I once heard a great quote that goes something like this – “He who masters the information controls the conversation” (unknown). We should apply this principle to every aspect of our lives, but certainly where it pertains to our finances. Knowledge is key to understanding how to navigate through any and every platform, system or challenge; and it is most certainly a way to mastering personal financial power. Ultimately, there’s no better way to say it. It’s not about having a lot of money. It’s about knowing how to build a strong financial foundation, and grow your money generationally.
I would, therefore, like to take you on a journey toward gaining more knowledge about finance and financial strategies so that you can allow this information to help you move toward your personal goals. And since personal finance is such a comprehensive topic, I’m going to spread this information out over the course of several articles.
Over the next few months, I’ll break down the key components to building a financial structure for yourself and your business. We’ll look at what everyone needs to think about to get started and the types of accounts you should consider. Having a strong financial platform for yourself and your business is a combination of the right daily financial planning as well as a strong investment strategy. Therefore in later articles, I’ll address the stereotypes and fears of investing, and the real benefits of establishing a long-term investment plan. We’ll also look at the different kinds of investment accounts that exist for singles, couples and entrepreneurs including tax advantages and specific account characteristics. It will be important to review popular investment strategies and the underlying products that create diversification in an account and drive your goals and objectives. Finally, we’ll complete our knowledge journey with a look at additional financial strategies and insurance products like estate planning and insurance that provides a complete and holistic financial platform to build wealth.
I’m so excited. Are you? Let’s begin.
If you’ve read my past articles or listened to my previous webinars, you’ll know that I begin every discussion regarding starting your financial plan with a focus on temperament and mindset. It’s extremely important. If you don’t have a good understanding of yourself, and the areas that could be considered weaknesses for you when you’re building your financial strategy, then you risk getting off track in your efforts or not beginning at all. Take a look at my previous article “Do You Have the Mindset to Build Wealth” to learn more about money mindset and what you need to be aware of when you’re getting started.
Where to Start
In this segment, we’ll review where you need to start if you’ve never developed a financial plan or structure for yourself. What questions you need to ask yourself to ensure you’re not missing any critical areas of your overall financial plan and what accounts and strategies to implement to get started on the right foot.
So where exactly do you begin if you’ve never developed a financial strategy for yourself? What I tell everyone I work with is that you should begin exactly where you are. Assess your current situation and begin to take steps to change or create structures that may not be working. Look at your current cash flow, which includes reviewing your personal budget and all of your monthly expenses. If you’re looking at major debt in any areas of your finances, write down how you’re addressing your debt. Have you created an efficient way of actually tracking your finances and how much money you are putting away for yourself and your future?
I’m sure that you’ve heard or read several times, at least, one or more person tell you that it’s important to create a working budget for yourself. Your budget is a critical place to begin if you truly want to understand the following: a.) where your money is going, b.) what expenditures may be weighing your budget down, c.) what you may need to consider adjusting to make your overall budget work, and d.) where you need to focus your attention to hit your targets for your cash flow.
If you’re a business owner, there are different tools and other elements of your business that you’ll have to consider as you develop a working budget or cash flow for your business. Whether you’re an entrepreneur or not, you should have a personal working budget, and the two should remain separate.
To help you build your personal budget, I’ve included the attached budget worksheet, which contains two components. The first worksheet is your income and expense sheet. Fill this out first. The second is your money flow chart that will allow you to go through the important exercise of streamlining your expenses. Click here to get your worksheet: papillonfinancialbudgetworksheet.
So to develop a personal budget, follow the basic steps below and challenge yourself to set a timeline to complete it. When you’re developing a budget for your household, whether single or working with your significant other, evaluate what your annual income is and break it into twelve-month segments. Remember to subtract what you pay in taxes and only include your net monthly income. Consider each of the following as income: salary, additional payments that come to you on a monthly basis (e.g., as alimony, child support payments, etc.), and any tax credits that you may be receiving to name a few.
Once you’ve identified all household income, place them on your income line and add the totals. Then you’ll want to identify your monthly expenses. This is often where the process can get tricky because we tend to look at the obvious expenses that we have such as rent or mortgage, and overlook many casual expenditures like dining out, that add up and impact our balance sheet each month.
This is where it becomes helpful to keep a spending journal. If you’re single, keep one for yourself, and if you have a significant other, the two of you should consider keeping a journal together. Such expenses like paying for your lunch each day, purchasing personal grooming items, and what you actually pay for monthly entertainment should all be factored into your monthly expense column. Don’t leave anything out, and talk to your significant other or a friend who can help you walk through your daily expenses to determine what you’re really spending on a monthly basis. Once you have your total expenses, subtract the total from your monthly income to get your net (total income after expenses) income for the month.
To consider yourself on track, you should have the following elements in place: all monthly bill payments made, including allocations going to personal savings, and an emergency fund. To be in a very good position, you should also have allocations going toward at least one investment plan such as your 401k, an Individual IRA or Retail Investment account.
