You have a business – your personal finances. The problem is that many of us need help. We are in debt. Yesterday I presented the idea that you are a manager over your financial resources. You are the chief financial officer of your personal life. You and only you are in control of your spending habits. As the financial controller, you have two options – you can be wasteful or you can be a faithful. The faithful manager is the one that really cares about their finances. They care about taking care of the resources that have been given to them. They care about providing for their families and they care about helping others. The faithful manager is where we all should want to be.
If you choose to go down the road of being a faithful manager instead of the wasteful manager then you must know that it isn’t easy! This article looks great on paper, but it can be much more difficult to follow once you begin to put it into practice. I promise you that distractions will come up, life will get in the way and you’ll begin to slide back towards being the wasteful manager. To make it easier, I’ve broken this task down into smaller bites. First, please read through this entire article. Then I challenge you to print it out and hang it somewhere where you’ll see it. That may sound silly, but being a good manager isn’t just changing your actions, it’s changing your entire mindset. So post it where you can see it and think about it every day.
To be the faithful manager you must:
Establishing Goals. It’s been said that if you fail to plan then you plan to fail (I know that’s really cliché.) It doesn’t matter how hard you try, you will never make any serious progress without established goals. This article from Steve Pavlina’s blog is a great piece to read on goal setting. The reason you should set goals is so that you not only do you have something to shoot for, but you also have a sense of accomplishment when you actually do get there.
These goals should be specific, measurable and written. An example of a bad goal would be, “I’m gonna get in shape.” That may have good intentions, but it is not specific or measurable. A better goal would be, “I’m gonna work out every night” or, “I’ll walk 3 times a week” or even, “I won’t eat any more Twinkies.” The same is true in dealing with your finances. “I’m gonna get out of debt” has good intentions, but it isn’t very specific or measurable.
Short Term Goals. In finances, our short term goals generally manifest in a budget. If you don’t have a budget, a specific short term goal for you may be to establish a working budget within the next 30 days. If you do already have a budget then good for you, but you’re not off the hook. Try setting a goal to monitor your spending for the next 30 days and re-adjust your budget accordingly. I hope to build on this topic more in the future. Putting together a budget is one of the most foundational pieces of becoming financially free.
Long Term Goals. Long term goals are exactly what they sound like – they’re long term. Don’t get too caught up in the details of these just yet. They are very important, but you will never see them fulfilled if you don’t start with some of the more basic principles of getting your finances in order. These are the goals that most people are familiar with, but most people fail to achieve. These are the retirement plans – 401ks, IRAs, Roth IRAs, etc. A simple example of this type of goal would be “I will invest $50 per month into my Roth IRA for the next 30 years.”
Lower Overhead. This is a big one, debt reduction. This is the one that all of the best selling authors are talking about. Here’s the thing though, it’s more than simply reducing debt. When a business is going downhill, the manager doesn’t just pay off the credit cards and call it good. No! The manager cuts expenses. When the ship is sinking, the crew starts throwing cargo overboard. It’s no different in our personal finances. If you are in debt and living paycheck to paycheck then you must reduce your overhead. You’ll never get ahead if you are constantly trying to play catch-up. You’ve got to get crazy and reduce overhead. If you want to take control of your finances then you’ve got to be willing get crazy.
Here’s a foreign concept. Act your wage. I talked a little about this yesterday. We are like a bunch of grown up 5 year olds. The average American has $38,000 in consumer debt. That’s debt excluding a home mortgage. If that weren’t enough, the average 28 year old, who hasn’t had as much time to get into debt, has $66,000 in consumer debt. Sixty-six thousand dollars! The average American has $8,580 on credit cards. Want to pay that off? At 19.8% interest paying the minimum payment, it’ll take you 40 years to pay the balance off! Total cost? $68,000 dollars! Doesn’t that make you crazy!?
You’ve got to learn the concept of delayed gratification. Don’t buy those golf clubs yet. Don’t put the vacation to Cancun on the credit card. Your big splurges could end up costing you big money. But I’m not just talking the cost of paying off the credit cards; I’m talking about opportunity cost. Look at this: If you took that $8,000 at invested it at 12% for 40 years you would end up with $1,017,998.50! Think about that the next time you want to pay for it with plastic.
Plan For Down Times. Life isn’t always good. We can’t always expect the market to be up and everything to be fine and dandy. We have to plan for down times. We have to save for emergencies. Three things are sure in life, death, taxes and things break. So here’s what I recommend: Set up an emergency fund. Put $1,000 into a savings account. Now, this isn’t an “Ahh, it’s an emergency, we don’t have enough money for pizza!” fund. It’s a fund for when the car won’t start or when the dishwasher breaks. Instead of putting the repair on the card, we have the cash to pay for it.
Now, what happens when you lose your job? What happens when your paycheck stops coming? If you’ve planned for down times then there’s nothing to worry about. What would it be like if you have 3 months of your living expenses in the bank? It would be incredible! What a sense of security to know that if you’re laid off or if you’re injured and can’t work that you don’t have to worry about the mortgage payment or the car payment and you’ll still have food on the table.
Practice Profit Sharing. The final point is the most important in my book. I’m a firm believer in giving back as you’ve been blessed. I believe that we are called to help others. It’s in our nature to be giving. Doesn’t it make you feel good when you help someone out? It truly doesn’t matter to me if I’m ever incredibly successful. I’ll feel that my life is complete when I have really made a difference in someone’s life.
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