6 Ways to Make Your Money Work HarderSubmitted by MacDev Financial Group on November 14th, 2016
Banks are a business. Their primary objective isn’t customer service, needs or interests, but to make money. And they do this successfully because banks understand how money works and implement as part of their business model, financial and economic practices most of us haven’t been educated on. Here are six ways you can make your money work harder for you just like banks do.
Take a macro-level approach to financial management.
When it comes to budgeting to save money, we often cut out necessary or small expenses first because it’s the easiest and most logical place to start without getting overwhelmed. Most of us take a bottom-up approach rather than a top-down approach to managing finances. But this limited perspective can cause us to lose sight of the larger financial picture.
Ask yourself how can you truly save money if you’re simply looking at the micro-level of your daily spending habits? You need to address the macro-level of your expenses to really understand where your money is going and how it’s working for you. That is why tracking what you spend, including fixed and variable expenses, can help you see the whole picture.
For example, economics incorporates both macro-economics and micro-economics. Macro-economics is economics concerned with large-scale or general economic factors, such as interest rates and natural productivity. Micro-economics is economics concerned with single factors and the effects of individual decisions. Economists need to take in both levels to understand how the economy is performing. Your finances are your personal economy.
Mainstream financial management advice emphasizes we look mostly at our variable expenses to reduce living costs and save money. We see fixed expenses as just that—fixed. As a result, we may be overlooking ways we can move money, leverage our money and even save money. For example, perhaps leasing a new car is more affordable than financing a car. Maybe spending money on home repairs will boost the equity of your home and generate a greater return down the line, even if you don’t have the finances upfront.
Understand how money really works
Have you ever heard of the term velocity of money? The financial world is full of terms we aren’t exposed to and tend to shy away from because they can sound intimidating. Sometimes financial vernacular is designed to 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.
For example, Investopedia describes the velocity of money as the rate at which money is exchanged from one transaction to another and how much a unit of currency is used in any given period. In economics, velocity of money is a mathematical equation In economics, velocity of money is important for measuring the rate at which money circulates through the economy and is used for purchasing goods and services, as this helps investors gage how robust the economy is, and is a key input in the determination of an economy's health.
However velocity of money can also be seen in terms of how productive money is or how much benefit (profit, revenue, or value) is generated from a particular investment. Velocity of money is the ability to increase the productivity of your money.
Applied to personal finances, the math equation for velocity of money can be seen as output divided by input. The less input (energy, work and time) you put in to making money and the greater output it 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 the 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 purchase a permanent life insurance policy with a cash value that grows over time
Therefore, the real 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 individual dollar, the wealthier we become.
Banks use velocity of money to make a profit when they hold cash and then lend it out to multiple customers over and over again, charging interest each time. It’s a similar idea to how one dollar can change hands through multiple transactions in an economy but never lose its value. The person paying the dollar is exchanging it for something they value more and so it continues. The interest banks give you to hold your money in a bank account is much lower than the amount of interest they charge on a loan—minimal input generates greater output.
Pay yourself first
One of the biggest mistakes we make is settling for the “living from pay-check to pay-check” or “surviving on rice and beans” mentality of financial management without teaching ourselves how to really save money. Saving money isn’t just differentiating from wants and needs, cutting down on frivolous spending and micro-managing every dollar right down to the last dime. Saving money is a habit we have to consciously practice, no matter what our income.
What many of us struggle with is trying to cover the basics, especially when the cost of living seems to be skyrocketing. By the time we pay the rent or mortgage, utilities, car payment and gas, groceries, a night or two out for entertainment, there isn’t much left to save. We don’t end up saving anything. So before you pay your bills, learn to pay yourself first by putting a percentage of your income away. Start with a percentage of your total income you can afford and that is reasonable, whether it’s two percent or 10 percent, and then with time, steadily increase that percentage.
Swap ‘budgeting’ for the creation of a prosperity plan
The term “budgeting” implies we must live within the confines of what we can afford. It does everything to perpetuate a “scarcity” mindset rather than an “abundance” mindset. What if we were to shift our perception and swap out the term “budgeting” for a “prosperity plan?”
Over time language and words, given their use, can be stretched to mean something completely different. In this sense, the term “budgeting” may have simply started as a way to manage household or business expenses, but on a deeper level it is also suggestive of a “scarcity mentality” of never having enough money. Creating a prosperity plan, sounds more positive and suggests the potential for abundance rather than continuous deprivation.
Put a “labour” cost on wants
Most of our spending is unconscious in the world today. How many times do you purchase something without asking yourself if you really need it or if you simply want it? Even if you ask yourself this question, how often do you justify buying things you want but don’t need? You need food to survive but not another pair of shoes or a designer purse. This line of questioning isn’t mean to deprive ourselves 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. What we fail to realize is money is not just a currency, it is earned with life energy—each hour you spend working to make money is your energy and time. As we get older, both energy and time become 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 life energy and time rather than a dollar figure, if radically shifts your perspective. You may be surprised how easier it becomes to walk away from impulsive purchases.
Categorize your expenses
If you want to make your money work harder, then tag your expenses into the following categories and stop seeing expenses as a negative word too, suggests Gunderson. By doing this, you can live “wealthy” now while contributing towards a wealthier future.
The only expense that you should view negatively 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 entirely. Bank fees, overdraft charges, using credit to consume without productive intention are all considered destructive expenses.
A productive or rainmaking expenses are anything that will get you a return for the money you put in. For example, the purchase of 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 types of expenses pay for themselves over and over again because they enhance productivity and your ability to earn more money. Rainmaking expenses is also anything that helps you replenish your energy levels and keeps you in peak performance such as a gym membership or healthy food. They types of expenses fuel your productivity.
Protective expenses is anything that helps safeguard your family, your productivity and way of life. Putting a percentage of your income away into an emergency fund, disability and critical illness insurance, life insurance, medical, auto and home insurance expenses fall under this category. Covering protective expenses actually helps us to be more productive because it frees us from stress and worry and future uncertainty which opens up more of our mental space in the present to be productive and earn income.
Lifestyle expenses are important too and we shouldn’t avoid them. After all, making money is about lifestyle, otherwise why do it? We want money to be able to live the way we want to live and do the things we want to do. A view of abundance will put us in the right mindset to make our lifestyle choices happen. An annual vacation, a fancy dinner out, or the latest technological gadgets, these kinds of expenses are important for establishing life balance and sometimes rewarding ourselves for are hard work.
There is an important caveat though. Lifestyle expenses have to be well managed, otherwise it’s tempting to go overboard. One way to keep such expenses under control is to pay cash instead of using credit.
So if you want to be smart about money, try some of these ideas to make your money work harder for you and put yourself on the path to creating your prosperity plan.
Disclaimer: This information is given for informational or educational purposes only. All financial endeavors should be vetted through a financial professional; example, life insurance broker, financial 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.