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Personal Finance Foundation – Part 3 – Grow Income

When it comes to moving the needle in your financial life and growing net worth, increasing income is one of the three primary steps you can take (with the other two being reducing expenses and investing).  You can make an immediate impact by cost cutting, but there’s a limit to how much you can cut spending.  On the other hand, although increasing income takes more effort, there’s no upper limit to how much you can earn.

Grow Your Career

One obvious way for you to grow income is to grow your paycheck at your current job or in your current career.  There are many ways to do this, with a few highlighted below.

Be Kind

You likely don’t expect “kindness” to be part of the advice you read on a personal finance blog.  That being said, with the hiring decisions I make, my number one criteria is bringing somebody on board who is kind, gets along well with people (even during disagreements, *gasp*), and reflects my organization’s culture (including and especially qualities of kindness and servitude).  No supervisor wants to be a babysitter, and no coworker wants to be around a bad coworker who exhibits any number of negative qualities:  Negative self talk, blaming, shaming, energy sucking, passing the buck, etc.

On the other hand, we all like people who are kind to us and generous with their time and effort.  Who doesn’t like that coworker who will take time out of their day to facilitate a project you’re working on?  Also, guess who management will promote when a position opens?  It certainly will not be someone who’s difficult to get along with, no matter how smart.

Work More Than Expected

I’ve observed colleagues whine and whine about not being paid enough, all the while showing up late and leaving early on a regular basis.  One thing’s for certain:  This doesn’t look good to managers.

Putting in more effort than is required is a simple way to build credibility while building your reputation.  Stack the cards in your favor by demonstrating to coworkers that you go above and beyond.  You’ll build a reputation for being a hard worker and your boss will notice, giving you an additional piece of justification for a pay raise when you next ask for one.

Learn Continually

Learning continually about your business vertical and your job responsibilities allows you to grow closer to being a subject matter expert.  Expertise in a given field can be parlayed into being a “go to” person, and this usually entails commensurate financial compensation.   For example, there are certain niches of engineering-related knowledge I pride myself in knowing well and I’ve become a go to person in my organization for this knowledge.  This means more recognition as a subject matter expert and an additional feather in your hat when asking for a pay raise.

Change Directions

You may determine that increasing your income in your current line of work isn’t feasible.  Whether it be that you hate your current job, have a limited income ceiling, dislike your boss and/or coworkers, a change of direction may be in order.  There are several ways to increase your income while choosing a different line of work.

Get an MBA

A Master of Business Administration (MBA) degree is a common way for professionals to change careers.  I’ve had MBA classmates change directions from technical roles to managerial roles.  I’ve also seen  other classmates completely change verticals, from software engineering to finance, and greatly increase their income.  I completed an MBA well into my professional career and found that it generated many opportunities, especially related to leadership, as I moved from a role with a technical focus to a leadership role.  An MBA is a great way to learn about the many aspects of leading and managing an organization and, as a result, organizations looking to fill leadership roles often filter resumes and LinkedIn profiles based on this credential.  Hint:  Look for an employer who pays for graduate education and leverage this benefit to further your career.

Learn a Trade or Become an Apprentice

There are many, many ways to earn a good living while not wearing a white collar.  A Google search for plumber and certified welder salaries indicates $50,000 annually is feasible, with much more compensation available for folks willing to specialize further.  Of course, as with any skill, it takes time, training, and patience to become proficient.  An apprenticeship under a well-experienced tradesperson could be your ticket to accelerating growth in expertise, career change, and income increase.

Develop a Side Hustle

You may be thinking, “thanks, buddy, but an MBA and trade school aren’t free.”  While I’m a big, big fan of having someone else pay for either, (whether it be through an employer, a government program, the GI bill, or another avenue), you can immediately boost your income  by picking up a side hustle or part-time job while you pursue education.  There are any number of side hustles you can pursue that you can jump into immediately:

  • Drive for a ride sharing company (i.e., Uber, Lyft, Sidecar, etc.)
  • Walk dogs through Rover or a similar app
  • Post your gig skills on Fiverr.  Many of the skills posted on Fiverr can be used from the comfort of your home.

This is the third part of my Personal Finance Foundation series that serves as a starting place for those who are looking for an organized way to approach their finances.  It’s easy to find personal finance articles, but it’s much more difficult to find an organized approach to personal finance.  To read Parts 1 and 2 of the series, go here:

Personal Finance Foundation – Part 1 – A Starting Place (Calculating Net Worth)

Personal Finance Foundation – Part 2 – Easy Money: Spend Less

Personal Finance Foundation – Part 1 – A Starting Place (Calculating Net Worth)

So you’re on the journey to get your financial house in order.  You first need to know where you’re starting.  You do this by measuring your net worth.  Net worth is calculated by adding up your assets and then subtracting your liabilities.  A very, very simple example: You have a savings account balance of $10,000 and have a credit card balance of $2,000.  Your net worth would be $8,000 ($10,000 in assets minus $2,000 in liabilities).  It’s certainly possible to have a negative net worth (think of the recent college graduate with student loan debt but no assets to their name), too.

