You work hard for the money but is your money working hard for you? Even though the inflation rate has cooled, rising food costs will climb well into 2023. Add to that high levels of household debt and below-par performance in stock market returns, and it’s getting harder to make our money stretch these days. Sometimes when it comes to managing finances, it’s all in our approach and how we think about money. Check out these four ways to challenge your financial thinking to make your money work harder.
Take a macro-level approach to financial management
When budgeting to save money, we often cut out necessary or small expenses first because it seems the most logical place to start without getting overwhelmed. Most of us take a bottom-up approach to budgeting rather than a top-down approach to managing finances. But this limited perspective can cause us to lose sight of the larger financial picture. Budgeting also emphasizes a lack which can lead you down the rabbit hole to scarcity thinking. Read more about this topic in our blog Why Budgeting Doesn’t Teach You About Money.
Ask yourself how can you save money if you only focus on the micro-level of your daily spending habits; look at the macro level of your expenses to truly understand where your money is going and how it’s working for you. You need to track fixed and variable living expenses to see the whole picture!
For example, economics incorporates both macroeconomics and microeconomics. Macroeconomics is economics concerned with large-scale or general economic factors, such as interest rates and productivity on a national level. Microeconomics is the study of how individuals, households or companies make decisions to allocate scarce resources. Economists look at microeconomics and microeconomics to understand how the economy is performing.
Your finances are your personal economy.
Mainstream financial management advice emphasizes we look at our variable expenses to reduce living costs and save money. We see fixed expenses as locked in place.
As a result, you may overlook ways to move money, leverage your money and even save money. For example, spending money on home repairs can boost your home equity and generate a greater return down the road, even if you don’t have the finances upfront.
Understand how money works
Have you ever heard of the term velocity of money? The financial world is full of terms we hear but tend to shy away from because they sound intimidating.
Financial vernacular can sound complicated to keep us ignorant. But learning financial speak can deepen our understanding of money and finances and empower us to make more informed financial decisions.
The velocity of money is the number of times money moves from one entity to another. In economics, the velocity of money is critical for measuring the rate at which money circulates through the economy and how it gets used for purchasing goods and services, as this helps investors gauge how robust the economy is. The velocity of money plays a factor in determining economic health and performance.
The velocity of money can also imply how productive your money is or how much benefit (profit, revenue, or value) gets generated from a particular investment. The velocity of money is the ability to increase the productivity of your own money.
Applied to personal finances, the math equation for the velocity of money can be seen as the output divided by input. The less input, energy, work, and time you put into making money, and the greater output your money yields or produces, the greater the velocity of money.
Here is an example from Garret Gunderson’s book Killing Sacred Cows:
- You have a lump sum of cash = $100,000 earning 10 percent interest
- You take that 10 percent interest and purchase a mortgage for a rental property
- The rental property gives you a stream of rental income with tax benefits
- You then take that rental income to get a permanent life insurance policy with a cash value that grows over time.
The ability to make your money work harder for you is to minimize input while increasing output. According to Gunderson, there are essentially two ways the velocity of money can increase:
- The more exchanges made with the same dollars; the more wealth is created.
- The more simultaneous uses we find for each dollar, the wealthier we become.
Banks use the velocity of money to make a profit when they hold cash and then lend it to multiple customers repeatedly, charging interest each time.
Think how one dollar can change hands through multiple transactions in the same economy but never lose its value. The person paying the dollar exchanges it for something they value more, so it continues. The interest banks give you to hold your money in a bank account is much lower than the interest they charge on a bank loan—minimal input generates greater output.
Put a ‘labour’ cost on your wants
A lot of our spending is unconscious. How often do you purchase something and stop to consider if it is a need or a want? Even if you ask yourself this question, how often do you justify buying things you want but do not need? You need food to live but not another pair of shoes or a designer purse. This line of questioning is not a tactic to deprive yourself of things you want but to adopt a more pragmatic approach to spending.
The value of an item doesn’t hold much regard when we see it simply as a number. We have become numb to numbers. Money is not just a currency; it is a summation of your life energy—each hour you spend working to make money is your energy and time. As we get older, energy and time become even more precious commodities.
So the next time you purchase something you want, ask yourself if that item is worth the number of hours you had to work for it to be able to afford it.
When you begin to equate purchases with your life energy and time rather than a dollar figure, it can radically shift your perspective. You may be surprised how much easier it becomes to walk away from impulsive purchases.
Categorize your expenses appropriately
Not all expenses are created equal. Nor should all your expenses be viewed in a bad light. The only expenses you should approach with trepidation are destructive expenses.
These are expenses such as vices (gambling, drugs or alcohol) and products and services that don’t add value to your life and that you want to eliminate. Bank fees, overdraft charges, and using credit to consume without productive intention are all considered destructive expenses.
Productive or rainmaking expenses will get you a return for the money you put in. For example, buying a laptop computer will allow you to work from any location, be more efficient, and make more money. Rainmaking expenses can be spending more money on an employee, education (as long as you use it), paying for a marketing campaign, fees to join a professional organization, and investing in equipment.
These expenses pay for themselves because they enhance productivity and your ability to earn more money. Rainmaking expenses can also be anything that helps you replenish your energy levels and keeps you in peak performance; think of a gym membership or healthy food. These types of expenses fuel your productivity.
Protective expenses are anything that helps safeguard your family, your productivity and your way of life. For example, a percentage of your income into an emergency fund, disability and critical illness insurance, life insurance, and medical, auto, and home insurance fall under this category. Covering protective expenses helps you be more productive because it frees you from stress and future uncertainty and opens up more of your mental space in the present to be more productive and earn income.
Lifestyle expenses enhance your lifestyle and can be paying for an annual vacation, a fancy dinner out, or the latest technological gadgets. These expenses help us establish a balanced life and sometimes reward ourselves for our hard work. Making money is about your lifestyle otherwise, why would you do it? We want money to be able to live the way we want to live while doing the things we want to do. A view of abundance will put us in the right mindset to make our lifestyle choices happen.
Disclaimer: The material provided in this newsletter is for informational and/or educational purposes only. The information, opinions and/or views expressed in this newsletter are those of the authors and not necessarily those of the distributor. All financial endeavours should be vetted through a financial professional: life insurance broker, financial planner, accountant, lawyer, and/or other professional, as the reader, sees fit. MacDev Financial Group Corp., SET Financial Solutions Inc., including but not limited to its agents, staff, associates and/or partners will not assume any liability for any information printed in this article; indirectly, or assumed. The MacDev tagline, “Financial Control For Life” and “Bank On Whole Life” are trademarks of the MacDev Financial Group Corp. Click Legal for further information.