| Financial Basics Before you start, we need to set one very important rule: Honesty is always the best policy. You cannot manage your money effectively, or your life for that matter, if you are not 100% honest about your spending habits. Denial is a very powerful human trait. You may say "but I don't spend that much,"neglecting to add up the $3 mocha frappachino or the Mickey D lunch. Honesty also means coming clean about a debt to your spouse. Another rule is to stop using credit and debt as a means to "get it now"; the biggest secret of the lending industry is that they offer instant gratification with credit, but the resulting debt has crippled the average American financially. I used to be in the mortgage business and felt like a loan shark. Why do you think there is such a huge mortgage industry debacle right now? The first thing you need to do to be fiscally fit is to examine your attitude regarding money. Do you feel that you will never have enough? Think you have enough for your current lifestyle but not to do the things you really want? What is your relationship with money? Do you control the cash, or does your money control you? Finances are actually 50% attitude; if you don't think you have enough, you probably never will have enough. We'll address psychology later; right now we're doing the quick fix. Write down your goals for the next week, month, 6 months, year, and two to five years. This gives you something to push for; it is widely accepted that individuals who have clear, definable, and obtainable goals are most likely to actually follow through and reach those goals. Set debt-reduction and savings goals. Be specific on these; write "I wish to have my credit card balance paid down to half of the current balance within the next 3 months." You can, and should, post your goals somewhere you will see them often; on your refrigerator door or the bathroom mirror. Include what you would do with the extra money if you had no debt and had some money in the bank. Would you go on a trip? Buy a bigger home? Buy a new motor home (my personal favorite!). Update your goals frequently, and continue to write new ones as you see fit. Step 3: Figure out your Finances OK, this is when you definitely need to be completely honest with yourself (and your spouse if you haven't been on the up-and-up about all those credit cards you've been using to fund your champagne tastes on your beer budget!). There are a few things everyone should know about their finances. This seems like a lot of work, but it doesn't really take that long, and it's essential to get a to get a true starting point; otherwise you won't know where the money is going to come from to fund your dreams. We are going to focus on a statement of Net Worth, an Income and Expenses report (or cash flow report), and a Budget. A. Net Worth Statement (also known as a balance sheet) Ever hear about someone being worth a certain amount of money and wonder how they get that amount? There's nothing difficult about figuring out your net worth. Simply list in one column all your Assets (this is anything you could sell to make money). I only include large items in my Statement that would sell easily (house, car, RV, jewelry), but you can be as specific as you like! Write down next to each item how much you could sell the item for, using online resources to determine sales price. Kelly Blue Book is good for cars and campers. Yahoo! Real Estate allows you to comparable values for your home. Be realistic;remember cars depreciate very rapidly once driven off the lot, so that car you bough last year is probably worth 5 grand less than you paid for it. Make another column beside the first. This is going to be a listing of all your Debts. Include everything here; that $25 bucks you borrowed from your brother last month and forgot to pay back, credit cards (even those with zero percent financing), autos and your mortgage. Rent doesn't count; that goes on the cash flow statement. B. Cash Flow Statement (aka an income/expenses report) For this exercise we are once again going to make two columns; one for monthly income, and one for all monthly expenses. Income includes your paycheck, alimony, rental income, the $100 you get for your birthday or Christmas, bonuses, etc. There are two different ways to handle your paycheck. You can use net pay, and leave taxes out of the expenses category. Or you can include your gross pay, then list all the deductions in the expenses column. If you use this method you list all deductions including pre-tax. I prefer the latter method, because you will need these numbers in later steps. Total all income and all expenses. Then subtract your expenses from income; this is your spending money, or Discretionary Income. Now we are going to use this information for the next step! C. The Monthly Budget Not the 'B' word you say! Don't worry, it's not a bad thing! Actually, a budget can be used to manage your resources to get you to financial freedom so much faster than not having a plan. Your first couple of budgets may not be terribly accurate, but you can call them "learning experience." A good budget should include every dollar you plan to spend in the future. Know where your money will go before you make it; Tell your money what to do! There are a couple of approaches to a budget. One way is to develop one with historical information. I used a checkbook register for my first budget, as I used my checkbook for everything when we first married. The problem with this method is that you may not know where every dime went. Now I use my checking account Visa Debit Card for all my purchases. All I have to do is download my financial information from my back into my MS Money software and Presto! Instant budgeting! |
| Follow Us to An Early Retirement |
| We Rv 4 Fun |
 |
| |
 |
| |
 |
| |
 |
| |
 |
| |
 |
| |
 |
| |
 |
| |
 |
| |
 |
| |
 |
| |
 |
| Step 1: Reflect |
| Step 2: Write |