Outside Economics

Recently I was in a meeting and the thought occurred to me; why do people even attempt to have a financial plan? What is the purpose of having a financial plan? Why take the time to create a financial plan and put forth the effort to implement it and follow through with it? The answer to these questions may sound obvious, but as I have studied financial planning and worked in the financial industry for the past 30 years, I have concluded that people have an innate desire to be self-reliant. However being self-reliant is a learned trait while we may have the innate desire, we have to act on it, and learn self-reliance.

What does it mean to be self-reliant? According to Dictionary.com, the adjective originated around 1826 and means, “relying on oneself or on one’s own powers, resources, etc.” Another definition, one that is a little broader is this: The ability, commitment, and effort to provide for the spiritual and temporal necessities of life for self and family. Both definitions explain the necessity to provide for one’s self.

The second definition is more comprehensive. My thinking is; how can you be self-reliant if you are not mentally or spiritually in the game? Can someone provide for self and others without that inner strength that comes from being mentally or spiritually prepared? I believe that self-reliance is more than just a good job and a fat bank/retirement account(s).

Self-reliant people not only have a good source of income, they have money in the bank, investments, as a friend of mine would add some food storage, debt free, and they are spiritually and mentally able to care for their own. This is a challenge in todays world where people are pulled in every direction, often wasting time and money. In some cases, children don’t have a complete understanding of what it took to earn the money they are now spending. 

With the challenges of providing for one’s self and family, may I submit that it would also include the necessity to continue to learn and improve one’s self. Consistently learning and integrating new concepts of truth, would help a person accomplish a goal of self-reliance. For example read good books, work with a mentor, be a mentor, help someone else reach their goals.

How does someone become self-reliant? Here are six ideas that will help you become more self-reliant:

1. Pay yourself first: Take some money out of each pay check and send it to savings (savings accounts, retirement accounts, investment accounts). The discipline of saving money and living on less than one’s income is a critical part of self-reliance.
2. Using a family budget: Using a budget is one of the basic principles of good money management. See more here
3. Risk management: Risk management is taking care of the risks we are exposed to on a daily basis. There are four things that can be done with the risks: 
1. Keep the risk yourself and personally pay for the things that may happen
2. Control the risk through behavior
3. Prevention - don’t engage in behavior/activity that would enhance the risk
4. Transfer the risk through some means of insurance.
4. Be prepared: Things happen in life that cause great pain or financial difficulty (loss of a job, divorce, death of a loved one, business reversal, etc.) These trials may cause us to stretch and grow in ways we never knew we could, so finding, and developing coping skills is critical (developing the mental/spiritual side of self-reliance).
5. Daily improvement: Find something to do on a daily basis that will help you improve various aspects of your life. For example each morning, I spend time, praying, reading, writing in a journal, exercising, and meditating. 
6. Become debt free: Debt is truly a bondage that never sleeps, never eats, is always your companion where ever you go; becoming debt free is a blessing of self-reliance. Get out of debt!

These steps towards complete self-reliance take time and work. Don’t be too hard on yourself if you are not self-reliant in the next year - keep working towards it. “Claim progress”, as my wife would say. Map these things out how you personally might implement them in your own families’ and measure your progress. And then realize that life happens and each of us can experience a reversal.

Reversals that can cause a person to be completely wiped out and they have to start over, some people go through life with no issues at all (at least not that we see), so be patient with people around you as we are all be on the road to self-reliance, we aren’t at the same level, or we may have just suffered a reversal.

Finally, remember that there is always hope; keep the embers of hope alive by working on the above six items in some manner, as part of your financial plan regularly measure and keep track of your efforts, and you will become self-reliant.

REMEMBER:

"Strive not to be a success, but to be of value." ~ Albert Einstein

We typically know how much we spend each month, but do we really know the details? Budgeting is the process of creating a physical plan for the uses of our monthly/annual cash flow. A budget therefore is a spending plan, it is the document that tells you and others how and where the money will go. While that is the basic concept there are several aspects of putting together and implementing a budget, namely finding the data, drafting an effective budget, agreeing to the budget, and using a budget. Budgeting is an essential building block to personal finance. I hope to bring about a positive mindset about using budget, so lets explore these items: 

Finding the Data

Right off the top this can be a task of self examination! I ask clients to go back through four months of check book statements and list and total where money was spent. Where people spend money tells a lot about what is important to them. The reason I ask for three months, some quarters may have a funny month of spending, it may require some extra data mining from another month or two in order to get enough accurate information. 

Don’t forget to list all the sources of income. Often the focus is solely on the spending, but listing income is important too. List bonuses, or second jobs, etc., an accurate income figure is especially important if it varies monthly due to commissions, overtime, or other factors. 

When assembling this information determine the level of detail to categorize the spending. For example there are several items that I buy at a grocery store that are not actually “food”, but since I bought them there, I put them in the grocery category. I try to keep it simple, otherwise I could end up separating items on one receipt, calculate the proper tax, and then put them in their proper category.

Next arrange where the spending has been based on “Needs” vs “Wants”. This is really important as it helps to prioritize our spending. Maybe you value your entertainment budget, but most likely it’s not more important than your mortgage.

Drafting the Budget

Once the data is organized, it is easy to see where and how much money has been spent. This becomes our basis for drafting the budget. Make sure at the top of the budget is the line “Pay Myself First”. Successful budgeters realize that they don’t save what is left over, they save first and spend what is left over.

