Financial Basics: The Solution to Your Financial Problem

Written by Dave Young, President

YOU MAY BE SURPRISED to hear that one household in 50 declare bankruptcy a year. On average, when a widow receives a death benefit, it is usually completely gone within three years. Credit card debit is at an all time high. Payday loan centers charging effective interest rates up to 500% are thriving. Gambling is epidemic. In the richest country in the world, millions of Americans are experiencing major financial problems.

What is the solution to this problem?

Make more money?

Most people think that the only way to solve these problems is to make more money so they have more money to spend. In reality, that might help their situation, but it isn't the solution.

It may sound like obvious advice to spend less than you earn, but it is often ignored. According to an article in Smart Money, Americans collectively spent more than they earned after taxes for the past two years in a row. This bad habit afflicts people at all income levels-- those with less may feel as if the extra expenses are necessary evil, while those with more may assume their high income protects them from any future financial trouble. This mentality must be changed in order to build wealth over time and save money.

I've personally met individuals who earn $40,000 a year but save $5,000 of that for the future. Although it may seem like a small annual amount, that money adds up to future wealth and security. In contrast, I have met others who earn $200,000 a year and spend $220,000. This is a quick way to destroy yourself financially. While it may sounds simplistic, in order to build wealth you must spend less than you earn.

Politicians talk about change... beauty contest contestants talk about world peace... all great ideas, but not practical unless they have a disciplined plan.

The solution that provides the structure or the disciplined plan to help you meet your financial goals is:

First, understand your personal numbers (the money you need on a regular basis) and write down a plan to spend less than you earn by making a budget.

Usually when you mention a written "budget"people often start to groan. They don't like budgets because they take effort and force you to decide what is a real NEED and what is a WANT.

A budget is the cornerstone of any financial plan. It brings control to the "numbers". It also takes your numbers out of the "world peace" type of plan and provides some substance and a road map to meet your goals. Budgeting can benefit both frugal people and spendthrift types.

A budget encourages frugal people to balance their spending. It helps them see they can spend money on things like entertainment when they normally wouldn't have spent the money. It also helps spendthrift people balance their spending so they buy things they need first and then have money to spend on additional items. Budgets help them keep their spending under control so they don't spend more than they make.   

Six Steps to making a budget:

1- If you are married, include your spouse.

2- Make a list of all income.

3- Make a list of all expenses from the previous month

4- Determine your needs versus wants. Sometimes we may think we need something, like a new ski boat, when we actually don't. We would like one, but we don't need one at that time. Instead, a need may be something like groceries. You definitely need groceries on a regular basis. We will discuss this topic further next week in another post.

5- Structure your budget so that you are paying yourself first, i.e. paying towards your savings or debt reduction, and your bills second. It is important to put money towards your savings or debts first and then set your budget. If this is done in reverse, your savings and debt usually don't get paid.

6- Determine if your goals are realistic

Second, start setting financial goals after you have set your budget to determine your spending needs.

I suggest setting three goals. First, set two financial goals that you want to meet in five years from now. Second, set two financial goals that you want to meet three years from now. Third, set two financial goals that you want to meet by the end of 2008.

Last, exercise patience and evaluate your progress month to month.

Overall, with anything in life, it takes patience, self-control, patience and more patience to actually start accomplishing your goals. Over time, as you continue to use your budget and stay on track with your goals, you will see results.

Feel free to ask questions or make comments.