Step 2: Start Being Proactive!
“I skate to where the puck is going to be, not where it has been.” – Wayne Gretzky.
Many of us handle our money by thinking in the present tense. We look at the bills we have today and the money we have in the bank today, then try to make decisions based on the current situation. The problem is, we make decisions in the now, but forget to think about the future: where the puck will be.
If you want to start winning with money you need to be more proactive with your resources. Stop living in the now and start making decisions for your future. You can’t spend all of your paycheck today when you’ve got a mortgage payment due five days from now before your next paycheck comes in.
You’ve got to start thinking about the opportunity cost of your spending decisions. If you spend a dollar today, you’re giving up the opportunity for that dollar to earn you interest down the road. If you choose to save money today, you lose the opportunity to spend it on something you may want. Everything has an opportunity cost, and they’re hard to recognize because the lost opportunity may be far in the future.
Be aware of these hidden costs with every financial decision you make. If you’re constantly thinking in terms of how much each decision is costing you, you’ll begin to make better decisions on a daily basis.
Ok, so you know that everything has an opportunity cost. Now what?
Armed with the mentality that every decision costs you something, you can now make more rational, informed decisions for your future. That new focus gives you the foundation you need to be proactive with your money.
The best way to be proactive with your money is to have a written plan. You need a long-term plan with goals and a strategy to reach those goals. This should be reviewed at least once a year to measure your progress toward those goals and make changes to the plan as needed.
You also need a short term cash flow plan. This is your budget. The cash budget should be done monthly based on the specific income and expenses for that month. It’s as simple as writing down your income for the upcoming month and writing down where you plan to spend or invest every dollar of that income.
Finally, you can’t just write a plan and expect it to happen. You actually have to follow the plan. Set up some metrics to measure your progress and make sure you track the progress regularly. It’s imperative to check your progress on the monthly budget during the month, not after the month is over. It’s counter-productive to wait until after the month is over and wonder why your wallet doesn’t reflect your plan.
It’s also important to track progress on your long-term goals. Every three months or so, take some time to review your net worth. Net worth is a great scorecard for tracking your debt reduction and wealth building efforts. The same holds true for investing. Take a look at your portfolio every three months or so to make sure you understand where you are and re-evaluate where you want to go in the future.