If this is not the case once you’ve created your budget, then consider areas where you can trim your budget. Look at each monthly expense and assess where you can lower the expense on a particular line item (refer to the cash flow worksheet). For example, ask yourself if you can make your lunch each day or at least 3-4 days a week instead of spending $10 daily to buy your lunch. Consider this for dinner, too. The larger picture will show that $50 saved each week adds up to a $200 savings by the end of the month that can be allocated toward accelerating the payments on outstanding bills, or the creation of a savings or emergency account for future needs. Additionally, look at ways to increase your income so that you can achieve your incremental or short-term goals. Evaluate bills like your monthly phone plan or cable T.V. package. You should even look at your credit cards and take steps to calling each of these creditors regarding your plan packages and monthly payments. Consider cutting out some of the extensive features that you don’t need right now, and if you’ve had a good payment history over the last six months to a year, negotiate lowering the current interest rates on your cards. Try to avoid closing your cards. Instead, work toward lowering and eliminating the balances on them. The spreadsheet will help you to see what your potential monthly and yearly savings can look like once you’ve inputted realistic numbers.
Remember to make it realistic for yourself, and to continue to factor in casual spending for yourself that allows you to have some fun while building a budget. If you make extreme changes to your money lifestyle, you run the risk of not being able to commit to the changes, and you can fall back into your old spending habits. Changing the way you work with and grow your money is very similar to going on a food diet. It’s a lifestyle change. Crash diets never work!
Work on your budget and cash flow worksheet until you have it in a comfortable place that you feel is realistic for your current income and overall lifestyle. Once you’ve become comfortable with your adjustments, you can begin the next phase of increasing your strategy to strengthen your financial foundation.
How to Keep it Going
Lastly, commit to reviewing your new plan at least monthly, if not more. Make it a nice event for yourself, especially if it’s historically something that is very daunting for you. Schedule a day on your calendar where you sit down in a comfortable setting, perhaps with nice music and a glass of wine, to review your budget and reconcile your expenditures for the month.
If you’re a couple, this exercise will take greater communication and joint effort. It’s amazing how many couples I’ve worked with who tell me that they don’t talk to each other about money. There’s strength in numbers, so if you are a couple who plans to share your financial assets, then it’s important to create a culture of communication around your finances early in the relationship.
Follow all the steps noted above to help each other create a working budget for yourselves and one for the household. Some people choose to share everything, therefore putting it all into one big pot, while others are more comfortable managing their own finances and determining how much each will contribute to household responsibilities, such as food and bills. Whichever you choose, have a conversation about it and begin the exercise together to set the pillars in place. Here are some of the things you’ll want to talk about as a couple when you sit down to create your household budget.
1. Discuss your current individual belief systems about money. This goes back to my past discussions about money mindset. Make a conscious effort not to judge one another. Proceed with the intention to find commonality and balance so that it becomes a win-win situation for both of you. We are all raised with some definition of money management that we’ve carried into our adult lives good or bad. Creating a safe environment to discuss our experiences will help the process.
2. Identify how you’re each spending money as individuals. Be truthful about your individual spending habits, and find commonality in modifying your household spending. Remember that some spending habits are tied to deep emotions and past experiences. So, remember to be sensitive to one another while working with positive intentions toward a successful wealth building strategy.
3. Set your spending goals as a unit. Decide what your short and long-term goals are going to be, such as moving, purchasing a home, or saving for college tuition, and structure your household budget around those timelines and milestones.
4. Give each other a personal allowance. Since adjusting to a new budget and lifestyle can be a little overwhelming, be realistic about who you are and what is common to you. It’s also important to remember to have fun and enjoy life while you are building your life. So remember to incorporate some personal spending for each partner to spend any way you wish.
5. Track spending as a household to make sure that you’re staying in line with your goals. Take this tip from my instructions above for the single person but instead, do it as a couple. Hold monthly meetings to go over your monthly household spending and find creative ways to make it enjoyable. Reward each other for hitting monthly goals and milestones and remember that this is all for a greater purpose!
I think that this is a good place for us to pause so that I don’t lose your attention. In the next article, we’ll focus on where to begin as an entrepreneur, which has very different elements and considerations to incorporate into your financial plan. So, stay tuned. Whether you work for an employer or you own your own business, you will need to begin with a close look at (and possibly restructuring of) your personal finances.
Ways to make it all stick!
So how do you make it all work and keep your efforts on track? Automate where you can, and use online resources to create a central place to track your journey.
Set up several accounts for yourself/household and automate your cash flow where you can, which shouldn’t be difficult. Mostly everything in this technology driven world allows us to automate what we do.
Ensure that you have a specific account for paying your bills, and most bank accounts have both a checking and savings components to them. Talk to your bank about setting up a certain amount of cash to be automatically transferred from your checking (the account that your paycheck comes into) to your savings account. Set up separate accounts as well for your emergency fund (at least 3-6 months worth of savings to cover basic living costs). This, too, can be automated. And don’t forget to treat yourself by setting up a separate spending account that you can call your “fun” account. This account will be for special occasions, like a last minute trip to a tropical place or that shopping spree that is long overdue. If you’re contributing funds to these accounts without you physically doing so, it will be a very nice surprise to have funds when you want or need them, and you don’t have to dip into other needed funds (like your account where you pay your bills) to do so.
Instead of expecting $1500 for your bi-weekly paycheck, you’re now expecting $500 because your money is automatically going to their respective accounts, including those to address your responsibilities and have fun.
• Online Budgeting Tools
There are many free software tools that will help you with your budgeting efforts. Here are a few of the most popular ones for you to consider.
Personal Capital: www.personalcapital.com
You Need A Budget: www.youneedabudget.com
Level Money: www.levelmoney.com
Mint Bills: www.mint.com/how-mint-bills-works
Bill Guard (Identity Theft Ap): www.billguard.com
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