budgeting

Smart Financial Planning isn’t as Hard as You Think

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There are all sorts of plans and programs and books out there to help people get out of their financial holes and step into a fresh, healthy budget plan. I’m not saying those programs don’t have value, but there is a very simple (and free) way to make sure you stay out of the red when it comes to your finances. Make sure more money is coming in than is going out, and make a conscious, organized, and concerted effort to track your spending.

When to it comes to budgeting, many find it right up there with dieting and root canals in terms of the pleasure factor (which is probably why so many people feel they always fail at it!). However, tracking your spending and disciplining yourself to live within your means and save for the future is definitely worth the effort. If budgeting is not a natural bent for you, don’t give up on the idea altogether. I promise, with just a willing attitude and some good resources to help you stay disciplined, you’ll be able to get on track with your finances.

So, what are my best tips for staying on top of your financial game?

The basic report you should complete (on at least on a quarterly basis) is a cash flow statement. This report tallies your income and expenses in several key categories. It’s the surest way to see whether you’re living within your means and where your spending may be excessive. After subtracting all of your expenses from your income, you’ll see whether your net cash flow for that period is positive or negative. Remember, the goal is positive, positive, positive!
There are many online tools to help analyze your cash flow  (e.g., www.quicken.com and www.mint.com). In the past, analyzing cash flow was a lot more work—you had to save your receipts and organize them manually. But nowadays, if you use a debit card and checks for your purchases and bills, and you link your bank account to your online budgeting program, it will automatically categorize your spending and indicate where your money is going. It will even send you an email in the middle of a month to let you know if you’re over budget in a particular category (it knows if you’ve been bad or good, which is great for accountability!).

Even if it’s just a 75-cent daily newspaper or a $10 Netflix subscription or a $4 (or more!) latte as you head to work each morning, make sure you account for every single dollar you spend. That’s how you can see exactly where your money is going. You may be surprised when you look at your spending after even just a couple of weeks. The nickels and dimes add up!

Analyzing spending and developing budgets are great skills to develop in the young people in your life. For young adults just starting out, tracking their spending will help determine how much they can afford for rent/housing and a car, significant expenses each month. It will also help them get an idea of how little things here and there can add up and destroy their budget! (I’ve heard many freshly-launched young adults say they’re shocked to see how quickly money gets spent!) How much should average living expenses cost? The following are typical expenditure categories and the rough percentages each should represent:

  • Housing/rent (includes utilities)    30-35%
  • Household/personal items                  20
  • Autos/transportation                          10
  • Charitable giving                             5-10
  • Savings and investments                     15+ (not an expenditure per se)
  • Entertainment and leisure                    7
  • Debt/loans                                           5
  • Insurance                                             5
  • Miscellaneous                                       3

While the above percentages are ballpark figures (and they do change through life), spending more than five percent above these levels is getting “up there,” with the exception of savings and investments and loans for new college grads. Compare actual spending to these ballpark figures, and you’ll have a good sense of whether you’re overspending in particular categories. And, take special precautions against buying too much house or car—these expenses get many people in trouble because the payments are fixed.

Wise financial planning requires knowing where your money goes—it’s as simple as that! You’ll make better financial choices, build a stronger credit rating, and develop good savings habits that help build wealth.
 
Do you track and analyze your spending?  How do you do it?  Have you trained and modeled this to the young adults in your life and, if so, how? We’d love to hear your insight and experiences!

Live Within Your Means, Part 1

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Money will never make you completely happy—but mismanaging it can be a life wrecker!

Money problems are among the top reasons for divorce, alcoholism, and suicide in our country. For these, and many other reasons, it’s critical to become a wise manager of your financial resources. You should consider this one of your greatest priorities and our nation’s educators should too.

Having a positive (and growing net worth) is essential for all of us, and the good news is it’s not rocket science. Simply put, it requires two things: 1) living within your means by spending less than you make and 2) building long-term wealth through a regular savings and investment program. This will set you up for success in both the short- and long-term.

In order to generate positive cash flow, you must spend less than you make. That means conservatively estimating your income and ensuring you have a “cushion” left over after all of your spending. Trouble sets in when you either overestimate your income or underestimate your spending.

Here’s where many run into trouble on the INCOME side:

  1. They forget that their take-home pay is roughly 60% of their gross salary (after taking into account deductions like federal and state income taxes and Social Security)
  2. They assume that a spike in their income is the new “normal” level of earnings and ratchet up their spending accordingly.
  3. They assume their strong investment returns in the recent past will persist.

It’s important to recognize whether your career provides a steady or volatile income. Generally speaking, the more your income is tied to sales (e.g., real estate agents) or project work (e.g., writers, architects, actors) the more it will fluctuate over time. This income pattern presents unique challenges in your financial planning because you can’t forecast the next few years based on the recent past.

Consequently, people often overestimate their future income when they just had a great year. Then, they increase their spending just when their income falls back to normal. Not good!

Don’t fall into this trap. Plan your income conservatively—it’s far better to be positively surprised than disappointed!

What are some ways you’ve learned to live within your means and generate a positive cash flow? Have you developed creative and effective ways of showing these principles to your own children or students? Share ideas and questions by commenting below; we’d love to hear from you!

