Today we are living in an uncertain economy. There is talk of changing and increasing taxes, of a failing Social Security system and of skyrocketing educational costs. Given the various financial uncertainties, it is more important than ever for you to apply financial planning principles to your personal life. Budgeting is one of these key principles.
The majority of American households are in significant debt. According to a study in Time Magazine – May, 2016, the average American household has total debt of $90,000, which includes households that live debt free. The average households with debt owes more than $130,000. This debt burden is costing the average household more than $6,600 in interest per year – about 9% of the average income.
Many do not have a budget and as a result most households have no idea where they spent their money last year. A personal budget can provide this information and can help you take control of your financial life.
The Last Step
Typically, people think of budgeting as a first step in the financial planning process, but it should actually be one of the last steps in “simple” personal financial planning. Here is a basic overview of the process.
First, summarize your present financial position. Gather information about your assets, liabilities, income and expenses. Next use this information to prepare two basic personal financial statements. The first is a personal balance sheet. This statement shows what you own and what you owe, concluding with your “net worth”. The other is a cash flow statement, which lists your various inflows and outflows. Combining these two statements creates a financial picture that can help you identify your own unique financial strengths and weaknesses.
Second, establish your financial goals and write them down. Your goals should include both short-term and long-term objectives. Reducing current debt, planning for children’s college education or retiring at a certain income level are a few goals you may want to consider.
Finally, increase your cash flow. To reach your goals you will need to maximize cash flow. Review your cash flow statement and identify inflows that could improve your net worth and also identify discretionary outflows that can be reduced to help you meet your financial goals. Remember, cash flow is just one part of the equation. When you shift your focus from growing your income to growing your net worth you will be in a mindset that leads to a financial independence.
Keep in mind that the main idea of a personal budget is to map out your income and expenses for the year and track what actually takes place. Then, evaluate and revise as needed. A budget is a guideline to manage your finances, not a rule book to govern your daily activities. Keep the process simple and utilize a computer program like Quicken or Microsoft Excel to aid in the process. Developing a personal budget takes time. But, once the plan is established, it should not require much time to maintain it. Soon you will be managing your money instead of it managing you, and your financial future will be much more certain.
Do you need to establish a financial plan? Or, do you need an objective look at a current plan? Are you giving thought to your retirement years and wondering if your nest egg will meet your requirements? Do you have questions about Social Security and when to start taking your benefits? Is the savings plan you have in place for your son or daughter’s education adequate? If you have some of these questions or others and would like assistance with mapping out a plan, give me a call to start or review your personal financial planning.
The Basics of Personal Budgeting
- Accumulate and review income and expense data from prior years.
- Create a listing of major income and expense categories for your household.
- Set personal short-term and long-term goals. Plan for reducing current debt, funding children’s college, or maximizing retirement contribution.
- Draft the budget. Using your recent historical income and expense data, project the figures to next year by line item. Be sure to take your goals into account.
- Implement the budget and strive for income and expense goals.
- Monitor the budget monthly. Fine tune the budget as personal circumstances change. Use the budget to monitor the financial performance of your household.
Mike DeVries is a CERTIFIED FINANCIAL PLANNER ™, Enrolled Agent, and a Certified Healthcare Business Consultant focusing on helping healthcare professionals. If you would like to learn more about becoming a client, contact Mike at www.vmde.com.