When you build a home, you begin with the foundation. The same is true when you acquire new knowledge & learn new skills. There’s a wealth of fun and complex financial concepts to explore over the course of your financial wellness journey, but these 5 pillars will be your guide no matter which money goal you’re pursuing!
MATH MATTERS
It turns out, math really is useful in the real world! No, you might not need high school calculus skills anytime soon, but the math you learned in elementary school will be worth gold if you consistently apply it to your fiscal matters! For starters, you’ll want to use your number crunching superpowers to calculate your Net Worth & develop your monthly Spending Plan (budget).
Net Worth
What is it, and do I even have one?
The answer to the latter is YES everyone has a net worth! The answer to the former is a simple mathematical calculation. First, add up the value of all your ASSETS, the things you own (house, vehicles, checking & savings account balances, investment portfolio balances, collectibles, etc.). Next, add up the balances of all your LIABILITIES, the things you owe (mortgage, vehicle loans, student loans, credit cards, medical bills, other loans, etc.). Then, subtract the total of your Liabilities from the total of your Assets and you’ll arrive at either a positive or negative figure. This is your NET WORTH.
For many people just beginning, this number can be shocking, disappointing, or a bit hard to process; AND it’s important to know the truth about where you’re starting from so that you can develop an effective plan to get where you want/need to be. If this is you, take a deep breath, sit with those feelings momentarily, and then breathe them out; accepting that you can’t change your past decisions, but you absolutely can decide today to change your future.
Once you start consistently tracking this number as part of your path towards financial wellness, you’ll be encouraged and motivated as you watch it grow (in a positive direction) over time and see just how far you’ve come! Now it's time to take action! Unleash your inner math nerd, breakout your calculator, and start crunching your numbers!
Spending Plan
“Behind every achieved goal, is a purposefully executed plan.” – Coach Amber, Purpose Collaborative
After you’ve calculated your Net Worth, you’ll spend some time identifying and defining your short-term and long-term goals. Goals are great, but I’ll never take my first trip to Greece if I don’t make a plan for how to get there! Same goes for your money goals. Your financial ambitions are worth accomplishing; developing and executing a SPENDING PLAN is how you’ll get there!
So, call on those math skills once again and start with the basics of budgeting. If you need a budget worksheet, you can find one here. Your budget needs to begin with adding up your monthly INCOME, your total household take home pay. Remember, there may be more sources of income than just your employment salary/wage.
Common sources of income include:
Salaries/wages
Bonuses
Tips
Child support
Alimony
Disability benefits
Retirement income
Social security
Interest/dividends
Rents/royalties
Now that you know what’s coming in, it’s time to project your EXPENSES. Always be sure to prioritize your basic survival expenses first (food, housing, utilities, and transportation). When creating your spending plan, you’ll also want to distinguish between fixed expenses, variable expenses, debts, and financial goals, usually planning for them in that order.
Fixed Expenses are those that tend to have predictable due dates, are not easily changed, and whose costs include:
Mortgage/Rent
Utilities (water, electricity, heat, trash, internet, phone, cable)
Insurances (life, health, auto, renters/homeowners)
Giving/Tithe
Savings
Retirement contributions
College savings
Variable Expenses are those spending categories whose costs tend to fluctuate and require estimation, due dates are irregular, or their occurrence is sporadic:
Transportation costs (gas, maintenance)
Food/Groceries
Prescriptions/vitamins
Home maintenance/supplies
Clothing
Grooming/beauty
Entertainment
Gifts
Child-care
Debts are those expenses that may be a mix of fixed and variable costs, but should be listed separately so that targeted debt-payoff strategies can be applied easily to eliminate these expenses from our budget and our lives:
Student Loans
Vehicle Loans
Credit Cards
Medical Debts
Personal Loans
Collection accounts
Back Taxes/Penalties
When you’ve finished making your projections, subtract your expenses from your income. If there’s a positive balance, allocate that surplus to your money goals. If there’s a negative balance, go back and figure out where to make adjustments until there’s a zero balance. Now that you have a clearly written budget, evaluate your planned spending and determine if it aligns with your FINANCIAL GOALS and values. Find ways to reduce spending in areas that aren't in alignment and increase what you allocate towards the areas that are.
