present happiness over future security. And sure, there has to be a balance. In most cases, however, we’re better off automating good behavior — saving, investing, paying bills, and so on — so that we do the right thing over and over without having to think about it. It’s a way of outsmarting our present-focused animal instincts.

There’s no one right way to automate your finances — each person’s financial infrastructure is different — but here are some common methods.

  • If you have access to an employer-based retirement plan, use it. Have money automatically set aside from your paycheck to save for the future. If your company has a matching program, contribute enough to get the full employer match at the very least. Ideally, however, you should contribute as much as you’re allowed. By doing this before you receive your paycheck, you’re reducing the work and the willpower required to save.
  • While you’re advising your human resources (HR) department to boost your retirement contributions, also ask them to deposit your paycheck into your checking account, which will act as the central hub to your financial network.
  • Next, set up automatic payments for every standing obligation you have: cable, internet, gas, electric, sewer, trash, rent, mortgage, and so on. In some cases, you might even get a discount for setting up automatic payments. For example, I get a few bucks off my auto insurance each month because I pay electronically. While you’re at it, see if your utilities offer a “level pay” option, which will make your monthly payments more predictable.
  • Don’t forget to schedule monthly contributions to other savings and investment accounts. Most major investment companies (like Vanguard and Fidelity) make it easy to set up regular contributions. And online banks make it easy to create automatic deposits so that you can save for emergencies or a down payment for a home.

Real businesses pay their bills first before using what money remains to invest in their company. By automatically paying your bills and funding your investment accounts, you’re doing the same thing with You, Inc.: You’re automating good behavior.

After you’ve automated your financial infrastructure, you still have to pay attention.You need to be sure you have the funds to pay your bills, and you need to verify that those bills don’t contain any erroneous transactions.

Checking in at least once a month allows you to spot possible problems, both with your own habits and from outside sources. For instance, somebody once used my credit card info to subscribe to a porn site. Because I monitor my accounts, I was able to spot the fraud quickly and get it corrected.

Now that your financial infrastructure is in place, you’re ready to pump up your profits!

Pump Up Your Profit

In order to survive and thrive, you need to earn a profit.

You already know profit is the lifeblood of every business. It’s like food and water for the human body. Although proper nutrition isn’t the purpose of life, we couldn’t exist without it. Food and water give us strength to do the stuff that matters most. So too, profit isn’t necessarily the purpose of business — but a company can’t survive without it.

Here’s a secret: People need profit too.

In personal finance, “profit” is typically called “savings”. That’s too bad. When people hear about savings, their eyes glaze over and their brains turn to mush. Bor-ing! But if you talk about profit instead, people get jazzed: “Of course, I want to earn a profit! Who wouldn’t?”

Profit is easy to calculate. It’s net income, the difference between what you earn and what you spend. You can compute your profit with this simple formula: PROFIT = INCOME – EXPENSES. So:

  • If you earned $4000 last month and spent $3000, you had a profit of $1000.
  • If you earned $4000 and spent $4500, you had a loss of $500.

There are only two ways a business can boost profits, and there are only two ways you can boost personal profitability.

  • Spend less. A business can increase profits by slashing overhead: finding new suppliers, renting cheaper office space, laying off employees. You can increase your personal profit by spending less on groceries, cutting cable television, or refinancing your mortgage.
  • Earn more. To generate increased revenue, a business might develop new products or find new ways to market its services. At home, you could make more by working overtime, taking a second job, or selling your motorcycle.

When you earn a profit, you don’t have to worry about how you’ll pay your bills. Profit lets you chip away at the chains of debt. Profit removes the wall of worry and grants you control of your life. Profit frees you to do work that you want instead of being trapped by a job you hate. When you make a profit, you truly become the boss of your own life.

With even a small surplus, the balance of power shifts in your favor.

For more on this subject, check out my article on why profit margin is the most important number in personal finance. You might also be interested on reading about the best ways to spend less and how to make more money.

Be Proactive

Here’s the dark, dirty secret of personal finance: Smart money management is more about mindset than it is about math.

Financial success comes when you master the mental game of money. It’s not about understanding the numbers. The math of personal finance is simple: spend less than you earn and invest the difference. We all get it. Instead, it’s controlling your habits and emotions that’s difficult.

That’s why those who are successful with money have learned to master their emotions. They don’t buy on impulse, don’t sell their investments when the stock market crashes, and they don’t allow friends and family to persuade them to do dumb things with money.

When I was digging out of debt, I was frequently seduced by the siren song of books and comics. I knew it was dangerous for me to walk into a bookstore or comic shop, but I did so all the same. I spent a lot of money because I was foolish. (In 2006, I spent $692.96 on books and $3202.91 on comics. Yikes!)

As I began to act as a money boss, I discovered ways to resist temptation.

For instance, I found that if I didn’t enter bookstores or visit Amazon, I wouldn’t buy books. If I didn’t walk into a comic store, I wouldn’t buy comics. By refusing to even browse, I had pre-committed to doing the right thing. My spending on books and comics plummeted, and I began to repay my debt more quickly.

This experience taught me an important lesson about being proactive: The best way to resist temptation is to never be tempted. Obvious, I know, but it’s shocking how many people overspend simply because they expose themselves to the object of their desire.

Avoiding temptation is a great barrier to bad behavior, but there are plenty of other ways to practice being proactive.

