The Planning Process

Having a plan is the most basic core principle that I try to teach. If you strip back all the practical application, all of the "theology of money," all stories or illustrations, I am basically saying to have a plan.

Tell your money where to go instead of wondering where it went.

Hopefully if you hear anything, you will hear this. Now, I am about to expand on logistical planning. Most people who know me will be surprised to hear me say this next statement but it is the truth and I don't really say it that often.

You can only plan so much.

I am serious.

There are 3 basic stages in personal finance planning:

1.) Short Term Planning
2.) Mid Range Planning
3.) Long Term

Long term planning is roughly anything over a year away. There are many things that we should be planning for that are a year away or over. An example of Long Term Planning is retirement. I think you should be planning from this and early on in fact. Another example is a new (to you) car. This will come up at some point, you might as well be prepared for it.

I also think there are things that come up within a year that you should plan for in advance; these are mid range planning items. Christmas, Birthdays, Vacations, Real Estate Taxes, etc. all fall under this. We know these things come up, we need to plan for them.

Next is short term planning. I do not want you to plan for monthly expenditures in advance. Each month is new. Each month things will change. For example my gas expense has now changed because it is football season and I go to all the Clemson games. This has increased my monthly gas expenditures a great deal, which effects my planning in other areas. Another example is you might know you need to get an oil change this next month, that changes your car maintenance category, which might change something else.

Let's say you had a friend who was about to play a game of chess. And let's say you are a chess expert and he came to you and ask for help. You would not give him step by step instructions on moves he should make. This is not a wise thing to do when playing chess because things change rapidly. The same is true with finances. You can have a basic goal/intent to take the queen or put the king in checkmate, but how you get there is a changing process.

It is a good thing to make goals and plans, but the details will be changing. It is important that we understand this so that we will not be frustrated with a process where change is inevitable.

Signs your financial System are Working

I wanted to offer up some encouragement to all who I have not had the pleasure of speaking with in person or through e-mail. I have heard really AWESOME things about people making commitments to handle their money wiser.

This allows them to be better stewards, better givers, better providers, and have actual freedom to do what God calls them to rather than be stuck in a position where they HAVE to earn a paycheck from a job they are not passionate about.

I wanted to list some signs that your financial system is working so that you may encouraged and continue what you are working towards:

1.) Paying car insurance quarterly or biannually without a hitch

2.) Giving e an offering to your local church not longer HURTS to write that check.

3.) Presents are a joy to buy for people.

4.) Getting to see monthly interest incurred from your 4.3%+ Interest Rate saving account. (If you do not have one of these, please sign up with ING Direct immediately.)

5.) No longer have stress when bills come in.

6.) You know that you have a plan financially if "life" happens.

7.) You are actually choosing to be at your job, rather than stuck at it.

And so many more! Having freedom with your finances is exactly what it sounds like. Freedom. It allows us to live life differently; I know too many people that are in bondage in their financial life which causes them to not be able to devote their lives to the calling they are called to because our money and hearts really are connected.

Budget Time

It is getting to be that time of month. About a week before the month is over I put my financial outlook together and start budgeting for next month. A basic process of what is do is:

1.) Update all transactions in Microsoft Money to date and look at a snapshot in a summary of my accounts.

2.) I plan out a detailed projection of expenses (for the next 7 or so days) and put them in as transactions. The date I use is the last day of the month and as the actual expense comes, I delete that "projected" transaction. The reason I do this projection is because it is my goal to always keep $1,000 in my main checking account. I do not want to keep more and do not want to keep less in there. Anything left above $1,000 goes to a different account (savings, money market, investment, etc.) but I usually will end up right at $1,000 anyway because that is what I plan for.

3.) Now I am ready to put a plan for next month down on paper. The first thing I do is put the amount of income coming in. This goes at the top of the page and I want to "spend" all that money on paper. And when I mean spend I do not mean buy stuff, I mean give all your money a name. A certain amount goes to food, a certain amount goes to investments, giving, college fund, etc.

