Earlier this week I took a look back at my finances over the past five years and discovered that I’d raised my net worth by almost $100,000. I took a look at each year and outlined what I achieved in each of the five years.
While I found this exercise useful personally to discover how much progress I’d made over the past five years, I did not talk much about the financial habits that allowed me to achieve this growth. I discussed how I paid off $38,000 in debt in two years, but beyond examining my inexpensive living situation and meager income, I didn’t go into detail how I managed to send over $1,000 per month towards my debt and later save thousands of dollars per year towards other goals.
So, here, in detail, are the financial habits I used to increase my net worth by $100,000 over the past five years.
Living on a Budget
One of the first things I did when I started to get my financial act together was tracked my spending and developed a budget. I’ve had a budget for the past five years, and have always laid it out the same way:
Income at the top followed by the following categories:
- Family Spending (Groceries, entertainment, etc.)
- Personal Spending (My “allowance” or fun money)
Every time I received a paycheque, I would move my money into the different categories. This ritual ensured I’d always be able to pay my bills on time and allowed me to put lots of money towards savings and debt repayment. I never got into doing automatic transfers, but I did always take great pleasure in the ritual of depositing my paycheque, moving all of the money to its various places in my accounts, and updating that budgets with the new totals.
Paying Myself First
As you can see above, the two bottom categories, debt, and savings were right there in my budget. Every paycheque, I’d move money into my savings accounts and make extra payments towards my debt. I’d gleefully update my debt repayment spreadsheet and watch my “debt free date” creep closer to me, as the extra payments shortened the amount of time I expected to be in debt.
Then I’d try to live the rest of the week on the small sum of money left over for groceries and entertainment. Because the rest of my paycheque was already allocated for bills or already spent on debt, I had no choice but to live on the money left over.
Putting money for your goals away first and living off the rest is the essence of paying yourself first, and it’s a tactic I still employ today. Even though I set a little more aside for groceries and entertainment every week, I still move a significant portion of my paycheque into savings every week and live off the rest.
I owe a huge part of my ability to reach my financial goals to windfall money. Windfall money is any surprise amount of money that falls into your hands. Here are some examples of the windfall money I’ve received over the years:
- Income tax returns
- Car insurance settlement
- Wedding gifts
- New Brunswick Tuition Rebate
- Extra paycheques
- Side hustle income
- Money from selling items
My default response to receiving windfall money has always been to put it towards my financial goals. Whether it’s using my car insurance settlement to pay off my student loans or using my New Brunswick Tuition Rebate to boost my emergency fund, windfall money has played a huge part in reaching my financial goals. Yes, sometimes it can be tough to say goodbye to all of the things you could have bought with that money. But for the most part, I find squirreling away the money towards money goals to be equally as satisfying.
Always Be Cutting
The ABC’s of budgeting stand for Always Be Cutting. Always Be Cutting means you should always be looking for ways to cut line items in your budget to save money and send more of your hard earned cash towards savings and debt repayment. Even if you are going through a reasonable period of lifestyle inflation, it’s important always to be cutting.
In my case, living in an un-insulated 400 square foot cottage was not a sustainable living situation, so I moved, which inflated my expenses. On top of that, deciding to relocate to Halifax certainly brought about additional lifestyle inflation. Finally, after buying a home this summer, my lifestyle is officially at maximum inflation.
Even though I’m spending roughly 4.5 times the amount I was spending on my lifestyle, I’m still constantly looking for ways to cut that cost and send more of my limited funds towards savings. Here are some of the things I’ve done in the past six months to reduce my living expenses:
- Negotiated cheaper car insurance rates
- Switched internet providers
- Shopped for the best mortgage rates
- Actively avoided peak electricity rate times
- Kept my thermostat at 19 degrees Celsius (66 degrees Fahrenheit)
- Expanded my home wine brewing hobby to include beer (Atlantic Canadians spend a lot on beer)
On top of that, I’m actively saving money to spend on home improvements that will decrease my housing costs, this includes:
- Insulating my attic, back porch, and front porch
- Replacing the older windows in my office and downstairs bedroom
- Upgrading my electrical panel to 200 amps so I can:
- Replace my oil-fired hot water tank (that I’m leasing!) with an electric one
- Replace my inefficient old oil-fired furnace with an air source heat pump
- Eventually, buy an electric car and say goodbye to fuel costs forever
These home improvement projects will decrease my monthly energy costs so that I’ll have more money to send towards savings in the long run. They will also increase the value of the home!
Back when I was a new graduate earning just $38,000 per year, I was desperate to make more money so that I could pay off my oppressive student loans and car loan. Asking for a raise wasn’t an option, so I turned to side hustling. I’ve been side hustling for five years now, doing essentially the same tasks I did back then. I started out staff writing for some other personal finance blogs, charging just $25 per blog post. I also sold some ads on My Alternate Life. That first year I made $2,300 on the side. Over the past five years, I’ve taken on higher paying clients, worked with bigger and bigger brands, and eventually grown that side hustle to about 10x that amount.
To make side hustling a key component of improving my net worth, I never include side hustle income in my budget. I don’t rely on it to meet my day-to-day expenses. Instead, my side hustle income is used exclusively to help me reach my financial goals. Back when I had debt, I sent 70% of my side hustle income towards debt and set the remaining 30% aside for taxes. I usually didn’t end up having to pay taxes, so in March I’d send the remaining 30% towards debt.
When I was saving for a home, I did the same, and now I’m doing a version of that. The only difference now is that I have more than one financial goal, so the money goes to a few different places, and I’ve finally conceded that 10% of my side hustle income should go towards “fun.”
Areas to Improve
That’s how I’ve gotten to where I am today, but moving forward, I want to do better. There are a few areas of financial management that I’ve ignored or haven’t paid enough attention to, and this year I want to remedy that. Here’s where I’m planning to focus in 2017:
Stop Shunning Investing
I’ve been investing a percentage of my income for retirement since 2013, but I haven’t been doing much else. I know that my money is not in the most fee-efficient funds, but I haven’t made the switch yet because of pure laziness. I also have been investing the bare minimum that I’ll need for retirement and no more. That needs to change because the best way to ensure long-term growth is to invest your money. I can do all of the saving, budgeting, and side hustling I want, but if I’m not putting that money in a place where it can grow long-term, I’m doing myself a disservice.
Start Planning for Long-Term Goals
I don’t usually like to toot my own horn, but I rock at accomplishing short-term goals. I paid off $38,000 in debt in two years; I saved a $10,000 emergency fund in six months, I saved $33,000 for a house down payment in 18 months. One and two-year goals are my jam. Put a short-term goal in front of me, and I attack it with a one-track mind. But longer term goals like saving for early retirement or getting my investing account to $50,000? So much more boring, in fact, I’m so not into those goals that I don’t even set them, which is bad.
So this year I’m going to do some big-picture thinking and try to set some longer term goals. I’ll break them down into manageable chunks that will hopefully make them more appealing.
What key skills do you rely on to improve your net worth? What areas do you need to work on? I want to know!
Photo Credit: Sandis Helvigs