  • Some experts advise that if you have trouble with debt, you should freeze your credit cards in a block of ice. Although it sounds crazy, this can be an effective deterrent for chronic debtors. I had to take things further when I was in bad shape. I destroyed my credit cards and hid the account numbers. (Even that wasn’t enough. Ultimately I had to cancel the accounts!)
  • I used to find it hard to build savings. As quickly as I put money away, I spent it. Part of the problem was easy access. My checking account and savings account were held at the same credit union. Eventually, I got wise to myself. I moved my savings account to a different bank (an online savings account) and established a link between the two. When I got paid, I put my money into savings first. I only moved money to checking when I needed it. This one act made a huge difference to my impulse spending.
  • When I go grocery shopping, I use a list. I walk to the store instead of drive. I shop the perimeter. I consciously avoid looking at the impulse items at the cash register. Each of these is an intentional barrier I build between me and bad choices. (All the same, I occasionally make it home with a bag of chips or six-pack of beer. Or a fruit pie.)

All of this is easier said than done, of course. I know from personal experience. For the first 37 years of my life, I sucked with money — and all because I didn’t have control of my financial psychology. I turned things around by learning to become proactive. I learned what my bad habits were and developed methods to fight them — in advance.

For more on mastering the mindset of wealth, check out my article about how to use barriers and pre-commitment to automatically do the right thing.

Practice Conscious Spending

Every time you make a choice, there’s a cost. By choosing to buy one item, you pass on the opportunity to purchase other items. By choosing to do one thing, you pass on the opportunity to spend your time in any other way. Opportunity cost is what we give up in order to have the thing we choose.

Imagine you’re the CFO of a delivery company. You have $10,000 to spend on new equipment. You could buy a new truck to add to the fleet, but then you wouldn’t be able to replace the ten-year-old computers in the main of office. Conversely, if you buy new computers, you won’t have as many trucks available to make deliveries. No matter which option you choose, there’s an opportunity cost.

While this concept is applied constantly in business, it’s often overlooked in personal finance. When You, Inc. uses money for one thing, that money is unavailable elsewhere. If you purchase a home with a $1500 mortgage, for instance, you can’t use that money to travel or to fund your retirement.

Opportunity costs are neither good nor bad. They’re simply the price you pay to have what you choose. The problem comes when the choices you make aren’t intentional — when you make them out of reflex or habit.

I endorse a concept called conscious spending, which I learned from Ramit Sethi, author of I Will Teach You to Be Rich. Conscious spending means actively choosing to spend on some things and not on others.

Contrast this with how most people spend.

We buy things because we’re expected to. We spend to have what other people have. We sign up for gym memberships that we never use, subscribe to magazines we never read and pay for golf clubs that get buried in the garage. We make impulse purchases at the grocery store–or even on large items, like computers and cars. In other words, we often spend without thinking.

The opportunity costs of these unconscious purchases are significant. We’re sacrificing our futures for lesser pleasures today.

But with conscious spending, you evaluate every purchase, asking yourself:

  • “Why am I buying this? Will it make me happier? Will this help me meet my long-term goals?”
  • “Would I rather have this now, or would I rather have something bigger and better next year?”
  • “Are there other, cheaper options? Could I borrow this? Could I buy it used?”

Conscious spending forces you to become more aware of every purchase you make.

For a long time, I was willing to spend $200 each month on gym and fitness programs because doing so helped me to lose fifty pounds and become fit. I made an active, conscious decision to spend that money, and I made certain that I derived ng value from it. I recognized that I was sacrificing a great deal in the future, but I believed my improved health was a worthwhile reward.

On the other hand, I’m unwilling to own a new car. Financial considerations aside, I don’t care enough about features and flash to make such a purchase worthwhile. For somebody else, though, the car might be a worthwhile purchase and the gym membership a waste of money.

When you spend, be sure it’s aligned with your purpose and mission.

Putting It All Together

These methods, when applied patiently and persistently, can turn You, Inc. into a profitable enterprise. But there’s one final piece to the puzzle.

As I mentioned earlier, successful money management — whether on a business or personal level — is less about mechanics than it is about mindset. When a future CFO graduates from business school, she shares the same basic education as thousands of other MBA students. Each understands fundamental business and economic theory.

But it’s not the book knowledge that breeds success. Instead, it’s mental toughness. Successful CFOs exhibit this strength of mind through three distinct qualities:

  • Vision. A successful CFO embraces her company’s mission and incorporates it into her vision for her own life.
  • Discipline. A successful CFO gets stuff done. She recognizes that, yes, some tasks are mundane and less fun than others. But she also understands that even the mundane tasks need to be completed, that they’re small parts of a greater whole.
  • Willpower. Most importantly, a successful CFO is willing to confront difficult tasks instead of shirking or delegating them. She’s willing to make unpopular decisions that bring short-term pain because she knows they’ll bring her company increased profitability in the future.

Most of the people who read this article won’t adopt any of the strategies I’ve suggested, and their lives will continue as before. But a handful of people — and I hope you’re one of them — will read this piece, absorb its message, and make big changes to their lives. These dedicated souls will experience something amazing. After slashing overhead and boosting income, their cashflow will be greater than they could have imagined.

Remember, my friends: Your personal wealth is your real business; everything else just supports it.

More about...Budgeting, Psychology

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There are 4 comments to "Seven money strategies to master this year".

  1. Josh says 03 January 2017 at 21:24

    I completely agree here. I have been made fun of for running my household like a business, but it works and those laughing are broke.

    • ESI Money says 04 January 2017 at 07:17

      Ha! I have run my finances like a business for 25 years now…and I’m the one laughing (retired at 52). 😉

  2. Freedom 40 Guy says 10 January 2017 at 17:47

    Speaking from my own experience – automation is definitely the key! Set it and forget it – to steal the line from the old infomercial. without automation, it is just too easy to spend a little too much and save a little too little!

  3. Piggy Bank Hank says 15 January 2017 at 11:02

    This is a very powerful article. I’ve been incorporating many of these ideas in my own finances, and this article gives me the motivation to continue doing so. I find having a plan and automating the biggest keys to my success. After creating a plan of where I want to be in the future, I set up a system to take me there through automation.

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