4.) After you put the income on the top of the page you start putting down necessary expenses. (i.e. Food, Shelter, Car, Utilities, Clothing in this order)

5.) I then think of upcoming expenses that could possibly be a budget buster in the coming months. I think of my car, Christmas, girlfriend's birthday, etc. And I choose a target amount for it then divide it by the number of months between now and then. This is now included in my budget and I make a separate account for it for money to be transferred to.

5.) Now lastly I roll over my previous months budget for all other accounts. I make my tweaks and then move on.

This whole process might be time consuming your first couple months but after a while you will be able to knock this out in less than 15 minutes. The important thing is to get the ball rolling. If you have yet to make a budget, I encourage you to start with next month (October).

The Breakthrough Cont'd

If you did not read yesterdays post from Jim Collins' book "Good To Great" please check it out before you continue with this one.

In that illustration (known as the flywheel concept) you are using a ton of force and only moving it a little at a time however at some point the wheel begins to turn on its own and even goes faster with you doing little to no effort.

I think we all want to be there in our finances. I have stated as a goal of mine, I want my alternative income streams to be greater than my expenses. This to me is true financial freedom. How do I do this? First I MUST understand this concept because it changes strategy on what our plan is.

What would happen if you were pushing that flywheel and you got tired and took a break for just a second (or a month when it comes to personal finance). The momentum would be lost and we would be discouraged to have to start over. Not only that, we would not have as much energy as before. If that happens perpetually we would never get to be to the breakthrough point.

This "stopping factor" can come in many different shapes when it comes to personal finances. It could be that emergency that comes up that we didn't have an emergency fund in place to counteract so we could keep building momentum. It could be the realization that it is hard right now and we want it to be easier immediately, instead of looking to the breakthrough point. Or it might be that you are just focused on results right now and give up because you are not seeing any.

Just like with the flywheel when we start we will put in the most effort and get the least amount of results. But getting to the breakthrough point is worth it and in anything you do and this needs to kept in mind.

Practically for any goal you have with your finances this applies. If you are budgeting for the first time it will take the most effort and you will probably make the most mistakes or be the most frustrated than you ever will. It gets easier, I promise. After a little over a full year of actually living on a budget, I am able to accurately, efficiently, and effectively budget my money in a matter of minutes for the upcoming month.

All it takes is getting through the initial max effort min results stages and looking to the breakthrough point.

Ways to Cut Down Your Entertainment Budget

Entertainment can be very expensive if we are not careful. I wanted to offer some great ways to spend less on this category while still having fun.

Not so much Traveling
This one hurts me because I love driving and more than that, I love driving to Braves games. I am a huge fan and I try to find good deals on eBay for tickets. While I figure I am saving money on tickets that most people would spend, I am killing a ton of money on gas to get there and back. Traveling really is a sneaky way to creep up your expenses and then when you look at your bank account balance you wonder where your money went.

Find Alternative Sources of Entertainment
I know quite a few people who have joined an ultimate frisbee league which is a great way to be entertained while not spending a lot of money. I also have friends who have a basketball night where they all get together on a certain night of the week or on Saturday morning and play. When you find things to do with friends and loved ones like these options you will feel no need to go out and spend a large amount of money on ways to entertain yourself.

Cancel some Memberships
Lots of people have gym memberships or other types of revolving expenses that they hardly ever use. This is sucking a good amount of money up. Most of the time you have signed up for a lot of little monthly fee type things which add up when put all together. If you go to a gym, health club, country club, or other service only once a week, chances are you are not getting your money's worth out of it.

Lower your Cable Package
I know this is crazy talk but I am serious. Most cable companies will have a low end basic cable package that usually cost a significant amount less. I know we are living in a world of HD, DVR, and premium packages and everything has to be HD but it is worth a thought. I am not saying you are irresponsible if you have a big cable package; I am just throwing out an idea for it in case it sticks somewhere.

