Financial Planning

We may have come across this article because we are in a financial crisis or perhaps we just want a better grasp of where our money is going. So let’s go over some basics of financial planning.

The essential ingredient to having control over our finances is having a budget. The heart of budgeting is really quite simple; you bring in more money than you spend. At times it can be frustrating to balance it all out, but there are numerous resources out there to help us get started. We also live in a society of consumerism — we want the best and the biggest — NOW. If we can learn to save for what we want, while living within our means, then ultimately we can have what we want but owe nobody anything. At first, as we’re viewing our big screen televisions with our surround sound it may be wonderful, but the gnawing that we owe somebody else for something that’s quickly depreciating isn’t worth it. Of course, sometimes we have to put things on credit to survive — and I’m not talking about this — I’m talking about keeping up with the Jones’s. And if we decide to put something on credit — because we get cash back or free airline tickets — and if we pay it off immediately, then that’s actually smart. It’s accumulating things that we can’t afford that I’m talking about.

Make a Budget
Calculate how much money we have coming in per month. Categorize expenditures. Let’s first list the bare essentials that are required during that month. I categorize my budget into bills (like house payment, utility bills) — things that we owe and we can’t change. I then have a certain amount of money set aside for groceries and gas. I also have a category for entertainment and extras. That’s where we can really be prudent if we need to be, and also creative! Pay off debt. Let’s define what debt is first. Debt is the obligation of owing. Now let’s differentiate between good debt and bad debt. Bad debt would be credit card debt. We want to pay that off as quickly as possible especially if the interest rates are high. A good rule of thumb to remember is that if the value of something depreciates then it’s bad debt. For example, going to a show and putting in on your credit card — with the interest rate (and depending when you pay it off) you could end up paying 3+times what the actual ticket to the show cost! A bigger example is putting your car on credit — as soon as you drive that car off the lot, its value has depreciated significantly and now you have to pay for the car and the interest! Now on the other hand, good debt would be something where the value would increase over time. In other words — you are more than likely to make more money through this investment than the money you borrowed to make this investment. A good example of this is a home purchase or going into debt to get a higher education. You fully expect to make more money due to this investment. Pay off your bad debts. Of course, after your bad debts are paid off — attack your good debts. Make a plan to pay off your house quicker than 30 years if that’s possible. It’s all more money in your pocket, and less interest. Invest and Save. Now you’ll owe no-one anything and you can use that same amount of money you were paying things off to invest. Invest in your retirement, your children’s education, save for your future.

Having a financial plan is definitely a balancing act — between needs and wants — good debts, bad debts — and investments versus safe saving. There are numerous financial resources out there — books, programs — to help you know where to begin. Planning a budget takes time but it’s a worthwhile investment for your future!