The rich know a simple secret to building and managing wealth. They pay attention to it every day. This is a process common to every person who has successfully built a fortune.
If you do not pay any attention to how you spend your money or where it comes from you are not likely to build wealth. People who are successful at building wealth keep careful track of how they build that wealth.
Most people make a haphazard effort at tracking their finances. They are unable to tell you where their money goes on a daily, monthly or annual basis. There is no plan or budget. Most people spend money “as the need arises” with no thought as to how it all fits together. Consequently they have no control over how they spend their money because they do not know how they spend their money.
The First Law of Wealth Management
The first steps toward building wealth are managing it. To manage wealth you make sure that you always spend less than you earn. This is the first law of wealth management and it is essential to building wealth. As long as you spend what you earn, or more, you remain in debt and you build no wealth. It really is that simple.
You have heard it before – pay yourself first. You must save some portion of what you earn if you ever hope to build wealth. You must systemize this process so that it happens every month, year in and year out. The power of this method is tremendous.
The only way you can really get control of what you spend so that you can enforce your commitment to save a portion of all you earn is to keep track of what you earn and what you spend. This is the first and most fundamental step. It must become an ingrained habit.
People who build and wisely manage wealth know where it comes from and where it is going and they know this through constant record keeping and review.
You can start simply by setting up a simple budget of what you spend every month on fixed and variable expenditures. Mortgage payments, auto loan payments, and your monthly contribution to savings are examples of fixed expenditures. How much you spend on food, gasoline, auto repairs, and electricity are variable. There is always a greater degree of discretion with variable expenditures.
You can shop for cheaper rent or mortgage payments, or cheaper auto insurance, but for the most part you will be most effective at controlling expenses by watching variable, or so called discretionary spending. You can only watch it and control it if you keep records on it.
Use the method that works best for you
Different people prefer different systems. Some like to use old fashioned paper systems like ledger books. For many today though computer programs like Quicken or Money make record keeping easier and more accurate. Whichever system you choose your commitment to using it every day and every month is essential to effectively managing expenditures and investments.
Over time you should have income from various sources. In addition to income from a job or business you will have passive income from investments. Different sources of income will perform at different rates. You must track how your investments perform, how our business performs and how these performance rates change over time to get an accurate picture of what is working best.
The success expert Brian Tracy teaches that people who pay attention to their money attract more of it. There is great truth in this. If you are careless with you money or pay little attention to where it comes from or where it goes it will slip through your fingers.
How to Create the Financial Record Discipline
Keeping good financial records is essential to managing your wealth. To develop this discipline resolve to maintain accurate and complete financial records for one week. Track all of your income and expenses for one week. You will be surprised especially on where it all goes. You will learn a great deal about your own attitude toward money.
Once your first week if over resist the temptation to drop this practice. Continue to track your expenses and income for a month. Analyze what you have tracked. Learn from it. Study how you can save more, spend more wisely and even improve income.
Now resolve to continue this discipline for six months. As each month passes you will gain more insight into how you spend and you will gain more control over your money. The more control you gain the greater your ability to build wealth.
After six months of faithfully tracking your finances you will have developed a wonderful habit. You will no longer feel comfortable ignoring how you use money. You will build confidence in your ability to control your wealth and build it. As your confidence and sense of control increases your ability to build wealth will increase.
This process costs you very little but some time and effort. It will pay you back beyond your expectations. Continue this practice and you will be on your way to financial independence.
Daniel R. Murphy writes on personal development, leadership skills, time management and how you can build wealth and financial independence.
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