Add a bottom line figure of approximately ten percent of the spending part of the budget for “TIF” - Things I Forgot. We all forget items or things pop-up which need some attention. This is where those items go.

After subtracting the savings, spending, and TIF, from the income, the bottom line should equal a “0” - zero! This is called Zero Based Budgeting. If the figure is positive put more into savings, if it is negative, then look to the wants section for items which may be easier to live without. 

This is where each person needs to come to grips with the “needs vs. wants” in the family finances. Focus on the needs then prioritize the wants and make things stretch as far as possible. However, do not eliminate or cut into savings. Savings is not the float figure in the budget!

Agreeing to the Budget

Now that the budget is drafted, it has to be agreed upon. It is critical that spouses agree to the budget, particularly if this process is to be successful and effective. Both spouses must be “All In”; one can’t simply dip a toe, while the other dives in. I cannot emphasize this enough. It does not work well if one spouse works within the budget and the other spends what ever they want, after all they should be on the same team.

Because things change, spouses should have a monthly meeting about their budget items to review what was done the past month and what the plan is for the next month. This little meeting should be taken seriously, by calendaring and keeping the meeting time sacred - do everything possible to make it happen. Needed changes should be noted and agreed upon and then move forward. 

Using the Budget

The budget is a financial tool, a spending plan - where dollars are told what their job is and sent off to do that task, in an effort to accomplish certain goals. What a budget is not, is a form of punishment! A budget should free us from many financial decisions that may be thrown at us on a daily basis through various forms of media. A budget is a way of disciplining ourselves by keeping our needs and wants in check.

We all have wants, a new TV, automobile, vacation, etc.. A budget helps us get these items by structuring how and when we get them. It keeps us from impulse buying, by predetermining how and where we are going to spend our hard earned money. This means that all these wants, can be had in their proper time, when the money is saved to make such purchases. This is a category I call “save to spend”. My mother use to remind me as a young boy, “You can only spend it once!”

Let the budget work for you by developing the habit of using it. Make your monthly meetings effective, at times they may take only a few minutes to simply review and say, “no changes needed”. Good, move on and have fun. Other times the meeting may take a little more time due to larger up-coming changes as to where money needs to go. Once this begins to happen regularly, recognizable progress will come. 

Don't let the on-going meetings be the weakness that kills the process. Remember the meeting may only need to be ten minutes to review and discuss the next month. The habit and discipline of monthly meetings will be what greatly increases your success of sticking to your spending plan. Steven R. Covey said, “The power to make and keep commitments to ourselves is the essence of developing the basic habits of effectiveness.” Keep it simple, but make it happen. With a new mindset about the use of a budget, your financial effectiveness will increase by keeping the commitment to properly manage your cash flow. Effective money management buys you financial freedom.

For more information you can see this article: Budgeting 101 and you may download my FREE simple .

REMEMBER:

"Kindness is a language which the deaf can hear and the blind can see." ~ Mark Twain

Providing financial counseling for many years, a question like this often comes up: Why is it hard to start saving? Money is a very emotional thing and we all have our own thoughts and opinions about it’s use, which can be very personal. We can always justify our wants into needs - its a matter of developing the strongest argument as to why this or that is a need not a want, thus eating up our entire pay check on the mixture of real needs and perceived needs (real wants). 

Here are some reasons why it is hard to start saving money: 

1. Saving money requires self discipline - lots and lots of self discipline. There is no one around “forcing” us to save money, like the government forces us to pay taxes. Saving is 100% on us personally. With each and every paycheck that comes in we have to make the choice to save. Establishing a habit of saving comes after months and perhaps years of successful saving.

2. The money we want to save is competing with the money we want to spend - there are so many wants and perceived needs that we look at and say, “I can afford this” and so we spend the money before saving. When in reality we might not be able to afford it, but because we want it we buy it.

3. People tend to spend first and save what is left over, when they should save first and spend what is left over. These priorities are mixed up. When we spend first and try to save what is left over there is never enough to save. We can always spend what we earn and our spending/perceived needs increases with our income.

4. Successful savers save first. They pay themselves first and pay others last. They sacrifice their short-term wants for long-term goals. They understand the difference between needs and wants and they focus on their self-discipline in other areas of their life so saving becomes a more natural extension of their disciplined life. In our society of instant gratification, which is filled with stuff, we focus on the things we don’t have. With some justification we make those things into needs, and exchange our future savings for wants, thinking they will bring us happiness, ignoring our future.

Keeping a budget (you can learn more at Budgeting 101) in line is a very key element to saving money. Our spending can and often does expand with our earnings, making every purchase important! One key to being a successful saver is to have an emergency fund established. And ONLY use if for emergencies! 

How do you go about saving? Many people simply save through their work via payroll deduction. They may contribute to the company 401(k) plan or other savings vehicles and call it good. Real savers do save through work and save more on their own. They simply move some money to an old fashion savings account, then when that gets to a significant size they invest it in some manner. Savings can be built several different ways. 

Saving money can become a priority. Developing the self discipline to save will be an attribute that will bless you for years to come. Struggling with it is natural, have faith that it can be done! Go do it!! Please let us know how you go about saving money. What are your challenges with saving money - outside of your company retirement plan?