Originally this principle of financial management was titled – You can’t manage what you don’t measure. I’m afraid I would lose too many readers if I didn’t stick to the conventional; so budgeting it is.

Many financial sites and bloggers focus on the big stuff. They write about saving thousands on real estate, slashing hundreds on cell phones, cutting the rates on credit cards. All of these are important and should be addressed, but what about the other 50% of your expenses?

The other 50% is made up of the little stuff that accumulates over time. The energy bars at $2 each, the sodas at $1.50, eating out for lunch each day at $9.80 and that’s just the consumables; impulse purchases add up too. You’ve just got to have that new lime green MP3, or a new fashion accessory. Walking through a store at the mall a pair of jeans caught your eye or you left without an umbrella and it’s now raining. In the heat of the moment almost anything can be justified. But at the end of the year when you realize that you’ve spent everything you’ve earned and then some you are wondering where it all went. You can’t remember the lunches, the MP3 was given to a friend when they came out with blue ones, the jeans came apart at the seams and for the life of you, you can’t remember where you left your “other” umbrella.

Can you really keep track mentally of every dollar you spend eating out? Can you really keep track mentally of every dollar you spend on coffee, snacks or presents for relative’s birthdays?

If you are like the 99.9% of the rest of us that continual has a hole in their pocket a budget is imperative. Aren’t you tired of “stealing from Peter to pay Paul?” Wouldn’t it be great to know that you spend more on eating out than you do on your car? Imagine how motivating it would be to change your spending habits if you knew that you were paying more for soda than you were for gas! Don’t laugh; you probably do pay more for soda than for gas, take a look at a different perspective on pricing.

Why do so many people have a hard time with budgeting? Is it because it is time consuming and boring? Is it because the numbers never seem to add up? Maybe you feel that it is a futile exercise because there is so much variation in your expenses?

Take a moment and think about what you are trying to accomplish by budgeting. In the end all we really want is some control over our expenses. It has been repeated often; the only sure way to wealth is by “spending less than you earn”.

Stop reading for a moment and think; financial comfort and wealth is not about what you make, it is about what you keep! Nobody likes this, but it is a fact of life. If you really want to get control of your financial life this is a must, you have no choice, you must save and the only way to assure saving is by budgeting.

So how does a budget help you keep more? Frankly it is simply about awareness. A term I use repeatedly in this blog (check out the 7 forms of muda) and in life. If you are not aware, if you do not track, if you do not measure how much money, time or effort you spend, the pennies add up to quarters, which add up to dollars, and dollars add up to hundreds or thousands. The opposite is true if you simply take the time to budget. Your pennies can turn into dollars and dollars will turn into hundreds, hundreds become thousands saved and money saved becomes wealth!

Budgeting will bring awareness and budgeting will bring wealth. But budgeting will also bring you much more:

• Clarity - For the first time in your life you will have a clear understanding of where all your money is going. It’s enlightening to know how much you spend on groceries, gas or gum. You can’t manage what you don’t measure. Knowing where your money is spent is the first step toward controlling it. With this clarity you will find opportunities to reduce and or eliminate wasteful spending.
• Control – Do you recall a day when the ATM wouldn’t give you the money you needed for gas or lunch? By using a budget and managing your money will finally put you in control of your finances. Once you are in control, it is only a matter of time before you will wake up one day with a reserve of cash.
• Communication – If you are married and sharing your finances, a budget will prevent much of the tension and arguing over money. 50% of divorces are due to fighting over money. There is no room for disagreements if a budget is clearly documented.
• Choice – With a budget you can now begin to prioritize your debts and expenses. As you get rid of debts and increase your free cash flow you we have greater flexibility in how to use your money to pay off additional debt or begin investing.  
• Comfort – With budgeting you will eventually be able to pay off all your debt and there is little that is more comforting than to know that you have control over your finances and your future.

Check back next week for details on how to start a budget!

If you like to be challenged to see things with a fresh perspective, if you like to learn new ideas and different concepts, sign up for my RSS feed or enter your email address here to receive updates directly to your inbox.

photo by mikebaird

Financial management is all about making the most of your earning potential through life. To capitalize on your opportunities you have to be healthy enough to do so. The 8th principle of financial management focuses on taking care of your health for this reason and more.

Health has the potential to impact your finances in a major way. In 2007 a report in the American Journal of Medicine reported that 62.1% of all bankruptcies were attributed to health care related expenses. More amazing was the fact that three quarters of these people had health insurance. Most were middle class American, well educated and owned homes.

Some of these cases were certainly tragic or unavoidable. Every day people that have followed the rules, eaten healthy and exercised are involved in debilitating accidents or suffer major unexpected illnesses such as cancer. While we will never be able to create absolute guarantees to avoid budget busting health care issues, prevention can significantly reduce your exposure to these risks.

