First Step to Financial Success: Budget
Personal financial planning consists of three general activities:
Controlling your day-to-day finances to enable you to do the things that bring you satisfaction and enjoyment.
Choosing and following a course toward long-term financial goals such as buying a house, sending your kids to college, or retiring comfortably.
Building a financial safety net to prevent financial disasters caused by catastrophic illnesses or other personal tragedies.
Why Should I Budget?
Controlling your financial affairs requires a budget.
For many people, the word "budget" has a negative connotation. Instead of thinking of a budget as financial handcuffs, think of it as a means to achieve financial success.
Whether you make thousands of dollars a year or hundreds of thousands of dollars a year, a budget is the first and most important step you can take towards putting your money to work for you instead of being controlled by it and forever falling short of your financial goals.
To those of you who think you know where your money goes without keeping detailed records, I issue this challenge: keep track of every cent you spend for one month. I promise you'll be surprised and perhaps shocked by how much some of your "small" expenditures add up to.
The $ Adds Up...
Habit Yearly Cost
Daily Cup of Coffee $547/yr
2 Packs of Cigarettes/Day $2555 - $3285/yr
1 Hardback & 3 Paperback Books/Mo. $690/yr
Lunch Take-out 5 days/wk @ $5-$10/day $1300 - $2600/yr
3 Drinks at a Bar/Wk. $936 - $1092/yr
3 Six-packs of Beer/Wk. $624 - $936/yr
Budgeting and tracking your expenses gives you a strong sense of where your money goes and can help you reach your financial goals, whether they are saving for a down payment on a house, starting a college fund for your kids, buying a new car, planning for retirement, paying off the credit cards, or saving for that trip to Aruba.
Since financial matters are one of the leading causes of marital discord and divorce, getting a handle on your spending, implementing a budget, and saving for the future can also have positive effects on your relationship with your spouse or partner.
Should I Use a Software Program?
You don't need to invest in fancy software in order to do a budget, but a good software program WILL make the job easier, and being able to print out graphs and reports from your PC can serve as a motivation for entering all that data.
Many banks are now offering free PC banking and free personal finance software. You simply dial into the bank's computer (or your bank may use web-based banking), and download the checks that have cleared your account, directly into your personal finance software. Then you indicate an expense category for each check.
You can do a basic comparison of budget versus actual expenses by category, or you can enter more detailed information such as investments, assets, liabilities, etc., and print personal financial statements showing your net income and net worth.
Some of the most popular personal finance software programs for checkbook and expense tracking are: Quicken, MS Money, and MoneyDance.
Whether you use sophisticated personal finance software or a couple of pieces of paper and a pencil, the important thing is that you get on the road to financial freedom by starting a budget today.
It's All in the Attitude, Dude!
Have you ever attempted to budget and given up in frustration or discouragement? If you can figure out the reason your budgeting attempt failed, you'll be able to institute a rewarding, successful budget and stick to it.
Think about it. What really determines whether budgeting works for you?
One of the top reasons, if not THE top reason, so many people fail at budgeting is attitude.
If you think of it as a penny-pinching sacrifice instead of a means for achieving your financial goals and dreams, how long are you likely to stick with it? It’s like the difference between going on a diet and eating healthily.
One is negative and restrictive; the other is positive and allows you to indulge now and then and still achieve your goals.
To increase your chances of success, work on your attitude first.
Many people refuse to budget because of budgeting’s negative connotation. If you’re one of them, try thinking of it as a “spending plan” instead of a “budget.” Once you’ve attempted to budget and failed, the bad feelings associated with any type of failure can keep you from trying again. Don’t give up!
Why does budgeting matter? Money is a tool that enables you to reach your goals in life, but until you know where your money goes, you can’t make conscious decisions about how to use this tool effectively.
A budget shows you exactly where your money goes and provides a spending plan that lets you save for the things that are important to you: a new house, a new car, a comfortable retirement, a college education, travel, or whatever your particular goals and dreams happen to be.
There are several universal budgeting concepts that every successful budget will include, but one of the most important features of a successful budget is customization to your needs. Don’t try to force your lifestyle and personal situation into a generic, one-size-fits-all budget.
If a simpler approach makes it easier to stay committed, then go for simplicity. If you stick with a realistic, effective budget long enough, the rewards will keep you motivated; in the meantime, do whatever it takes to keep yourself going.