Newspaper/Magazine Subscriptions
I am guy that LOVES sports. And I love reading/watching/talking about sports all the time. Therefore, I used to have a subscription to Sports Illustrated, Sporting News, and ESPN the magazine. The problem is that I never really read them. I looked through them, read some blurbs here and there but I realized that I needed to cancel. This took a good shot to the pride because I am a man and men read Sports, but I am glad I am saving that $10-$15 a month now.

Use the Library
The library is freakin awesome. I love books (more like books on tape), I love movies, and I love free. Did you know the library has all 3? I suggest to use this amazing service that we are given by the state.

Anyway, there are tons of ways to keep our entertainment seeking hearts occupied without spending a ton of money. The key is to just make a little effort and it will go a long way. If you end up cutting down on movies and dining out you will more than likely save a LOT of money.

Two Column Budgets

I received an e-mail saying:

"I am trying to do my first budget but I am having trouble with it because I get paid in the 15th and the last day of each month. While my bills are due at different times during the month. Any advice?"

My suggestion is to have a two-column budget. The first column represents the first paycheck of the month and the other represents the second paycheck of the month. Place the amount that you are bringing in out the top of each column and spend (plan) every dollar on paper for that pay period.

If your power bill is due on the 5th that is the first column. But then cell phone is on the 19th that is the second column. Then adjust categories that have some flexibility (like clothes can be budgeted on whichever pay period has some room.)

I encourage you to keep it up. It takes practice and you will constantly be getting better at it. It is extremely hard at first but most things in life that are worth doing are like that.

Learn the Magical Word

The great word that we as Americans need to tell ourselves is "NO!"

It may sound simple but it is so NECESSARY. It doesn't matter how much money you make you still need to tell yourself "NO." For whatever reason the trend is to always spend a little bit more than what your income is; it could be a $30,000 income, $300,000 income, or $3,000,000 income you still end up living paycheck to paycheck.

I was reading an article in ESPN the magazine I think like a year ago. And it had an article on John Daly and how he was in debt $4,000,000. He turned to casinos to try to keep his head above water and was running himself into the ground by trying to make it to so many appearances.

It doesn't matter how much your income is, you need to learn to tell yourself no. That is the toughest thing for me. If I want something (or talk myself into "needing" something) I want it right then; it is the mentality we all have in America. I want it right now, my way or I am pissed.

When I make a plan I need to stick to it, the next month I can make a new plan; I can figure into the new plan the thing I want (and it might take multiple months saving for it!!!!). It is so worth it; to be financially free allows you to live life the way Christ designed it (not in bondage). There is so many warnings throughout scripture; they are not there for show, its truth.

A Glimpse of Compound Interest

Have you ever thought about being a millionaire but then just laughed it off. I am going to show you the key to becoming a millionaire; compound interest.

$100 a month, that is all it takes. If you invest $100 a month for the next 40 years you will have invested $48,000 by the end of it. That is a lot of money.

But after 40 years of compound interest that $100 a month would be $1,176,477.25!!! (This calculation was done with the assumption of the market average over the last 75 years, 12%)

I think most people could plan to set aside $100 a month; but the problem is nobody is doing it.

Compound interest is your greatest friend or your greatest enemy. (By the way, that exponential growth works against you for your debt)

"Above and Beyond" Cash Flow

At the risk of this post being "out there," I am going to talk about what I have termed "above and beyond" cash flow.

This is any money you have coming in that is unexpected. It is different than your alternative income stream where you are making money work for you without going into a "job" so to speak (that is a planned income stream). Above and Beyond Money is when you find $20 on the ground, when your annual tax return comes in, or when your Aunt gives you $50 for your birthday. It is irregular income that you know is coming someway, somehow, sometime; you just don't know how, from where, or when.

If you have a detailed cash flow plan and receive above and beyond money you know exactly where that money can be put to good use. If you do not have a plan there is a good chance that money will leave you quickly and this is never a good feeling.

