Your Financial Journey: Step 4

Of all the steps in your financial journey, step 4 is probably the most difficult. This is the step where you take your actual monthly income and expenses and reconfigure them in a way that you can start working on your goals. You will be creating a map of where you’re money will go (also known as that dreaded “B” word, budget).

What is a Budget?
The word “budget” has a negative connotation to it, and I’m really not quite sure why. A budget doesn’t mean you can’t spend money on things you want, because you can. You can choose where to put your money. A budget is simply a written guide to help you spend your money on the things you’ve identified as important to you. Perhaps the negative feeling people have about the word “budget” is that it reminds them that there are limits to how far money can go.

Constructing Your Budget
There are a lot of budgeting guides out there, so I’m not going to try to reinvent the wheel. Do a google search for “create a budget” and you’ll find thousands of worksheets and programs. When you documented your monthly spending in the previous step, you were laying the groundwork for your budget.

There are a number of expenses each month that are absolute necessities that must be paid: the mortgage/rent, electricity & other utilities, food, insurance, gas, healthcare, vehicle loans, credit cards, etc. So, these are the first things to add to your budget.

Next are all the discretionary items. These are things that aren’t absolutely necessary, but we choose to have them. This includes things like cable/satellite, a family pet, eating out, cell phone plan add-ons (data, texting, etc), entertainment, etc. If you were in a negative cash flow position in the previous step, these are the first things that need examined.

Making Adjustments
This is where things can get painful. If you’re in a negative cash flow position (where more money is going out than coming in) something has to change. It’s important to point out that there are two sides to this coin, and both of them are worth exploring.

The first is the income side: make more money. Maybe it’s possible for you to take a second job or volunteer for overtime at your current job. Maybe you have piles of unused “stuff” at home that you could sell on eBay or craigslist. From a longer term viewpoint maybe you could get some additional training to have better higher-income job opportunities. The point is that there are other options than cutting spending alone. Maybe you’ve already cut spending to the bone and can’t possibly cut any more.

The second budget adjustment is to reduce your expenses. There are a lot of opinions about the best ways to do this.

Some say to look at your largest expenses first:
– Can you refinance your mortgage to a lower rate or move somewhere with lower rent?
– Can you get lower car or homeowners insurance rates with another company?
– Can you sell a car and get a less expensive one instead?

Some say to look at the smaller things:
– Can you pack your lunch for work rather than eating out?
– Can you brew your own coffee in the mornings instead of going to Starbucks?
– Can you switch to basic cable rather than the deluxe package?
– Can you switch to a cell phone plan with less minutes?

The important thing with budgeting is to spend your money on things that are truly important to you. As an example, television isn’t that important to us. Therefore, we don’t pay for cable. Instead, we have a $7.99 subscription to Netflix, and this works great for us. Budgeting isn’t about never doing anything you want to do. It’s about spending on things you really value. We use the money we would spend on cable and choose to spend it on our dog. Just keep in mind that ultimately, your monthly expenses can only go as high as your monthly income.

Now, I know that there are some severe budget situations out there where even the smallest luxuries need to be cut, at least temporarily. I know it isn’t “fun” to have to cut things from your budget to pay off debt. But the more you can cut, and the sooner you can pay off debt, the sooner you’ll be able to live the life you want to live. It’s important to keep your goals in mind, because the sacrifices you make today are what make it possible to achieve those goals tomorrow.

If you have a specific question about your individual budget situation, feel free to send me an e-mail at and I’ll listen and give advice tailored to your situation.


Your Financial Journey: Step 3

Now that we’ve covered the first two steps (determining where you are and where you want to be), the next step is looking at your monthly cash flow and figuring out what you can do to make your goals happen. Here again, don’t be intimidated by the term “cash flow.” It just means the cash coming in minus the cash going out.

Determine Your Monthly Cash Flow
For the next month or two, keep track of every dollar you spend. An easy way of doing this is to keep all your receipts and then write it all down at the end of the week. The goal of this is to document where your money is going each month. Be sure to include everything here: utility bills, debt payments, groceries, your morning coffee, entertainment, charity, savings, investing, healthcare, tv/cable, eating out, pet costs, childcare, etc. Anything at all that you are putting money toward should be listed.

Now, do the same thing for any money you receive during the month. This should be easier, since most of us have relatively few income sources. But you could have wages/salary, child support, alimony, money from a side business, eBay/craigslist sales, etc. Again, any money you have coming in should be listed.

If you add up all the money coming in and subtract all the money going out, the resulting number us your cash flow. Just like “net worth” you want this number to be positive. A negative cash flow is a warning sign that your current spending habits are not sustainable. It means you are either taking money out of savings to pay for expenses, or you are paying expenses by taking on debt. To make progress on your financial journey you must get to the point where you take more money in then you have going out. A positive cash flow means there is money remaining at the end if the month. Congratulations! This means you have extra money to put toward your goals.

If you are just starting your financial journey, this step can seem very discouraging. If you had a large amount of debt in step 1, you’ll see that the monthly payments on that debt can make up a large portion of your monthly expenses. But again, that’s why you are starting this financial journey. It might be difficult at first, but it will be worth it in the end.

How Is This Useful?
Now that you’ve documented your monthly cash flow, it’s a good time to see how your spending relates to your goals. For example, if your goal is to pay off $5,000 in credit card debt this year, but your monthly cash flow is negative, you aren’t going to reach your goal. If your goal is to go on a family vacation to Disney next year, but your monthly cash flow shows no money being saved toward it, you’ll have a hard time meeting that goal. And if your goal is to retire at 60, but your cash flow shows no money being put toward retirement you’ll have a hard time meeting that goal. The point of analyzing your cash flow is to see if what you’re actually doing with your money is in synch with your goals.

