This is a guest post by Miranda Marquit. You can read a little about her writing at the end of the post.
One of the more controversial subjects being canvassed right now in the world of personal finances is the idea that maybe a financial plan based around a monthly budget isn’t the way to go. Indeed, the monthly budget mentality is about living paycheck to paycheck and managing your resources rather than growing them. The alternative to the monthly budget mentality is the net worth mentality. This is a long-term, big picture mentality that is about wealth building rather than mere money managing.
With the monthly budget mentality, you can spend everything you make each month, as long as you have enough to cover it. But then you are left, at the end of the month, feeling anxious as you await your next payday or you are worried about what happens if your hours or benefits get cut at work, or — worse — if you lose your job. With the net worth mentality, you spend less than you earn every month and get into that habit. You actively build wealth.
Ideas that can help you shift from a monthly budget mentality to a net worth mentality
Shifting to a net worth mentality requires that you change how you think about money, and then change your practices to go with it. After a while, you develop habits that become part of your life. Here are some ideas that can help you make the change from a mentality that considers only budget, to one that is focused on net worth:
- Find ways to spend less than you earn every month. One of the first steps is to stop viewing your paycheck as something that you spend. Most people see the paycheck and make a list of things they need or what to spend it on. View your paycheck as a tool to help you achieve wealth. This means that you can’t spend all of it every month. Even after savings and retirement type things, there should be money left over in your checking account at the end of the month. This might mean cutting some things out and learning to prioritize your spending.
- End impulse buying. If you have a net worth mentality (and the checking account padding to go with it) you can spend money on fun things. In fact, you should spend money on fun things every once in a while. But impulse buying can be a way of keeping you in the budget mentality. Think about what you are spending your money on. Do you need it? Will the fun it imparts be of a lasting variety? For big purchases, plan it out. And, even for small purchases, give some thought before you buy.
- Set long term financial goals. Create long term goals for growing your wealth. Create a long term financial plan that goes beyond the monthly budget.
- Look for ways to add multiple income streams. Living paycheck to paycheck in a monthly budget mentality usually means that your only source of income is your job. Can you find other ways to bring in some income? Investing, hobbies and other opportunities can provide you a way to take the money you have and leverage it into something even larger. Just be careful that you don’t get involved in anything too risky.
- Reduce your debt. Debt is one of those things that diminishes net worth. And making a monthly payment feeds into the monthly budget mentality. Try to get out of debt, and live a lifestyle that keeps you out of debt.
When you develop a net worth mentality, and start living in such a way that invites you to grow wealth, you can actually experience less money stress in your life. Having that paycheck right now, and in a specific amount, no longer seems as important. And you have the security to know that if something happens, you won’t be in immediate trouble because you have a safety net.
Miranda Marquit edits information on debt consolidation for DestroyDebt.com. She also writes on personal finances for YieldingWealth.com.