A marketers job is to appeal to your senses and use our psychology against us. So if you suddenly have $1600 that you did not have a plan for, there is a good chance it will be gone and you will be left wondering where it went. I am not trying to tell you what to do with YOUR (cough, God's) money; but I am trying to tell you that whatever you spend it on, you need to do it on purpose.

I believe that if we receive Above and Beyond Money and there is no plan, then it is not going to be a financial help to us. I cannot stress the idea of a planning enough. I love talking about doing fun stuff with your money: investments, generosity, savings for cash purchases, etc. But you HAVE to have a foundation first and one of those foundational blocks is a PLAN.

Tips for Cash Flow Planning

These are all tips that have worked for me; if you have been frustrated with budgeting try some of these ideas.

1.) Use a computer. They are good for you. If you do it in excel you can make it calculate your total as you go. Not only that, if you forget something you can just insert a row instead of erasing everything like you would on a sheet of paper.

2.) Budget for upcoming expenses. If you know something is coming up a few months from now, start budgeting now. It makes things so much easier when it comes time to pay whenever that something comes.

3.) Do your budget monthly. Each month changes. I am single with a basically simple lifestyle and still things change for me on a monthly basis. You are not going to come down from the mountain with the stone tablet budget, you have to continue to tweak and change things depending on what life throws at you.

4.) Start your EMERGENCY FUND. I don't think anyone will argue with me that life throws curve balls. Why would we not plan for this? This is the FIRST thing recommend you to do, it is SO important. Save up $1,000 and set it aside. Then attack your debt. (See Attack that Debt) After that is completed I suggest you set aside 3-6 months income as your emergency fund. (See Emergency Fund)

5.) Keep copies of old budgets. I like looking back on things from a year or so ago and see how far God has brought me in life. Not only would it be neat to see this in our cash flow planning, it is also a good reference tool.

6.) Use envelopes to hedge overspending. If you plan for $200 for groceries one month, just put $200 in an envelope and have all your money come out of there. Dunn & Bradstreet did a study that says in our psychology we spend less money when we use cash. It is a fact and we can argue but because debit/credit cards are so convenient we end up spending more. If you set aside a few envelopes a month: food, groceries, fun money, etc. it will aid in your effort to not overspend.

Side Note: My friend Dean has a "five pocket wallet" that he uses to set aside his cash for each category, rather than having five envelopes . This idea intrigues me and I think I would like to try that in the near future.

7.) Do NOT turn to debt. If you can't fit everything into your budget that you want/need to spend money on do NOT turn to debt. You need to cut things out of your life, debt cannot be an option anymore.

8.) People with irregular income still have to budget. You do not have a round number each month and to planning for your budget will look a little different. You need to prioritize your spending. Rank your expenses. 1.) Food 2.) House 3.) Transportation 4.) Basic Utilities 5.) Clothing from there rank what you deem most important then next importance. It is a skill and will take time to develop.

What You Don't Know CAN Hurt You

I used to believe that what I didn't know, could not hurt me. In fact, I told my friend Jon this many times when discussing "rules" for us to live by while living in the same house.

To give more life to this, I did not want Jon using certain things. For example I did not want anyone to sit on or put stuff on my bed (pet peeve...don't know why, I just don't like it). Along with me telling Jon that these are my wishes I told him, "But...what I don't know can't hurt me." If I get home and my bed is all messed up, I now know and we have a problem. But if I truly do not know and do not find out, there is no way it can hurt me.

This was my motto for roommates for many years. However, I now believe it to NOT be true in all cases and will never use it again.

If you do not KNOW where you money is going, it WILL hurt you. It is so simple, yet the hardest thing for us in America to grasp. Your income MUST be greater than what you spend. There is no gray area. It is not calculus or trigonometry, it is addition and subtraction. If you are reading this blog you need to KNOW a budget or it WILL hurt you.

You might be saying, “I don’t need a budget.” I know from experience that if you are broke or are stuck in a trap of all the money coming in then going out like a whirlwind, the way to get out is through the introduction of a monthly budget. Once you do this you are actually able to give more than you ever thought possible, save more than you ever thought possible, and will be able to utilize your income to do something besides PAY BILLS!!