Be sure to check back tomorrow. We’ll discuss how you can get your monthly cash flow back on track, so you can start working toward your financial goals.

Your Financial Journey: Step 2

Yesterday I discussed the first step in getting your financial journey started, which was determining your current financial position. Today I’ll cover step two: Determine where you want to be. What are your financial goals?

This seems simple enough. First determine where you are and then determine where you want to be. A lot of people make personal finance out to be some complicated system, like a mathematical algorithm that only the smartest people can figure out. But the truth of the matter is that personal finance is simply about making the choices necessary to best meet your financial goals. But let’s take a step back and discuss goal setting.

Financial goals can be very different from person to person, family to family. And that’s ok. We’re all different and shouldn’t have the exact same goals. There are certain goals that for most people are similar, such as saving for eventual retirement, paying off high interest debt, buying a house, and so on. But there is no one best way for everyone to achieve those goals.

Goal Timeline
It works best when you have goals covering different timeframes. For example, you should have a short-term goal (up to a year), a medium-term goal (1 to 5 years), and a long term goal (over 5 years). Having goals with varying timeframes helps keep you focused. If you only have long-term goals, you’re more likely to get discouraged at how long it’s taking to achieve. If you only have short-term goals, you can lose sight of important long-term necessities like putting money aside for retirement.

Realistic Goals
When setting financial goals, make sure they are challenging enough to make you have to work for them, but not so challenging as to set yourself up for disappointment. For example, if you have $50,000 in student loan debt but only make $35,000 a year, it wouldn’t be a realistic goal to pay off your entire student loan in a year. You could certainly make it a 5-year goal, though. It would be challenging, but doable, depending on your other financial obligations.

Our Financial Goals
Seeing our goals as an example may help you in setting your own goals, so here they are:

Goal #1:
Save money for a downpayment on a house, so we can move to another school system by the time Tyler starts school. This is a medium-term goal, since Tyler is 1 right now, and will start school when he’s 5. So, we want to achieve this goal within 4 years. It’s a challenging goal, because we’re looking to save around $20,000 by then.

Goal #2:
Be able to pay for at least half of Tyler’s college expenses. This is a long-term goal since Tyler won’t be starting college until age 18. With all the expenses of raising a baby, saving now for his college is challenging. I have a worksheet showing how much we need to save each year, starting with a small amount this year and gradually increasing as he gets older.

Goal #3
Pay off our credit card debt in the next six months. Thankfully, we do not have thousands of dollars in credit card debt. I know others do, and it’s a challenge for them to make a dent in paying it off. We have a very small amount that is still in the zero interest introductory period. It isn’t a huge financial burden on us, but I’ll feel a whole lot better once it’s completely gone. There’s a lot of expenses that come with a baby, and we accumulated a little bit of debt in the process. This is another short-term goal.

Goal #4:
Be able to retire somewhere between age 60 and 65. This is obviously another long-term goal, as I have around 35 years to go for this one. I contribute regularly to my 401k and am seeing my balance slowly but surely get larger.

Your Goals
Your goals will be different from ours, and that’s fine. But it’s important to write down your goals and make them a priority for you. Your goals are an important part of your financial journey. You have to know exactly what you want to accomplish.

Starting Your Financial Journey

I think it’s probably safe to assume that most of us are not where we want to be financially. I know we aren’t. I also know that everyone’s financial situation is different.

– Maybe you’re a young single person that recently graduated college and are just starting out. You probably have a fair amount of student loan debt and maybe some credit card debt or a car loan to go with it.
– Maybe you’re a family with children trying to get by (let alone get ahead). You have a lot of child-related expenses, maybe a mortgage, car loan, and other debt. You’re thinking about retirement and your kids’ college expenses and wondering how you’ll manage.
– Maybe you’re getting by pretty well already, but aren’t sure what you should be doing to prepare for the future.

Whatever your unique situation may be you’ve reached the point where you know you have to get the ball rolling. The good news is that the first step in getting started is the same for every financial situation: Figure out where you stand right now. Before you can get where you want to be, you have to know where you are. Just like reading a map, even if you know where your destination is, you won’t make it there without knowing your current location.

What Do I Do?
Assessing your situation is the easiest step, which is good considering it comes first. You need to put together a personal balance sheet. Don’t be afraid of financial terms like “balance sheet,” though. It simply means make a list of everything you have (your assets) and everything you owe (your liabilities). For future reference, if you take the total of everything you have and subtract everything you owe, the result is your net worth. The goal of your financial journey is to get this number higher.

Your list of assets includes any cash you have, be it in a checking account, savings account, or just bills sitting in your wallet. It also includes investments (bank CD’s, stocks, 401k holdings, etc.) The value of your house and vehicles are also assets. Anything you own that has a financial value is an asset.

Your list of liabilities includes credit card debt, the remaining balance on your mortgage, car loans, student loans, loans to family, etc. Basically anything that you owe anyone is a liability.

Now, when gathering all this information make sure to keep it someplace where you can easily see it. Personally, I have my listing on the computer in a program called Quicken. You can use a spreadsheet, or an online program like, or you can physically write it out on a sheet of paper; whatever works best for you.

What’s The Point?
After completing this exercise, you might not like the results. A lot of people see that their net worth (what they have minus what they owe) is a negative number. But don’t be discouraged. After all, the whole reason you’re starting this financial journey is because you want your financial status to be better than it is now. The point of putting all this information together is to have an accurate picture of where you stand, so you can work on making things better. It also gives you a numerical figure to measure your future progress against.