Everyone could use more money in their pocket, but did you know there are only two ways to get more money?
No matter your job, spending habits, debt, and any other parameters related to your finances, if you want more money coming in there are only two choices open to you.
You can either increase your income or decrease your spending.
It’s as simple as that.
The Two Ways to Get More Money
No matter your goals or reason for wanting more money, increasing your cash flow boils down to increasing the money coming in or decreasing the money going out, or having some combination of both.
To help illustrate this point, let’s look at a concept you may be more familiar with: losing weight.
It’s the same idea. In order to lose weight, you must either burn more calories (through exercise or activity) or decrease the calories consumed (eat less and healthier). Also similar to losing weight, the most effective method for saving money may be some combination of both increasing your income and decreasing your spending.
Why are we telling you this?
Because very much like losing weight, people tend to focus on only one option when it comes to increasing cash flow. When trying to lose weight, people tend to focus on exercise and neglect the impact of diet. With money, people tend to focus on increasing income and fail to recognize that they can increase their cash flow by limiting their spending.
Increasing your income is always an option and will allow you to have more money without changing any of your current spending habits. But for those who already work multiple jobs, cannot work a second job (or more hours at their first), or simply don’t want to work more, there’s another option.
Decrease your spending.
Remember, Money Saved is Money Earned. Decrease your spending, increase your money.
We’ve already written several articles on how to save big money on interest (check out our Taking an Interest in Interest series), but the purpose of this article is to guide you through a process for determining what money-saving option is best for you.
First, you must create a budget.
Click here to receive a free interactive monthly budget sheet!
We know, budgets aren’t super fun, and you may not know how to create one. Well, you’re in luck, because here’s a quick step-by-step guide to creating a basic budget and what to do based on the results.
- Calculate all your fixed expenses. These are things like rent/mortgage, car insurance, utilities, loan payments and whatever else you MUST pay every month. These are set payments that are relatively predictable. Some of these things are necessities to live, while others are the result of choices you’ve made (think car payments: a basic commuter vs an expensive sports car!). No matter which category your fixed expenses fall into (necessities or choices), these are things that must be paid every month and take priority over all other spending. You should also factor some money into your fixed expenses every month for unforeseen expenditures. These are things like broken appliances, car repairs, and similar Murphy’s Law issues that must be addressed.
- Compare your total fixed expenses to your income. What is the difference? Is it a positive number or a negative one? Hopefully it’s positive (meaning you have money left over after fixed expenses), but if it is negative you’ll need to make some major changes ASAP.
- If the difference is negative you are running out of money before you can pay all your bills and have a serious problem. You either need to increase your income (through a second job or other means), or you need to reduce your fixed expenses. You could move to a cheaper place, sell your car (or other items bought using loans), or seek assistance. If you’re in this position, stop here and look into the options just listed to get yourself back on track. DO NOT DIG A DEEPER HOLE BY SUPPLEMENTING YOUR INCOME WITH CREDIT CARDS OR PAYDAY LOANS!
- If the difference is positive you are in a good place. This means you can pay all your necessary bills and expenses, and there is money left over that can be put to other uses. Read on for the next steps!
- Calculate your variable expenses. If your fixed expenditures compared to your income is positive, you can begin to look at variable expenses. These are things that you don’t necessarily have to buy and can vary drastically from month to month. First up in this category are things such as groceries and gas, which are similar to fixed expenses except these items can be adjusted through frugal choices. However, the most impactful variable expense categories are things such as eating out, clothing, personal grooming (mani’s and pedi’s, nails, Starbucks, massages, etc.), and entertainment. This is the number one place people blow their budget. While these things may give us short-term satisfaction, they are not needed to live and are the prime place to begin saving money.
- Decide what variable expenses you are willing to reduce or cut out. This is where you can have major Money Earned through Money Saved. Typically, people who have a surplus of money after fixed expenses spend most it on fun things. They get a Starbucks every day (at $4 a pop!), eat out a lot, or use their surplus to buy more expensive items and increase their debt. This is all fine and good, but if you want to increase your cash flow looking at ways to decrease your variable expenses is a good way to do it.
- Budget your variable expenses based on your goals. How much money do you want? We recommend setting that amount aside and budgeting your variable expenses to allow for the loss of that chunk. For instance, say you want to contribute $100 a month to a retirement account, and you currently spend $100 a month each on dining out and entertainment. Setting your eating out and entertainment budgets at $50 a month instead saves you the $100 you need to reach your goal.
Moral of the Story
The above steps for building a basic budget focus on reducing your variable expenses in order to have Money Earned through Money Saved, but this option may not be for everyone. No matter your goals or how you intend to increase your cash flow, having a basic budget is a must to truly understand where your money is going and to make informed decisions about your options.
The steps above will help you to build a budget and determine the areas of your finances that can be changed to meet your goals. Hopefully, you’re in a position where you can play around with your variable expenses in order to save money. Even if you have enough for variable expenses, maybe you decide you’d rather keep your habits and increase your income. On the other hand, maybe you realize you’re paying too much in fixed expenses and decide to make a change there.
No matter what you decide, remember that you can only get more cash by increasing your income or decreasing your spending. Building a basic budget is the tool you need to see where your money is currently going and make an informed decision about which option works best for you.
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