Financial Goals are those budget items that we are purposefully pursuing at the present time, they are likely already listed elsewhere in the above lists, and surplus funds are added as much as possible:
Debt Payoff Strategies (debt snowball)
Emergency Fund Savings (starter or fully-funded)
Other Savings Goals (home purchase, vehicle purchase, vacations, etc.)
Retirement Contributions
College Savings
Mortgage Payoff
Outrageous Generosity
To execute your spending plan with purpose, you must be an active participant by regularly TRACKING TRANSACTIONS. You can do this in a variety of ways from keeping a written log, downloading your bank transactions to a spreadsheet, or using a web/app-based budgeting platform. Pick whichever method you like best.
Now that we’ve handled the math, let’s tackle that mindset and COMMIT to your spending plan! At the end of the first month, assess the outcome. Don’t be discouraged if things didn’t go perfectly. Adjust where needed and try again. It typically takes at least three months to really get in your budgeting groove!
MINDSET MATTERS
"Personal Finance is 80% behavior and only 20% head knowledge." – Dave Ramsey
It's true, you can know all the math there is to know, but knowing what to do is not the same as doing it. And when it comes to Personal Finance, it really is Personal. That's because managing money isn't about math, it's about psychology. The relationship we have with money is a unique and complex one, shaped and impacted by our own personal life experiences, which we often use to drive our financial decisions far more frequently than we use mathematical logic. That means, if you're going to achieve financial wellness, it's time to take charge of your thoughts, beliefs, and behaviors with money!
Avoid Lifestyle Creep
Yay! You worked hard & earned a pay raise! So where did it all go?
For too many people, having more money to spend inevitably means spending more money. Over the typical working lifespan, we can expect our careers to advance & our salaries to increase, giving rise to the often experienced cyclical phenomenon known as LIFESTYLE CREEP; where one’s standard of living improves & expenditures formerly deemed “luxuries” gets relabeled as a “necessities”. The creep usually starts small but snowballs quickly as purchases become habitually more frequent & extravagant.
Examples of Lifestyle Creep
Upgrading owned & perfectly working items to the newest releases
Increasing frequency of visits to your favorite coffee house
Dining out regularly & more expensively
Brand name/high fashion clothing purchases just to stay on-trend
Flying premium cabin options (economy plus, business, first class) rather than coach
Paying for household services you could DIY (housekeeping, gardeners, etc.)
Replacing a vehicle sooner than necessary with the latest model year
Buying/renting more house than needed
While none of these purchases are inherently wrong, making too many of them too often, has the potential to wreck your financial future by sabotaging your retirement goals & delaying your ability to get out of debt.
The core of the “lifestyle creep” problem is often found with glitches in our mindset. The first one being the belief that non-essential spending is a right rather than a choice. Instead of seeing the long-term benefits offered by saving money, purchasing decisions tend to be justified by an “I deserve it” attitude. Simultaneously, is our ever-present battle with comparison vs. contentment & the pressure to “keep up with the Joneses”. While some increases in spending are natural as your life evolves over time, inflating your lifestyle with every incremental pay increase just to match the spending habits of your neighbors, co-workers, or social media network will undoubtedly leave you stuck in the paycheck-to-paycheck cycle (and likely in perpetual debt). If you’re ready to live with Financial Purpose, you must change your money patterns!
Clarify Needs vs. Wants
“You can’t always get what you want. But if you try sometimes, you just might find, you get what you need.” – The Rolling Stones
One surefire way to reduce the lifestyle creep is to get honest about the difference between “must haves” & “nice to haves” in relation to how you spend your hard-earned money. It’s true that there can be some variance in what expenditures land on what list from one personal situation to the next, however, the principle remains the same: NEEDS are things that contribute to your basic survival while WANTS are things that accommodate your level of comfort.
We blur the line between needs and wants when we engage in rationalization of the more extravagant version of the needed item. It often sounds a little like this:
“Do I need a vehicle to get myself and my family from point A to point B? Yes."
