4 Simple Steps You Can Take Today To Improve Your Financial Life

Here are 4 habits that have helped me improve my finances. None of these are get-rich-quick solutions, but when practiced over multiple years, the results are astounding.

1. Track your net worth and update it once a year.

Some people scoff at the idea of tracking their net worth. The thinking goes that if you have a general idea of what your net worth is, you don’t need to track it on paper. I was also skeptical until I actually saw the power of this simple tracking in my own life.

I often take my daughter to a volleyball and basketball facility that is high energy and full of passionate young people eager to learn and win. As I sat there watching the games over the last season, I noticed that people play differently when they know that someone’s keeping score. Even the sound of sneakers moving on the floor in a basketball game is different when the score is being kept - the kids move with urgency and purpose when they know the scoreboard is tracking their performance. The same rule applies to your net worth - it’s your financial scorecard.

Why does tracking matter? A weight loss study involving hundred of people found that those who kept a daily food log lost twice as much weight as those who did not. Psychologists say that tracking brings mental focus. Focus causes heightened awareness and forces the subconscious mind to think of ways to improve the outcome, and that thinking guides your actions and not surprisingly,?action creates results. In short, the mere act of tracking a behavior brings awareness that can spark the urge to change it. So keep score of your net worth, and you will subconsciously start thinking of ways to take your financial game to the next level. This idea is so simple that most people do not believe in it. But the simplest ideas are often the most effective.

Personally I make updates to my net worth spreadsheet during tax time when I am looking at all my accounts and statements. That way I need to spend very little extra effort to update the net worth spreadsheet. If you prefer tracking your net worth online, a quick google search will reveal several websites that make the task easy.

We can apply this idea in other areas of life as well. For example, tracking your habits can inform what needs changing. Writing down your problems may spark possible solutions. The change starts with seeing reality clearly.

2. Track your active versus passive income ratio.

Active income is the money that you earn trading your time. Your job earns you active income - if you stop giving your time, your paycheck stops as well. Active income is directly proportional to the number of hours you spend earning it and thus it is limited naturally because you have only 24 hours in a day.

Passive income is the money you earn with little or no ongoing investment of time. Dividend income, rental income, book royalty income, income from a business that a manager runs for you are examples of passive income. Passive income can be scaled as it has little correlation to the amount of time you spend. Many people have the active versus passive income ratio of 100 to 0 - that is, they have no passive income. That is a mistake. The ratio may start as 100 to 0 early in your career but start tracking that ratio and focus on increasing your passive income. Want to take moon shots but are scared how will you pay the bills? Focus on growing your passive income and when you have enough passive income to pay your bills, go for those crazy moon-shot ideas.

3. Be the best version of yourself, for both active and passive income stream skills.

You must continuously improve your skills to increase your income so take the time to sharpen your skills. And remember to improve skills in both active and passive income generation - that means improving your primary skills so that you can earn more active income from your day job and also improving your secondary skills of saving and investing to improve your passive returns. The world is filled with professional athletes and actors who are paid highly in their day jobs during their career peaks but due to their poor skills at saving and investing, they end up?poor after the active work dries up.

One way to improve oneself is to associate with people who are what you want to be. Find ways to add value to their lives and they may be willing to share their knowledge with you. You don’t have to seek out Warren Buffet as your friend, just regular people who are ahead of you in the journey and are willing to share and help. With internet, you can find like minded tribes for even the most niche areas. Association matters!

4. Act

I don’t know of anyone who learnt swimming just by reading books on swimming. Similarly, you?can not improve your financial life by reading if you do not act.

We live in constant fear that we may be at an informational disadvantage if we do not browse through our online feeds. Consider this - if more information was the answer, we will all be billionaires by now. There’s a difference between reading about success strategies and actually building a successful life. The irony is that the step from knowing to doing is rarely taken.

Engage in digital minimalism and avoid overloading on information that serves no purpose in furthering your goals. Instead, set your priorities and make action your new habit. And remember, execution does not like complexity. Keep it simple.