10 Financial Mistakes You Should Avoid

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Money, money, money.

Few things in life generate as much interest yet demand more responsibility. And while money itself will not bring happiness, mismanaging it can surely ruin a peson’s chances  for success and cause a lot ofUNhappiness.
The principles of wise financial management aren’t that tough to master. You simply need to know the basics and abide by the disciplines and key principles. It also pays to understand and avoid these ten most common financial mistakes:

  1. failure to set goals and plan for major purchases and retirement
  2. spending more than you earn and failing to budget and monitor expenses
  3. incurring too much debt, including excessive credit card usage
  4. investing too little and starting too late
  5. incurring significant fixed expenses that can’t be reduced in difficult economic times (e.g., spending too much on housing and cars)
  6. ill-timed investment decisions (“buy high, sell low” habits and market timing)
  7. poorly diversified investment portfolios (overly concentrated in high risk stocks)
  8. impulse buying and lack of value consciousness when shopping
  9. inadequate financial knowledge
  10. lack of discipline and personal responsibility

We all need to keep these principles in mind both now and in the future. Periodically review how you’re doing in each of these areas, and encourage the young people in your life to do the same.

If we can all successfully avoid these traps, we’ll be in excellent financial shape!

What are some ways you’ve learned to avoid–or overcome–costly money mistakes in your own life? Do you ideas for passing these principles on to young people? Please share your suggestions and comments below.

Live Within Your Means (& Generate POSITIVE Cash Flow!) – Pt. 2

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In last week’s blog we discussed how to live within your means and generate positive cash flow by conservatively estimating your INCOME. But that’s only half of the equation. You must also carefully manage and control what you spend.

 
When it comes to the EXPENSE side of the equation, your goal is to spend less than you earn on a regular basis. This is how you generate positive cash flow and have money available to invest. However, for many people, this is the most difficult part of managing their finances, for several reasons:

 

  1. They don’t keep track of it and develop a budget. Those small items can add up!
  2. They fail to consider seasonal expenditures (e.g., gifts, vacations, and property taxes).
  3. They have no idea how expensive children and pets are!
  4. They don’t appreciate how much more expensive it is to own a home than rent an apartment.
  5. They forget about finance charges on credit card balances.
  6. They live a more lavish lifestyle than they can afford:
    1. They’re lured into spending on impulse items.
    2. They purchase big-ticket items such as homes and cars that are far too expensive for their budget.
    3. They assume that if they purchase it on credit, they’ll figure out a way to pay for it later.
    4. They place too much value on possessions and expensive brands in order to impress others.
    5. They’re too impatient—wanting it now rather than saving up for it.

 
It’s essential to discipline yourself to spend less than you make (thereby generating positive cash flow) and regularly measure your progress. Remember that if your cash flow is negative, your options are to: 1) increase your income (not always possible!) and/or 2) reduce or postpone your expenses.
 
One of the best ways to generate positive cash flow is to set up an automatic savings plan where a set percentage of your income is placed in an investment program each month. It will force you to save and help you resist the temptation to overspend.
                                                                     
Do you monitor your spending versus your income to ensure you’re living within your means? This is true whether you’re a college student on a modest income or an executive earning seven figures. Share your comments and questions: we’d love to hear your experiences and ideas!

Live Within Your Means (& Generate POSITIVE Cash Flow!) – Pt. 1

Posted by

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Money will never make you completely happy—but mismanaging it can be a life wrecker!
 
Money problems are among the top reasons for divorce, alcoholism, and suicide in our country. For these, and many other reasons, it’s critical to become a wise manager of your financial resources. You should consider this one of your greatest priorities and our nation’s educators should too.
 
Having a positive (and growing net worth) is essential for all of us, and the good news is it’s not rocket science. Simply put, it requires two things: 1) living within your means by spending less than you make and 2) building long-term wealth through a regular savings and investment program. This will set you up for success in both the short- and long-term.
 
In order to generate positive cash flow, you must spend less than you make. That means conservatively estimating your income and ensuring you have a “cushion” left over after all of your spending. Trouble sets in when you either overestimate your income or underestimate your spending.
 
Here’s where many run into trouble on the INCOME side:

  1. They forget that their take-home pay is roughly 60% of their gross salary (after taking into account deductions like federal and state income taxes and Social Security)
  2. They assume that a spike in their income is the new “normal” level of earnings and ratchet up their spending accordingly.
  3. They assume their strong investment returns in the recent past will persist.

 
It’s important to recognize whether your career provides a steady or volatile income. Generally speaking, the more your income is tied to sales (e.g., real estate agents) or project work (e.g., writers, architects, actors) the more it will fluctuate over time. This income pattern presents unique challenges in your financial planning because you can’t forecast the next few years based on the recent past.
 
Consequently, people often overestimate their future income when they just had a great year. Then, they increase their spending just when their income falls back to normal. Not good!
 
Don’t fall into this trap. Plan your income conservatively—it’s far better to be positively surprised than disappointed!
 
What are some ways you’ve learned to live within your means and generate a positive cash flow? Have you developed creative and effective ways of showing these principles to your own children or students? Share ideas and questions by commenting below; we’d love to hear from you!