“Do I need the latest model, fully loaded, with all the bells and whistles? Well, the leather seats would make it easier to clean, and the SUV would be great for added storage capacity, and man, wouldn’t the entertainment system be perfect for family road trips? Yep, we really do need this one, it just makes so much more sense!"
So, does that mean we are relegated to only ever buying the most inexpensive options of our basic needs and to never ever purchase the nice things in life?
A B S O L U T E L Y N O T.
As a matter of fact, if we do this, we will unquestionably find ourselves in budget-burnout-mode as a result of deprivation. I want nice things; likewise, I want you to have nice things too! In clearly differentiating between our needs and our wants, we create harmony in both our finances and our life by prioritizing our needs first and then our wants in accordance with our core values. After you get honest about your needs vs. wants, work towards intentionally finding harmony between the two!
MONEY MATTERS
"Money isn't the most important thing in life, but it's reasonably close to oxygen on the 'gotta have it' scale." – Zig Ziglar
The truth about money is, having it is incredibly important. Not necessarily for the purpose of status and extravagance, but because not having it often puts us in a place of desperation and struggle for basic survival; preventing us from experiencing peace and an opportunity to thrive. So let's accept the fact that Money does indeed Matter and solidify a plan to maintain our access to it!
Expect The Unexpected
There’s no clearer way to say it: YOU NEED AN EMERGENCY FUND. This fund is money that you’ve set aside and must treat like that hallway fire extinguisher in the glass box: Break open ONLY in the event of an EMERGENCY!
That means you use this money if and only if
An unexpected expense arises that wouldn’t be included in your normal monthly budget and qualifies as a bona fide need
OR
Your income is interrupted and you need to pay for basic expenses until adjustments are made and circumstances stabilize.
When you learn to expect the unexpected in your financial life, the emergency event often turns from long-lasting catastrophe to temporary disruption. Depending on your specific circumstances, a fully funded Emergency Fund should cover 3-6 months of basic expenses, but 2020 has shown us that 6+ months would be more effective. Making your savings contribution a regular line item in your monthly budget, will ensure you are preparing properly for emergencies and protect against frivolous spending.
If you have debt (other than your mortgage) and you’re not in storm mode, build a starter emergency fund (EF), which is much smaller than a fully funded EF, then shift your focus to your chosen debt payoff strategy. Once you achieve debt freedom, use all that newly liberated money to fill that puppy up fast!
Save Early and Save Often
“The best time to [save] was yesterday, the next best time is today.” – Randall Tiongson
You’re aware that you need an emergency fund, but do you also know that you need a future fund? Yep, chances are, one day you’ll reach the retirement stage of life. This stage is about more than just age, it’s about being able to leave the workforce knowing that you at least have enough money set aside to fund your needs through the late stages of your life, and maybe have enough left over to have some fun, be wildly charitable, or even leave a financial legacy for your children’s children.
The sooner you start saving for retirement, the better off you’ll likely be once you reach that distinguished stage. Why is this so? The answer is one final math term: The power of COMPOUNDING. This phenomenon is where your principal contribution earns capital gains or interest which are then reinvested; and time in the market becomes your very best friend. The longer time your earnings are reinvested, the greater your investment value grows, and the larger your potential earnings will be. In simple terms: If you start saving for retirement in your 20s, your contributions and earnings will enjoy a much longer period of growth than if you wait until your 30s or 40s.
Unfortunately, you don’t have the power of time-travel to go back & put away more of your income for emergencies, pandemics, or retirement investments. But you do have the power to start TODAY so that when future-you looks back on today-you, you’ll both smile with pride. There’s an abundance of saving & investment options out there to help you get started. I am NOT a financial advisor, so this is where I gladly take a bow and tell you to go consult with one to discuss your specific strategy!
Don't miss out on your opportunity to secure your future, build wealth, and give with outrageous generosity; make sure you’re purposefully pursuing the Five Foundations of Financial Health outlined above! If you need help getting started or staying accountable, let’s chat and see if financial coaching is right for you.