Take Control Of Your Finances
What does it mean to take control of my finances?
Taking control of your finances means quite simply that you know what's going on with your finances. You know how much you're making. You know how much you're spending. You know the areas that you're spending money in, and you know how much you own - what your assets are. You also know how much your credit card debt is, and how much you owe on your house or your auto. Taking control of your finances is just really becoming clear: "Okay, these are my finances. I know where I stand."
How can I take control of my finances?
There are two great tools that you can use to take control of your finances. The first is your net worth, and in a moment I'll talk about exactly what your net worth is and how you can calculate it. The second tool is your cash flow, which means how much money is coming in each month and how much is going out. Those are the best two ways to really take control of your finances.
How can I calculate my net worth?
You can easily calculate your net worth. When you hear net worth, you think, "It seems kind of sophisticated, complex. What does that mean?" Net worth is really simple. It is taking a look at what you own, meaning your assets - your house, your car, your IRA, your 401Ks - coming up with how much that total value, and comparing it against how much you owe - your credit cards, your auto loan, your mortgage - whatever it is. Your net worth is taking a look at what you owe versus what you own.
How can I get an accurate picture of my cash flow?
Cash flow is what comes in each month and what goes out each month. It is really a simplistic definition. To calculate your cash flow, you look at your income, and you may look at your spouse's income. Look at all of the sources of income you might have each month, through your earned income, through your work, and maybe social security or your investment produced income. Take a look at that total on a monthly basis and write that number down. Then you have where all that money is going - "What is my mortgage? What are my utility bills, my auto bills, my insurance bills?" Come up with all of those categories, where you might spend money - write down how much you spend on the cell-phone bill each month - and total that figure. Then you have a pretty good picture of how much is coming in and how much is going out. That is your cash flow.
How can I optimize my cash flow?
This is a great tool to use to optimize your cash flow. Once you've listed all the outgoing finance categories - the utility, the insurance, the phone bill, those kinds of things - you go down the list and mark the ones off that are negotiable, the ones that aren't absolutely critical to your survival. Then, once you have that list of negotiable items, mark those as either eliminate, reduce, postpone or keep. To explain what that means, let's take an example of auto payment. For an auto payment, what you could do is reduce it; maybe you could sell the car and get another car, reducing that auto payment. Now you have more money to deal with, because this process is all about taking a look at your income, taking a look at your expenses and really maximizing the income, and by maximizing the income we're reducing some of the expenses. What I've found is that a lot of times, we spend money on things that we just aren't even aware of. We spend money on things that don't even really value. The money just goes out the door. By looking at this strategically and by identifying the things we really do need to spend money on, we're left with the things that we just spend money on that we don't really value. If we can eliminate those or reduce some of those expenses, we've got some free money we can put to some of our goals that we've created. Optimizing your cash flow is all about creating more money to put to the goals, to the things that you really care about.
Should I prepare a personal budget?
Budgets are great if people can follow them. That's the problem. In my profession, its called the B-word, because no one wants to talk about budgets. There's a euphemism, and it's called a spending plan. Spending plan sounds great because its all about spending. Honestly, I think the best approach is this analysis of the cash flow, and looking at the income, looking at the expenses, categorizing the expenses as far as, "Are they negotiable? How can I reduce each of these?" The next step is critical - and this is where budgets kind of fail - and it's coming up with those goals, looking at the goals that you've created earlier, and coming up with dollar amounts for those. Maybe that trip to Disney World: there was a dollar amount associated with that. That gives the motivation to reduce some other expenses, so you've got the income that you can now put to that goal that you have every single month.
What is a 'spending pyramid'?
A spending pyramid just illustrates the flow of funds. Picture a pyramid, an inverse pyramid, where at the top of it, it's the wide part. That's where most of your expenses go, and as you get farther and farther down to the point of the pyramid, you have fewer dollars to spend on those areas. A common spending pyramid is where most of the day to day living expenses are at the top - that's where most of the money goes - and at the bottom of that, where you have very few dollars, that's where you have saving for retirement, and saving for your goals, and saving for the emergency reserve. It's as if we spent all of our money just kind of getting by and on frivolous things and we have just a little bit of money left for the things that really matter. There's the common spending pyramid and then there's the optimized spending pyramid, and what that looks like is - still it's an inverted pyramid but now we have more of the things that are of value, the things that we really want, our goals higher up on the list and the frivolous things much farther down on the pyramid.
How can I maximize my income?
There are a lot of great ways to increase your income, and the best and probably easiest way is, if you work for a company, and they have a 401K, and they happen to match part of the money that you put in, that's a no-brainer. I mean, you can easily increase your income just by contributing to your 401K, because the company's going to match it. It's like a free raise that you don't have to sweat over or ask the boss about - it's free money. That's an easy way to increase your income. The next way is a little bit harder but I would definitely recommend it: ask your boss for a raise. Even if they don't give you one immediately, go back a few months later and ask again. The greasy wheel tends to get the oil, so just keep going back and stating your case, and asking for the raise. It's there for the taking.