You have to KNOW how much you have coming in (Income). And now you have to KNOW what is going out (Expenses). If you do not know this it WILL hurt you; there are too many hurting people out there for me to think otherwise anymore.

If you need help with setting up a preliminary budget and need someone on your team, e-mail me. Click the contact me link on the tool bar.

Common Budget Planning Traps to Avoid

In order to ensure success in your cash flow plan I wanted to talk about 4 common traps or mistakes that people fall into which ultimately causes them to "get out of the game" with their finances.

I have been harping on "having a plan" for the past few weeks and those of you that have started making a plan I want to encourage you. Every month you are going to get better at planning. The first month is the hardest, I cannot urge you enough to continue this every month because it is so easy to give up.

Everybody that makes a Cash Flow Plan is not always successful to start. Some do have a natural gift at thinking through each detail and following their plan, but I would say most do not. 4 Common reasons why your Cash Flow Plan may not work:

1) Leaving Things Out

Each month is different. December is going to be much different than June. December has Christmas; June probably has a vacation. March might have a birthday; August your kids need new clothes for school. My point is actually think through your month. Plan it carefully. You have a specific number of money coming in, you have to tell it what to do. That includes mid and long term savings that you set aside each month such as: car, retirement, kids college, etc.

2) Over Complicating Your Plan

You do not NEED to put down $17.22 for toilet paper in a certain month. This is not only tedious and annoying, it is also unnecessary. As an example of what I do is actually lump in my toiletries and groceries together (I usually get them from the same store anyway).

3) Not Actually Doing It

Tell your money where to go instead of wondering where it went. Imagine if a coach did not have a plan for his team; there is a pretty good chance he would not be very successful (and probably fired).

4) Not Actually Living By It.

If that same coach made a plan, but then didn't care if his players actually did what he planned out, they would still not be very successful in this scenario either.

Cash Flow Planning helps avoid living on a crisis by crisis management system. It should not be a surprise when Christmas presents come up or when you need to buy clothes for the kids. These are not what I consider "emergencies." If you want to review my thoughts on emergencies (see Click Here and read the importance of an emergency fund.

Proverbs 21:5 - "The plans of the diligent lead to profit as surely as haste leads to poverty."

Workouts are not easy...

So it is my birthday today and I decided to wake up early and go for a birthday run. Which turned out to be more like a birthday crawl. Workouts are not easy and I got to thinking about how physical fitness parallels a lot to financial fitness.

Firstly, both are very important and affect other areas in our lives. I will not go into this but I am certain I won't have many who disagree that this holds true. Secondly, a workout takes discipline, which is the same thing that is needed with money. It does not come natural and it takes effort. Once you do this for a while you begin to get in shape.

With physical fitness it takes eating as well as working out. You cannot just eat all the time and be healthy it takes both eating right and exercise to be healthy. The same goes with the way we handle our money. Tracking AND planning are two essential parts that are necessary for financial fitness.

When we get overwhelmed with money, chances are it is because we are not handling it and letting it handle us. A common form of this is not tracking or planning. When you plan and track your money it takes all guesswork out. But you cannot just do one and be financially healthy; you have to do both.

It is important to take a spreadsheet (or even a yellow pad) and put down a projection of what your month looks like. Each month is different and will change so it is important to change and tweak before every month. Some things you need to plan for and set aside money each month (ie Christmas or Vacation). But the point is you have to start now. Just like when I got up this morning to run, even though it did not go as well you have to start somewhere.

Cliche Quote that applies is: "A journey of a thousand miles begins with a single step."

Practical Application Challenge: Download the Cash Flow Plan from my tools portion of my website FINANCIAL TOOLS. Fill it out and try to stay within your plan (keep all receipts for the new month, in this case it is August). Then after the month is over tally up all receipts and track where your spending went and compare that to your plan. From there you will see how you need to tweak things. If you have debt check back tomorrow, I will have a specific plan for you to attack with.