• Exercise –  Exercise significantly reduces your risk to a range of illness and disease. Risk of some forms of cancer, heart disease, stroke, diabetes and high blood pressure can all limited by moderate exercise just 30 minutes a day.
• Eat Well – Eating a well balanced diet also help you to maintain your health and build a strong immunity system. Parenting Magazine had a great article on preventing illness that included this:

“Go for the nutritional superstars  – most often foods high in vitamins A, B, C, and E  – that truly help boost immunity,” says Annemarie Colbin, founder of the Natural Gourmet Cookery School and author of Food and Healing. She recommends eating plenty of orange and yellow produce (one or two of the recommended five total daily fruit and vegetable servings), which are naturally high in disease-fighting flavonoids and carotenoids  – such as butternut and acorn squashes, sweet potatoes, and carrots, or brightly colored fruits like kiwis, mangoes, clementines, and pink grapefruit.

• Stay Clean – Washing your hands. The Mayo Clinic reports that several common illness are commonly transmitted through hand-to-hand contact includes “the common cold, flu and several gastrointestinal disorders”.

 These are of course just some basics to help stay healthy. In part it is to avoid the costs of being sick today but taking a long-term view it is also about creating the right habits today so that you will be healthier in later years.

The Employee Benefit Research Institute reported earlier this year that a couple retiring this year at age 65 will need $414,000 to cover Medicare premiums and out-of-pocket health care related expenses. If you retire in 2018 you will need $694,000. Both estimate only provide you a 90% chance of having enough to cover medical expenses. Staying healthier than the average person will help you reduce your need for these  savings or allow you to redirect these funds towards something else. Skydiving at 85 anyone? 

photo by laurenatclemson's

.5? Ok this is a little different. If you take the time to look through my other Principles of Financial Management you will see they all have to do with taking control of your financial life: paying off debt, spending less, saving more and investing wisely.

While there are listed in a logical manner, more or less, I don’t intent to imply that a person follow the principles exactly in the order presented. Your personal situation may dictate that you focus more on one or another in a different way than your neighbor.

When I first started this blog, my vision was focused on presenting a different perspective on life, organization and wealth accumulation; a lean perspective. However an unexpected but pleasant side effect has been the opportunitity to reflect even deeper on these topics and others. In just a few short months I have been exposed to many more ideas than in the entire previous year and learned much along the way.

As a result I have realized that my knowledge and beliefs about life and personal finance continue to develop and grow. This is what has led to a Principle of Financial Management #.5. 

Without the boring details I will say my parents raised us with the value of personal responsibility. For us there was nothing to think about, it is just the way it is.

In the past few months however I have been exposed to many stories where others have not been personally responsible. Stories like:

• Deleting The Debt - Mike, as told by The Dolans, was in debt to the tune of $50,000. A year later he only owed $8,000. This great progress however was not a result of eating “beans and rice” it was a result of negotiating with his creditors to accept less than he owed.
• Offers In Compromise to the IRS – Thousands of people every year manage to reduce their tax debt to an average of $.13 on the dollar. If you look at those sites that offer  a service to help you do this there are often dozens of testimonials.
• Deadbeat Dads – Some studies show up to 30% of spouses that owe child support fail to pay. While many are levied unreasonably high child support amounts in relation to their income. Thousands are simply not man enough (or woman enough) to do what is right for their children.

Disclaimer: We must recognize that bad things happen to good people. Catastrophic health issues happen. Layoffs happen. Accidents happen. The point I raise is not about people that have found themselves in an untenable position due to reasons beyond their control.

I am only thinking about the millions that have the ability but not the interest or motivation to face their obligations head-on. In their latest poll on the issue from CareerBuilder.com they cite that 61% of workers are living paycheck to paycheck.

Many of these are the same iPhone buying ($1200/year), clunkers buying (17% feel regret), latte sipping people that we work with everyday. They live in houses that are too big, drive cars that are too expensive and eat out too often. These are the same people that complain about not making enough, too many bills and the high cost of gas.

If you want to live debt free, you can. If you want to have money in the bank, you can. If you want to be able to afford the price of gas whether it’s $2.50/gallon or $4.00/gallon, you can. But none of it will happen until you choose to take personal responsibility for your life and your finances.

Getting a handle on your money is like getting a handle on your weight. You can’t go on a diet once a year or save money by not going out for a few months and think that you are going to be fit, thin and rich for life.

Weight control is not about dieting it is about lifestyle. Financial control is the same, it is a lifestyle; a lifestyle that requires the personal responsibility to make the right decisions routinely.

Until you can commit to this principle of financial management, nothing else is going to work.

That said, I need a diet coke!

If you like to be challenged to see things with a fresh perspective, if you like to learn about new ideas and different concepts sign up for my RSS feed or enter your email address here to receive updates directly to your inbox.

