Finance success means different things to different people. The FCA asks, ” When you think about financial success, what does that mean to you?”. Most people might automatically think of high salary, large bank balance and the like. From my point of view, financial success is being able to control my money. This means making better financial choices and ultimately feeling comfortable with the financial choices I’ve made and will make in the future.
There are good and bad financial choices. Some of the bad financial choices could be making the decision to pay off debt, saving up for an emergency rainy-day fund, and/or making decisions to ensure long-term financial security.
Some of these choices can feel good, but the bad choices can ultimately leave a person feeling helpless and trapped. Ultimately, I believe the key to financial security is small, consistent choices and/or habits. These small habits can slowly alter a person’s financial security without requiring the person to become suddenly wealthy.
Another critical part of financial security is setting a proper goal and plan, and actually sticking to it, no matter how slow the progress may feel. People don’t have to get the goal 100% correct the first time; they just need to be making better financial choices and learning from past mistakes. Overall, keeping disposable income and having financial security over the long term is the aim of financial discipline and truly having your money work for you.
What Does Financial Success Really Mean?
What financial success looks like varies from person to person. One individual may define financial success as the ability to own their own home without financial struggles. Financial success for another person may mean becoming debt-free, supporting their family, or being able to retire. There really isn’t one single figure that determines a person has financially “made it.”
There are other issues that need to be considered. Do you have enough financial means to handle your day-to-day obligations? Do you have enough financial means to plan for the future? I evaluate financial progress by looking at someone’s debt, income, savings and net worth. A person who makes a moderate salary may be more financially stable than someone with a much higher salary because the person with the higher salary may be spending every dollar.
Also, I believe money should be able to support and enhance life instead of strictly controlling life. Having financial security can make unexpected challenges in life less stressful. I don’t need to be rich to have fewer worries. Building a financial situation where I have money when I need it and fewer worries is my goal.
Set Clear Financial Goals for the Future
It’s easy to lose track of money if you don’t have a plan for it. Setting specific financial goals makes financial choices simpler and clearer. I used to have a hard time when people told me to save more money; now I can set a specific goal to save money, set a deadline for it, and then track my progress toward it. I break my financial goals into three categories: short-term, medium-term, and long-term goals.
Short-term goals usually include things like saving to pay a bill, saving to go on a trip, or starting an emergency fund. Medium-term goals usually include things like saving to buy a car or saving for a down payment on a house. Long-term goals usually include things like saving to be financially independent, saving for your retirement, or saving to create generational wealth.
I broke my goal to save $1,200 in 2020 into 12 monthly goals to save $100 each month. Saying I need to save $100 each month is a lot easier than saying I need to save a lot of money this month. I also take into account changes in my life. For example, a change in my job, a loss of income or an increase in my expenses will affect my goals and plans.
In general, my plans and goals are flexible. If something doesn’t work out like I wanted it to, or if things happen out of my control, it’s okay as long as I have a general plan for how I want my money to work for me.
Budget That Supports Your Financial Success
Creating a budget helps me see where my money is coming from and going to. I don’t think of a budget as a list of things I can’t buy. I think of a budget as the opportunity to decide where I’m going to spend my money and where I shouldn’t spend my money.
I find it useful to start with my after-tax pay. Next, I add in the expenses that I consider necessary, like food, housing, utilities, transportation, insurance, and the minimum payments on my debts. After I figure out my necessities, I add in the things I want to d,o like savings and other debts I want to pay off.
I find the 50/30/20 budgeting rule a good starting point. It suggests that after-tax income should be allocated to necessities (50%), wants (30%), and savings/debt repayment (20%). This rule does not take into account locations where a large percentage of after-tax income is allocated to housing.
The rule can also be flexible. I also find that tracking my spending for 30 days helps show ways that money is spent that don’t align with my goals. In fact, all those small, seemingly insignificant purchases can add up to an arbitrary limit that doesn’t help achieve my financial goals.
Build a Consistent Saving Habit
Money isn’t saved at the end of the month. If I expect to save money at the end of the month, I’ve already failed. I’ve found it’s best to budget savings at the beginning of the month.
An emergency fund is a good first savings goal. It helps pay for things like unexpected vehicle or medical bills, loss of a job, or unplanned expenses around the house. I can start small and work my way up to covering 3-6 months’ worth of living expenses.
I have an easier time achieving my goal if I set up automatic transfers. If I put money away right after payday, I’m less inclined to spend it. I also have the option to keep this money in a more stable place and in less risky investments. It’s a good habit to save money regularly regardless of the amount. As my situation improves, I can save a larger amount. It’s up to me to set a limit.
Manage Debt and Improve Your Financial Health
Not all debt is bad. For example, a mortgage or loan to start a business may be good debt. The bad kind of debt comes from the unhealthy need to repay loans and give upwards of 15% of your monthly income to loan sharks.
I create a list of every debt I owe, including its balance, interest rate, the minimum payment, and its due date. This helps me analyze my debts in detail and decide which repayment strategy I would like to implement.
The debt avalanche method requires making minimum payments on all debts and putting the remaining payment toward the debt with the highest interest rate. Using this method can help lower the total interest cost.
The debt snowball method requires making the minimum payments on all debts and putting the remaining payment toward the debt with the lowest balance. This can help build and sustain motivation.
Payment due dates, as well as the credit balance, can also impact creditworthiness. To improve creditworthiness, it is important to pay down debt and avoid adding on more. Once expenses are under control, I can put more money toward saving and investing for the future.