A word of prophecy if this is your first budget: you will not stay within your plan. I suggest that you put more than you would think for food because chances are you are going to undershoot it if you haven't been tracking your money closely. If there is no more money for food and there is still more month you are going to be going on one intense diet.

Tell it where to go...

Being on top of your money is simple. It is the difference from telling your money where to go instead of wondering where it went.

Let me disarm people who are intimidated by their money. Life is hard to plan for, your money is not. However, we have made it more difficult than it has to be. Think about it, life has all types of curveballs. Relationships are confusing, jobs are frustrating, men are difficult, women are emotional, life has all types of abstract things that are being thrown at us. But money is not one of them...

We have a number of what came in. All you have to do is put it where you want it to go. So simple; it is a concrete number and you just use it. That's it. When it's gone, it's gone so don't put it in places that it shouldn't go.

Figure out your money TODAY. Basic suggestion that I challenge you to is write this down on a piece of paper.

Your Money : $________

Food : $________
Housing : $________
Power, Water, etc. : $________
Clothing : $________
Transportation : $________

These 5 categories are what you NEED. If your money coming in for a month is less than these 5 basic needs you are in need of ACTION. You need to sell that expensive car payment, you need to sell your house that is beyond your means, you need to quit buying Gap this and Ralph Lauren that, you need to quit eating out so much.

If your money is less than those 5 basic categories I urge you to act and get back in control of this thing.

Notice that I did not include any credit card payments. Those categories get paid FIRST. I don't care that Visa did not get paid and it hurt your credit. I care more about you and your kids having food or having lights on in the house.

But let's say your number of income is BIGGER than those 5 basic needs. Then choose where to put the rest, don't waste it. I recommend an emergency fund so that just in case "life" happens and you lose your job and that number at the top becomes $0 one month. Your family will still have food, home, lights, clothing, and transportation.

It takes time...

If you work for (yourname) incorporated and you are handling all the money for that company the way you handle the money in your life, would you fire yourself?

It is not effortless to know where your money is going. Farmers are good managers. They have to be or they will lose a lot of what they work so hard to gain. I really like what Proverbs says:

Proverbs 27:23 "Be sure you know the condition of your flocks, give careful attention to your herds"

You have to do this or you your animals will run away without you even knowing. At some point farmers would even need to hire hands to help them with this. IT IS THAT IMPORTANT.

According to the Wall Street Journal nearly 70% of all consumers LIVE from paycheck to paycheck. This means that they would not be able to make a mortgage, utility, or credit card payment if they missed a paycheck.

According to the American Bankruptcy Institute filings for bankruptcy is at an all time high with a new record being set virtually every year. I think these statistics are connected to the life that we now have that is very contrary to the life on the farm.

It is simple, if you don't have an accurate picture of where your money goes, you are bound to make a decision that will hurt. Trust me, I have made too many bad decisions that I definitely paid for.

Please don't just look at the balance in your bank account. I know A LOT of friends who have made decisions because of their balance and then a few days later they realized their rent check that they wrote a week ago just cleared and now they are in a STRESSFUL situation. Please please at the very least you need to get some sort of program or service that you can type in your transactions and track where your money goes.

You can check out www.clearcheckbook.com it is free and online which is a great feature. I personally use Microsoft Money and I love it.

If any of you are competitive or enjoy games like me, handling money is a game. Think about it, you plan out your money (let's say you have $3,000 coming in a month. Plan where all that goes before the month. $1,000 savings, $1,000 to giving, $1,000 spending. As an example). Then you just track it...see how you did. You will keep getting better and better.

The best part of the game is, that if you just do it, YOU WIN! You will be in the minority of people in America handling your money correctly.

Did you know that the average Japanese family saves 18.8% of their income? According to the Department of Commerce after 2000 the personal savings rate in America fell to -2.2% (the lowest in 60 years).