As we end 2019, I wanted to thank all of you who read our Moneysavers posts and who have purchased the FinancialVerse – A Common Sense Approach for Your Money. By taking these actions, you are taking steps to improve your financial knowledge and money skills. Over time, this information will help you make better money decisions. I want to leave you with a message for the new year that will inspire you to continue your journey of improvement. That message is that you can change your money algorithm.
Your Money Algorithm
The Oxford Dictionary defines an algorithm as a set of rules to be followed in calculations or other problem solving operations, especially by a computer. I believe each of us has our own money algorithm that we use to solve the money issues in our lives. Our set of rules is determined by formal learning, what our parents taught us about money, what we experience in our adult lives, and what we learn from others, including financial professionals.
For most people, their money algorithm is not as developed as it should be. I believe this situation can be changed. Algorithms of all kinds are constantly updated as new knowledge is gained. I believe we can each develop and improve our personal money algorithms each day. With that in mind, let’s look at the five steps you can take in the new year to change your money algorithm.
The Five Steps
Step 1 - The Realization
The first step in upgrading your algorithm is to have the realization that money today is a very scarce resource. Because of lower incomes, fewer good job opportunities, exorbitant college costs, or the high cost of living - money is hard to come by. As such, you must treat money as a scarce resource and only spend it when needed and to seek to maximize your earning power. This fundamental belief that money is scarce should form the foundation of your money decisions. For today’s young adults this truth is painfully obvious.
Step 2 - The Budget
Like any scarce commodity, you need to be able to track the sources and uses of your money. The only way I have learned to do this is using a cash budget. In the FinancialVerse I have included significant information on how to construct and use a cash budget. Please see our most frequently read Moneysavers post from September 20.
Step 3 - Mindful Spending
Because of how scarce a commodity cash is today, you need to mindful of what you are spending and why. You decide the lifestyle you want to have. You make the daily decisions on what you spend and why. I don’t tell you to stop drinking coffee or playing video games. What I tell you is that you need to be aware of how much you can spend and manage the results of your decisions within this constraint. The reality is that your cash outflow cannot exceed your inflow over time.
Step 4 – Begin to Plan for Your Future Needs
Your personal algorithm needs to be constructed with the knowledge that you are likely going to lead a long life. You will need cash to pay for your living expenses for all these years. As such, you have to save cash today to pay the costs of tomorrow’s expenses. Your algorithm cannot exclude these future needs. You need to save some of today’s cash for tomorrow.
Step 5 – Improve Your Knowledge
The one certainty about having financial knowledge that forms the basis of your algorithm is that what you have learned will change. Thus you need to set aside time to keep your money knowledge as current as possible. I am an advocate of Spend2 or two hours per week improving your financial knowledge. Plan this for 2020, it will pay large dividends for you. Our website offers a separate tab with ideas on how to go about this.
Summary
As 2020 dawns, it is a great time for you to reprogram your money algorithm by taking the five steps discussed above. Armed with an up-to-date algorithm your financial success should greatly improve in the new year and beyond.
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Thanks again for your interest in improving your financial knowledge.