One important aspect of a successful, long-term relationship is working towards common goals, and a budget is a means of achieving them. Couples who can’t come to an agreement about savings towards common goals should sit down and talk calmly and rationally and come to a compromise to resolve this disconnect in their relationship.
It’s okay to have individual goals that the other person doesn’t share, and to provide for a way for those goals to be met, but it’s critical to have basic common financial goals that both people in the relationship agree to and are motivated to work towards. If you can’t agree about saving towards those goals, you’re going to be at cross-purposes that are going to be a cause of ongoing conflict. A budget centered around conflict and resentment is a budget doomed for failure.
If you still can’t figure out why your budget isn’t working, consider the psychological factors at work. What does money mean to you? Do you use it for reasons other than its obvious purpose? Do you use it as a self-esteem booster, to make yourself feel worthwhile? Do you enjoy the heady rush of making a new purchase? Do you use it as a sign of power or control in a relationship?
If you jump into budgeting without a positive attitude about it, chances are high that you'll give up before you've seen the difference a budget or spending plan can make in your life. The secret is to work on your attitude first.
The Second Step in Personal Financial Planning
The first step in personal financial planning is controlling your day-to-day financial affairs to enable you to do the things that bring you satisfaction and enjoyment. This is achieved by planning and following a budget, as discussed in the first article in this series.
The second step in personal financial planning, and the topic of this article, is choosing and following a course toward long-term financial goals. As with anything else in life, without financial goals and specific plans for meeting them, we drift along and leave our future to chance. A wise man once said: "most people don't plan to fail; they just fail to plan." The end result is the same: failure to reach financial independence.
The third step in personal financial planning, "Building a Financial Safety Net," is discussed in the third article in this series.
The Third Step in Personal Financial Planning
The first two articles in this series discussed the first two steps in personal financial planning: controlling yourday-to-day finances to enable you to do the things that bring you satisfaction and enjoyment; and choosing and following a course towards long-term financial goals.
The final article in this series discusses building a financial safety net to prevent financial disasters caused by catastrophic illness or other personal tragedies.
Long-Term Disability Insurance
Long-term disability insurance helps replace your income if you are unable to work due to illness or injury. Many people consider this coverage a luxury, when in fact, it should be considered a necessity for those who don't have other financial resources they could tap in the event of an illness or injury.
Even if you do have other financial resources, would you want to use them to pay your monthly bills? If you saved 5% of your income each year, a 6 month disability would eat up 10 years of savings!
Don't think it could happen to you? Although your chances of having a disability increase as you get older, illness and injury can happen at any age. Car accidents, sports injuries, back injuries, pregnancy, and disease are just a few examples.
Ask yourself this question: could you live without your income for three months? Six months? A year? If the answer is no, you need disability insurance. Employers often offer this coverage via a payroll deduction, which may be tax-deductible.
Life Insurance
Life insurance is necessary if you have dependents who will suffer financially if you die (children, for example). If you have no financial dependents, it's probably not necessary, although many people also use insurance as part of their estate planning and cash accumulation regardless of their dependent status.
If you plan to buy insurance other than term insurance provided by your employer, you should educate yourself about the pros and cons of term, whole life, and other types of insurance. You may also want to talk to an adviser about how much insurance is enough. The Investment FAQ Web site explains how to determine your life insurance needs.
Emergency Fund
Financial advisors suggest having enough savings in an easily accessible account to cover your living expenses for six months in the event of illness, job loss, or other serious emergency.
Summary
Once you've protected your income-generating ability with disability insurance, protected your dependents with life insurance, and protected your other assets by having a six month emergency fund, your financial safety net is in place and you're ready to turn to the task of accumulating wealth.
FOUR SIMPLE STEPS FOR SETTING FINANCIAL GOALS
Step 1: Identify and write down your financial goals, whether they are saving to send your kids to college, buying a new car, saving for a down payment on a house, going on vacation, paying off credit card debt, or planning for retirement.
Step 2: Break each financial goal down into several short-term (less than 1 year), medium-term (1 to 3 years) and long-term (5 years or more) goals.
Step 3: Educate yourself! Read Money magazine, or a book about investing, or surf the Internet's investing web sites.
Step 4: DO IT NOW!
There are no hard and fast rules for implementing a financial plan. The important thing is to do SOMETHING, and to start NOW.