Basics

I’ve taken the lessons my mother has taught me about planning and budgeting and broken it down into six steps. Follow these to establish your personal finance plan, and you will have the foundation in place for success — no matter what small obstacles or larger life events may come your way.

Here are the six (in order):
1. Figure out your net worth.
2. Set goals for yourself.
3. Determine how much money you spend per month.
4. Take your paycheck and start allocating for your expenses.
5. Set aside your savings.
6. Adjust accordingly.

Common cents? Sure, but sometimes we all need to get back to basics. Read on for more information on each step.

Figure out your net worth.
I firmly believe that you need to know how much you’re worth, whether positive or negative, before setting any goals. If you don’t know what your current financial situation is, then how is it possible to set the proper and necessary goals for yourself? People see the term “net worth” and freak out about how to calculate it — it’s not as hard as you think. It’s actually pretty simple.

Basically, your net worth is assets (what you own) minus liabilities (what you owe).

Examples of assets — short term, long-term, and tangible — include:
— checking accounts;
— savings accounts;
— money market accounts;
— stocks;
— bonds;
— 401(k) or a similar retirement account;
— IRA (Roth or Traditional);
— life insurance;
— house;
— car; and
— boat.

Examples of liabilities include:
— student loans;
— mortgage;
— credit card debt; and
— personal loans (for a car, etc.).

For me, that means taking my assets (checking, money market, stocks, bonds, certificate of deposit, 401(k), Roth IRA, and life insurance) and subtracting my federal and private student loans. The last time I calculated my net worth, the first week of September 2009, my assets came to $86,443.20. My only liabilities are my student loans, which is approximately $34,720.38. So, my net worth is $51,722.82.

Set goals for yourself.
Now that you know your net worth, you can set your goals accordingly. If you’re not sure where to start, talk to people you trust. I suggest breaking up your goals into short, medium, and long term.

Here are my goals for now:
Short-Term Goals:
— Stay in the black.
— Remain on top of day-to-day finances.
— Keep disciplined.
— Enjoy myself within reason.

Mid-Term Goals:
— Save money for my gym membership.
— Save money for next summer’s vacation.
— Continue contributing to 401(k).
— Save money for Roth IRA.
— Establish/maintain multiple revenue streams.

Long-Term Goals:
— Purchase or rent a place of my own.
— Pay off all college loans in full.
— Become financially independent.

Determine how much money you spend per month.
Now is the time to take all of your monthly bills and expenses, and add them up.

Let’s say that you pay the following bills every month:

  • Rent — $850
  • Utilities — $100
  • Cell Phone — $100
  • Cable/Internet — $60
  • Transportation — $60
  • Charity — $20
  • Food — $120
  • College Loans — $360
  • Gym Membership — $70
  • Discretionary Expenses (going out, etc.) — $160

That’s a grand total of $1,900. This is essential to know when you move onto the next steps.

Before we get there, though, a word about some bills that you may only pay every six months or so. It’s best to break them down by month and include them on the list. That way, you can set aside money monthly and not be surprised when you get your car insurance bill in the middle of the year, for example.

It also may be hard to figure out how much to budget for discretionary expenses, since it could vary. The best thing to do is save every single receipt you have from going out, shopping for clothes, etc., and write it down for one month. See how much you spend, and add that to your list of bills and expenses. It’s best to maybe overestimate a bit, so you budget for more and create a cushion for yourself.

Also, oftentimes utility bills can vary depending on usage (unless you pay a flat budget rate per month and then either owe or are due money at the end of the year). If you pay the bill in full each month, take the highest bill you had (probably either in the dead of winter or heat of summer) and imagine that is your bill each month. That way, you create a cushion for yourself during the fall and spring when you generally don’t spend as much on utilities and don’t have to worry when peak usage months — usually in the winter and summer — come along.

Take your paycheck and start allocating for your expenses.
First, take 10 percent of your paycheck and earmark it for savings. Write the figure off to the side, and save it for later. We’ll get to it.

*A quick word about tithing. Depending on your religious beliefs, you may have been taught that you should set aside a certain percentage of your earnings for God, the church, whatever you believe. This decision is personal, and entirely up to you. I was raised in the Catholic Church, but do not set aside 10 percent of my earnings for tithe. I do contribute monthly to one charity, and budget money accordingly. I can tell you it is far less than 10 percent of my earnings. I believe that if you are to set aside money for God, that you should have a purpose for it. If that means contributing to it weekly at church, fine. Charities? Fine. But do it for a reason. If you don’t have a reason, or are not able to, then don’t do it for now. As you get older and your income grows, if you want to reassess for philanthropy, then do so at the proper time.

