For many, the area of personal finance remains a mystery. Financial success seems elusive and nearly unattainable. Others think that things are fine in their world, that they’ll be one of the winners, beating the system. Yet the numbers that were true more than thirty five years ago when I secured my first licenses in the financial services world remain unchanged.
Out of every 100 people alive today in the United States, only one or two will become financially independent. Five or six more, with modest adjustments to their lifestyles, will be able to meet their needs for their allotted time, assuming no major economic upheavals. For the rest, their golden years are altogether different than what they had hoped for and dreamed about when they were young. Unfortunately these numbers, which have their root in reports generated by the Social Security Administration and the Bureau of Labor Statistics, apply equally to both Christians and non-Christians.
So, what are we to do? How can we gain the understandings and insights needed and apply them effectively so that we can be assured not to be among the 92 to 94 percent? How can we lead ourselves and our families to different, better outcomes?
In the coming months, we will look at many of the tools, tactics and strategies that I have utilized over the years to help make a difference, one life and one family at a time. Occasionally you will find yourself nodding in agreement with me. But often you will find the thoughts and ideas shared to be contrary to “common wisdom” and the teachings of those who many view as the “Gurus of all things financial”. All I ask is that you keep an open mind.
So now, on to the beginning . . .
Please allow me to preface the core message in this posting with this observation:
Personal finance is a team sport!
What I mean is, if you have a spouse and/or children they should be part of the process. All too often, I meet with families where only one spouse handles the family finances. This can potentially be very damaging to the relationship between a husband and a wife and it eliminates the opportunity to parent and teach our children many critical skills they’ll need later in their lives, none of which will cross their paths at school.
- What we have already
- What we owe
- What we earn
- What we spend
Said another way these are our assets, our liabilities, our income and our expenses.
What we have and what we owe are fairly easy to identify and list. A couple should do this together and, in an age appropriate way, children should be included. Initially, it is only important to identify and list the individual lines that make up bucket one and bucket two, our assets and liabilities. As an aside, more often than not some of what we have tends to have more value in our own eyes than what the market would really pay (smile). Anyway, make the list. Make it together if you’re married and include the children if you have them. Repeat this exercise at least once a year.
Next is our income or earnings list. Most of us have a pretty good idea about this, but we tend to think about that number in relationship to what gets deposited into our bank account every couple of weeks. You want the gross amount of your income and you want to make sure to include all sources, whether taxable or not. Some examples of a non-taxable cash flow are proceeds from a loan or life insurance death benefits. Get it all down on paper and now you’ve filled the third bucket. I’ll reiterate, this area is a great teaching opportunity for your kids, letting them know that money flows in based on the exchange of our skills and capabilities in the marketplace of life.
The fourth and final bucket is by far the most challenging to capture – our spending. We live today in the world of electronic payments, credit cards, debit cards and the cash transactions from our last visit to the ATM machine. Some of what we spend represents fixed amounts, like a car payment or mortgage. Others are variable, like credit cards, utilities, food and other purchases. Yet again I’ll emphasize that if you’re married, this should be undertaken together. First, identify on paper the things that are easy, your house payment or rent, your car payment and so forth. List those things that happen every year, but not every month, like property taxes, car registrations, etc. Examine those utilities and other common expenses like groceries and eating out, and try and estimate these variable items as accurately as possible. This may well seem overwhelming, but give it a try. The exercise will produce a rough estimate of reality for you and your spouse to consider together.
Now for the hard part! For one month each family member needs take a notepad with them everywhere they go in order to list their actual financial activity. Every time you spend money by cash, credit card, debit card, authorize an electronic payment or debit, or write a check, put it on your list on the notepad. The list should include the name of the company where you made the transaction, what you purchased, the amount spent and the date. Each week summarize the information into categories (gas, personal care [barber, nails, etc.], entertainment [movies, sporting events, etc.] and so forth). The more detailed the categories the better. Finally, consolidate the weekly numbers at the end of the month. If you do this, you’ll begin to see for the first time perhaps, exactly where your money goes. For many, this won’t be pleasant. Also, I don’t want to minimize how hard an assignment this is. But I promise, once done you’ll have a level of understanding about your personal finances that you’ve likely not ever had before.
Next time I’ll describe how to put this all together to create your starting point and initial roadmap forward, the ultimate outcome of “starting at the beginning”. I’ll also share with you an optional one time project you can do with your kids to help to bring them up to speed – – – FAST!
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Photo credit: Alan Cleaver / Foter / (CC BY 2.0)
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Photo credit: Artist in doing nothing. / Foter / (CC BY 2.0)