I like writing about personal finance, because the best hours in the day and best years in our lives we earn money. Lately, I have reflected upon the finiteness of money. It’s not without bounds and certainly is not limitless.
Money is subject to the limitations of space, time and circumstances. These are the reasons that every person should manage money as earnestly as they manage other areas in their personal lives.
List the things you want to carry out over the short and long-term. Think about what it will take to reach your goals. Be reasonable and don’t go overboard!
You’ve go a lot of time to realize your dreams, but you need a lifelong plan to make it happen.
. short term goals are one year goals. Things like pay off credit card(s), save for a vacation, pay cash for a big-ticket item.
. Long term goals run beyond a year and are “never lose sight of” goals. Pay cash for new car, retirement plan, children’s college, pay-off home early.
Get to Know Your Net Income
We often start planning financial goals using our total monthly or annual pay, which is actually our total salary. But, its income after federal withholding, Social Security taxes, 401-K contributions, flex-spending accounts and other deductions that will be the money we use to meet goals.
Final take-home pay is not only what we actually live on day-by-day, but also the amount we really have to make our dreams come true.
Keep a list of everything you spend for 7 days. Take no shortcuts, carry a small notepad, and track every item you buy, small or large. If you really want to get off to a great start, track 14 days.
I know this is a pain, but trust me, it is well worth the pay back down the road.
Get out your check register, or even better go online to your checking account. Use highlighters to color code expenses, forming similarly related groups over a 2 month period.
Match this against your 7-14 notepad history. The reason for the match is that during a year we can burn through large amounts of cash a few dollars at a time buying small impulse and habitual items. It’s easier to catch these purchases in the notepad record than in our checking account.
Make Your Personal Plan
I recommend using two spending categories to start:
. True Expenses: Recurring must pay items such as savings, groceries, rent/mortgage, insurances, car payment, school loan, utilities, cable, etc. These are items that you absolutely pay without fail.
*Tip – stick savings into the True Expense class and make it a lifelong fee paying yourself first each month.
. Variable Expenses: Expenses that vary month by month such as fuel for car, dining out, entertainment, etc. These have the most flexibility, and some are stopped short-term or stopped altogether.
*Tip – Cash spent in True Expenses may vary within certain items, just as Variable Expenses cash definitely fluctuate each month. It’s less important to hold cash spent in categories to preset amounts, and more important to track where your money is going so that you can get the most out of net income.
. As your plan develops over time, add other categories if needed. A word of caution is the more detailed the plan the more difficult to become a long-term habit.
The best family money managers I know use three categories: Needs, Wants, and Savings.
Personalize your method for monitoring your plan. People use self-designed spreadsheets, online sources such as Mint.com, and canned software products like Quicken. Do it your preferred way!
The most effective family money manager I know uses a legal pad to track money flow.The real importance is to track your net income in a way that is the easiest, most meaningful way for you.
Some people will read this and think “another budgeting method.” Maybe it is but maybe it isn’t. I’ve rethought our use of money, setting personal goals, and family decision-making. Really, it’s not the process or method we follow.
. It’s the understanding that income, specifically net income, is finite.
. It’s a set value (cash) and runs for a set amount of time (years).
. Make the most of it.
I have been an active investor for over 35 years. My lifelong interest in personal finance has led to teaching community classes to a variety of groups. Retirement activities include travel and serving as a volunteer site coordinator with the VITA Tax Program.