Maximize Your Earnings and Build Your Wealth Over Time
Investing, unlike saving, has the potential to provide long-term growth. Unfortunately, I have seen enough market volatility to know that I can never be certain of an investment outcome. There are risks associated with all investments.
A number of factors inform my investment decisions, including my goals, the time I have before I need the money, my obligations, and my loss tolerance. I do not depend on the stock market for money I need in the short term. I’d rather establish financial security first, and then take the investment risks.
I look at the tax implications of my investments, as well as the rules governing my accounts, because they can impact my investment performance and returns. I understand the importance of diversification, and try to spread my investments across different asset classes.
I educate myself on compound growth, as the markets may be volatile in the short term, but over time they may rise and support wealth growth. Wealth can also be lost due to fees, so it is important to understand what you’re purchasing. There is no free lunch, and there are no easy ways to get wealthy quickly. The highest returns usually come with the highest risk,k and anything that promises a high return with no risk is probably a scam.
Create Additional Income Sources
I try to achieve my financial goals by increasing my income rather than reducing my spending. While cutting expenses is certainly important, I believe there are diminishing returns. By increasing my income,e I can divert a larger percentage of my total income to savings, investment and/orwealth-buildingg activities.
There are times the better move is to increase my earning potential. It could mean training for a career, negotiating a pay raise, freelancing, or starting a small business. A person with skills in writing, design, programming, tutoring, or marketing could make additional income without a high upfront cost.
I don’t assume every side hustle is profitable. Many require high upfront costs like equipment or advertising. Some side hustles require a subscription or other costs. There’s also the time cost. I factor in all of these when determining a side hustle’s viability.
Some side hustles are active income, which means it’s work for pay, and some are passive income, which takes upfront effort or capital but is less work for pay over time. Neither is effortless. Employees who receive a salary increase can always spend that money, but they could also use some of that money to build their savings, pay down expensive debt, or invest for the future.
Build Financial Discipline
Understanding budgeting is only helpful if a person breaks bad financial habits. Financial discipline is practiced and perfected with time and repetition.
Lifestyle inflation is the increase of expenses to match an increase in income, and it is a common mistake when a pay increase is received. I can sometimes enjoy rewards with a portion of each pay raise directed to savings or debt repayment.
I also make a point of reviewing my finances regularly. A brief, monthly check helps me identify unnecessary expenses, missed goals, and opportunities to improve my finances. Mistakes will happen, but I don’t need to turn one poor decision into a permanent habit.
Long-Term Financial Plan
A long-term financial plan helps with money habit integration. While it is ideal to prioritize savings to capture potential future growth, debt repayment is also important in reducing financial stress and creating financial flexibility. It’s also important to integrate investment activities to build wealth. These should be aimed at achieving the same long-term goal.
To illustrate, let’s say someone wants to buy a house in the next five years. In the interim, they may need to deal with expensive debt, set up an emergency fund, determine the size of the required down payment, and decide the best place to put money for the down payment. In the next five years, they may have a hard time saving for the down payment if they take on high-risk investments.
I evaluate my retirement planning, the insurance I need, and my financial dependents. The best plan for me will be different from what’s best for you, depending on factors like our age and location, family situation, and income.
Every year or so I look over my financial state and make needed adjustments. I check my net worth, the debts I owe and how much I save and spend.
My financial plan is not something I write once. Due to the changes that happen in my life, I adapt my financial plan accordingly. For example, some of my goals change when I’m planning for kids and when my kids are grown. My plan reflects all of these changes.
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Practical Steps to Start Your Finance Success Journey
It is not practical to try to change all your financial habits at the same time. A better approach is to take a few smaller steps at a time. For the purpose of this example, I would determine my monthly income, identify my essential expenses, and document my debts. Once I have this data, I will have objective figures instead of guesses.
Next, I will determine three priorities. These could be to build an emergency fund, pay off a credit card, and save for a course to increase my income. For each, I would set a specific dollar amount and target date.
I will schedule a short monthly financial review. During this review, I will determine my spending for the month, assess progress toward my goals, and decide if adjustments need to be made. The review will be monthly, but adjusting my budget to be less restrictive is allowed.
I will measure my progress toward my goals and my overall financial success against my own past performance. Comparing myself to others is not helpful.
FAQs
What Is the First Step Toward Financial Success?
The first step toward success is to determine your current financial position. Calculate your income and expenses, identify your savings and debts, and set a financial goal. Knowing your starting point helps you identify what financial changes you can make to improve your situation the most.
How Can I Achieve Financial Success on a Low Income?
Prioritize your essential expenses and track your spending to avoid going into high-interest debt.
Save money regularly and look for ways to increase your income. The goal is to improve your financial security, and having habits focused on doing this regularly can strengthen your financial situation over the long term.
How Much Money Should I Save Each Month?
The answer is different for everyone. The 50/30/20 rule says you should aim to save 20% of your income. If that is not possible because of other financial obligations, don’t worry and aim to save as much as you can.
Is Investing The Only Way To Achieve Financial Success?
There are many strategies, and investing can be one of them, but losing money can also be part of investing. If you want to make better decisions with your money, understanding risk can help.
How Long Does It Take To Be Financially Successful?
Financial success can be defined differently for everyone. For some, this can mean saving up enough to feel secure in the case of an unexpected event, and this can take a few months. Others may be planning for the future and want to succeed financially by the time they are ready to retire. This can take decades. Your success and consistency can all play a role in how long this takes for you.
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