April 2008: Minding Your Money
This month’s featured E-Wealth Coach is Ray Forgue. Ray taught personal finance classes at the University of Kentucky for 27 years and currently serves as the Interim Executive Director of the Association for Financial Counseling and Planning Education (AFCPE).
Dear Saver,
Do you ever ask yourself, “Where does all my money go? Why can’t I save? How can I get ahead?” Lots of people have such concerns these days. The answers are available with some very simple and direct steps you can start taking today.
First, you need to know the “what is” of your finances. This means you need a balance sheet. Your balance sheet will list all of your assets, all of your liabilities and reveal your net worth. Your assets are all of your bank accounts, your possessions and your investments. What you could get if you turned them all into cash today? Your liabilities are your debts. What would it take to pay off all of your debts today? When you subtract your liabilities from your assets you get your net worth. Set aside an hour this week to determine your net worth. Click here for a balance sheet you can use. The results will be very revealing.
Second, you need to know the “what was” of your finances. This means you need a cash-flow statement. A cash-flow statement lists all of the money that you received over a period of time such as a month or a year. It then lists all of the money you spent and saved over that same time period. You can use categories such as food at home, meals out, gasoline, car repairs, utilities, rent/mortgage payments, entertainment and others that fit your lifestyle. The dollar amounts in a cash-flow statement should be accurate. So it might be best to keep track of all income and spending for the next one or two months rather than look backwards for your data. The first of next month would be a good day to start.
Third, you want to be in charge of the “what will be” of your finances. This means you need to set up a budget. This scares many people. But budgeting is a positive step. A budget puts you in charge. Budgeting is not about paying bills. It is about reaching goals. And goals are reached through saving. Do you want to have $1000 in a savings account for emergencies? Putting $80 per month in a savings account for a year will do that. Do you want to save $20,000 to help a child go to college in 10 years? $150 per month will do that.
So what should your budget look like? It should look exactly like your cash-flow statement. Your cash-flow statement told you “what was”. It is up to you to say “what will be” in your budget. You should “pay yourself first” by setting aside funds for achieving your goals. A good rule of thumb is to save at least 10% of your income. Reviewing your cash-flow statement will reveal categories where you can make the adjustments necessary to reach your goals. Click here for a cash-flow and budget sheet you can use to develop a plan. Can you start your first budget in two months?
Money management is not rocket science. Use the “what is”, “what was”, “what will be” approach to take the mystery out of minding your money!
Ray Forgue
Interim Executive Director
Association for Financial Counseling and Planning Education