Now, onto the expenses. We totaled the bills per month — I’m going to operate under the assumption that you receive a paycheck twice per month. Therefore, I’m going to take all of the bills listed above and split them into two.

Now let’s say that after taxes, insurance, disability, 401(k), or anything else that is taken from your paycheck before you receive it, you clear $2,500 per month. You get paid twice per month — so every two weeks, you get a paycheck for $1,250. Now, split all of your monthly bills into two, and allocate enough funds for half of each of the bills (if you get paid weekly, split it into four, monthly, don’t split it at all, etc.). So, for the bills I listed in the last step, this is how the paycheck should be allocated:

  • SAVINGS: $125
  • Rent — $425
  • Utilities — $50
  • Cell Phone — $50
  • Cable/Internet — $30
  • Transportation — $30
  • Charity — $10
  • Food — $60
  • College Loans — $180
  • Gym Membership — $35
  • Discretionary Expenses (going out, etc.) — $80

That is a grand total of $1,025. Mind you, we’ve already taken out 10 percent for savings, yet this example case has $225 left. How lucky! Now, how you use this money depends on the financial goals you have already created for yourself. If you are just starting out and have no emergency fund set up, I would suggest that you take the extra money in addition to your preallocated savings and put it toward your emergency fund. We’ll talk more about that in the next step.

If you have an emergency fund set up, you can take the extra money and set it toward your saving goals, or keep it in your checking account and pad your allotment for discretionary expenses, food, or transportation — whatever your specific needs are. It’s up to you, so choose wisely. More importantly, choose according to the goals you have already set for yourself. Do this with every paycheck you receive.

Set aside your savings.
Now that you’ve already earmarked a particular amount for your savings, it’s time to allocate it according to your goals. Let’s say that this example case is fresh out of school and has no emergency fund set up, no cushion whatsoever. This person wants to have a six-month emergency fund for his vital expenses before saving for any of his other goals.

Going back to his list of bills above, the only things I would subtract are the gym membership and charity. These are not vital to his keeping the lights on. But honestly, you may feel that you have to go to the gym — you need to determine for yourself what you would need during a time when you’re not getting a regular paycheck. I would cut in half his discretionary expenses, because if he was out of work, he should realize he needs to cut back on going out until he gets back on his feet.

So, let’s say that per month (without charity, gym membership, and half of discretionary expenses), he would need $1,730. Multiply that by six months, and he would require a cushion of $10,380. I would take the $125 per paycheck, and the $225 extra per paycheck and stash it away in a savings account until he reached that amount.

After that is when the fun begins. Since you have an emergency fund in place, you can start taking your savings and allocating according to your goals. Let’s say that he wants to save for a Roth IRA contribution, vacation, and a new car. If he takes $125 and $225, a total of $350 per paycheck, he can split it among the three, and let interest add an additional boost.

How you split it depends on your goals. If the vacation is coming up in three months, but you don’t see yourself buying a car for eight months and won’t contribute to your Roth until the end of the year, then I would put slightly more money away for vacation. That’s me, though. How you split it is up to you, and that’s the beauty of it.

Adjust accordingly.
Now that you’ve put your plan into place — keep track of it all in a budget book. That way, you have it right in front of you and can track your progress as often as you’d like. I recommend reconciling your checkbook and savings accounts every time you receive your monthly statements in the mail (or email).

I also assess my net worth once per month, but do this according to your comfort level. If you’d rather do it every other month, or even quarterly, that works as well. I would just caution against only doing it once a year, and doing it more frequently than once a month. A lot can happen in a year, and quite honestly, checking your net worth every week will drive you crazy more than anything.

When you do reconcile your checkbooks and recalculate your net worth, more often than not if you have a good plan in place using my process, you shouldn’t have to change things much. But, if you have a major life change, it is important to readjust your allocations and your budgeting to meet those needs.

The beauty of having it all in front of you, on paper, is that you have a living history of how you have budgeted thus far. This will help you see where you’re at, where you need to be, and how to fill that gap.

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3 responses to “Basics

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