Goals and Plans

“A goal or a plan is not a goal or a plan unless it has a projected completion date…. Until it has a date, its but a wish” – unknown

photo by frli

Last year I met a man that informed me that he had just started a new business as a luthier. He was just getting his shop set up, had finished an extensive course in some out of the way midwest school and was looking forward to being his own boss.

Recently, we were given a vintage guitar in need of a little repair. Thinking of the new luthier that may like some business I called and learned that while he is a “luthier” he doesn’t do repair work. To be nice I inquired how business was going. He replied that he was still working on getting his shop set up and working on a marketing plan.

He didn’t have a business, he had a dream!

To achieve any goal, be it starting a business, making more, saving more or investing more you must start with a destination in mind. Without first establishing a destination you will likely never find your path to get there.

Proper goal setting is a skill that is acquired over time. Learning about yourself and how much you can handle or how little can distract you is critical to successful goal setting.

If your desire is a pie in the sky, grandiose dreams like becoming rich, how likely are you to achieve this goal if you cannot create a clear path for getting there?

On the other hand if your only goals are short term such as survival each day with a few dollars left over, you may achieve your greatest potential.

Successful goal setting begins with the big picture. What are your long-term, big objectives in life? Once these have been established begin breaking them down into smaller segments that can be accomplished through your stages of life.

Each of these can be further reduced to yearly then monthly and even weekly or daily goals. Successful achievement of your life goals depends on combination of these short-term and long-term goals coupled together to help you achieve your desired results.

For every financial principal from education to investing you should set short-term (1 week – 6 month) goals, mid-term (6 month – 5 year) goals and long-term (5 year +) goals.

Every goal should also follow the S.M.A.R.T. standard. Goals should be:

• S – Specific and clear. You don’t set out to make more you set an objective to make $100 more a month, $2000 more this year and $15,000 more within 5 years.
• M – Measurable - Every goal should be measurable. Your savings rate this quarter should be 5%, 8% by year end and 15% in 5 years.
• A – Actionable – What are you going to do specifically to make more or increase your savings? Make a clear and written plan.
• R – Realistic – Don’t set goals that are not realistic. Make yourself stretch for them but make them plausible.
• T – Time Based – Like the quote above, any goal without a date is just a dream.

Just like the last time you took a road trip, you had specific destination in mind and a targeted time for arrival. Without following the path you mapped out and maintaining your momentum you would not have arrived when and where you set out to. The same hold true for financial management, without SMART goals you will never get to your desired destination.

“If you don’t design your own life plan, chances are you’ll fall into someone else’s plan. And guess what they have planned for you? Not much.” – Jim Rohn

photo by Qtea

Maybe you have done everything right so far regarding the previous financial principles. You can see freedom from debt, you are managing your money well and investing it wisely.

How confident are you that you are getting the most value for your money or effort?

Are you earning as much as you should or could? Did you get the best price for your most recent purchase?

The 6th Principle of Financial Management is recognition that virtually everything is negotiable. Sadly for many they just don’t bother to ask! Why not? John F. Kennedy was once quoted saying: “Let us never negotiate out of fear, but let us never fear to negotiate.”

My life experience leads me to believe that fear is one of the driving factors why people do not try to negotiate. When I worked in the retail environment it was interesting to see that just a small percentage of my customer base would ever raise the question about flexibility in pricing.

How do you overcome fear of negotiating? Arm yourself with an education. Understand the business you are dealing with and learn as much as possible about the product, service or job you are negotiating for.

Regardless of the situation you must understand who has the upper hand or power in the negotiation. This is generally dictated by who needs the deal to go through the most. Unless you give up the power, in most purchasing situations you will have the upper hand. In most job interviews it may be the employer.

When purchasing products here is an insiders tip: 10% of something is better than no percent of nothing.

The statement above was one I heard from sales managers many times in my retail career. Granted, that was nearly 20 years ago but the same philosophy still permeates many companies today. In the current economic climate there  is strong evidence that this attitude is more prevalent than ever before. While any business is trying to maximize profitability, profits are only possible if  sales are being generated.

Over the years I have become less surprised how often just asking will get you a better deal:

• Clothes – Most sales staff are commission associates and  have the authority to discount)
• Groceries – Often the cashier will have spare coupons lying around. On one occasion I had a clerk use her rewards card on her keychain to provide me with a better price
• Real Estate – Everything from the price paid to the documents fees are negotiable. Negotiate every step.
• Real Estate Taxes – If applicable, most states have a process available to have your home value reviewed.
• Banking Fees – Look at recurring monthly fees and even the bad-boy fees like overdrafts (these may not work more than once or twice!)
• Cell Phones – From activation fees to excess use.

Whether it is buying a car, or getting a new cell phone the internet can be a great source of insight on how to negotiate for a better deal. Whatever it is, prepare yourself by simply performing an internet search for: Negotiating ____Fill In The Blank____.

You never get anything unless you ask and by asking you will save tens of thousands over your lifetime.