As you can see, one way to increase your net worth is to increase the value of your assets.  Another way to increase your net worth is to decrease the value of your liabilities.  Often, though, and especially in the world of personal finance loud mouths, an extreme emphasis is placed on either increasing assets or decreasing liabilities, as if both can’t be accomplished simultaneously.  Both can be accomplished together and you’ll find positive movement in your net worth by focusing on both initially in your journey to a healthier financial state.

Here is a screen clip of an Excel spreadsheet I use to track my net worth:

Net Worth Spreadsheet
Net Worth Spreadsheet

You can download the spreadsheet here.  As you enter assets and liabilities, the spreadsheet automatically adds up both categories and automatically updates the resulting net worth value.  I update my spreadsheet monthly in order to keep tabs on my financial health and, more importantly, to see if something is out of whack and needs to be addressed.  Frequently updating your net worth will provide you with encouragement when you’re taking the right steps and seeing net worth grow, but it will also alert you if you’re slipping into bad habits.  It’s better to catch a bad habit a month or two in rather than realizing years later that the bad habit has caused you major financial damage.

Here are some challenges I’ve encountered while tracking net worth:

Challenge 1:  Accurately valuing certain assets and liabilities.  The value of a given asset or liability may not be black and white.  For example, when including a home’s value in net worth calculations, you should use the going market price for your home and avoid using values that may inaccurately inflate or undershoot the actual value.  This means that your home’s taxable appraised value may or may not be near the home’s market price (i.e., what you’d get if you sold the home).

Challenge 2:  If you have an asset that you’re financing, like a home or a car, make sure to include both the asset and the accompanying loan on your net worth statement.  Again, make sure you’re valuing the asset accurately (hint:  Kelley Blue Book is a great way to value cars).

Challenge 3:  Even though you’re enthusiastic about a collection you have (American Girl dolls, stamps, coins, etc.), they may not be nearly as liquid (i.e., easy to sell) as you think, and they may not be worth nearly as much as you envision.  I don’t include collectibles or jewelry in my net worth statement because I don’t see them as liquid assets.  This is an arguable point, though.  If you choose to include collectibles or hard-to-value items on your net worth statement, try to be accurate with their valuation.

Challenge 4:  You’ll encounter ups and downs in your net worth if a sizeable portion of your asses are in volatile categories, like stocks.  You’ll notice the ups and downs even more if you track your net worth monthly.  This is OK, as stocks (I’m thinking index funds when I say “stocks”) appreciate over long (10+ years) periods of time.  Just make sure that if you’re net worth is declining in value that you’re not contributing to this with reckless spending, overloading credit cards, or buying that Corvette you probably can’t afford right now.

Now that you know your net worth, you have a baseline from which to measure progress or regression.  If your net worth increases, this shows financial progress.  If your net worth decreases, this shows regression, and you should be especially aware of what’s causing the decline.  Your goal should be to increase your net worth over time.

Personal Finance Foundation – Part 2 – Easy Money:  Spend Less

Why You Should Use Index Funds in Your Retirement Accounts

When I first started learning about investing and retirement accounts, I struggled to determine where I should invest my money.  Thankfully, several great personal finance web sites (including Motley Fool and Bogleheads) agreed that investing in index funds led to the most benefit for most people.  Index funds are mutual funds that track what is called a market index, like the Standard and Poor’s 500, and maintain small slices of companies in proportion to the companies’ share of the index.  For example, if Apple currently makes up 2% of the S&P 500, an S&P 500 index fund would place 2% of its holdings in Apple.

Why is indexing preferred over investing in actively managed funds, where fund managers buy and sell stocks on a frequent basis?  The frequent buying and selling of stocks generates commissions for the fund managers and their companies (this is your money going to pay the fund managers).  Additionally, there are often fees associated with the initial purchase of actively managed funds.  At the end of the day, actively managed funds must increase in value not only to match the gains of index funds, but also to cover actively managed funds’ much higher expenses.

Study after study indicates that index funds outperform actively managed funds:

http://www.cnbc.com/2015/06/26/index-funds-trounce-actively-managed-funds-study.html

http://www.usatoday.com/story/money/personalfinance/2016/03/14/66-fund-managers-cant-match-sp-results/81644182/

https://www.bogleheads.org/forum/viewtopic.php?f=10&t=88005

I recommend Vanguard Funds (www.vanguard.com) for index funds, as Vanguard’s funds have the lowest expense ratios.  One fund that is highly recommended by many proponents of indexing is Vanguard’s Total Stock Market Index Fund (VTSAX), which has an extremely low expense ratio of 0.05%.  In comparison, many actively managed funds have expense ratios of over 1.00%.  While this extra percentage point may not seem like a lot, when compounded over time, this extra 1.00% may result in you paying fund managers tens of thousands, if not hundreds of thousands, of dollars that could have been used to grow your retirement nest egg.