We all want financial security. We want to make enough money to support our lifestyles, raise and educate our children, save for a wonderful retirement, and (of course!) have fun along the way.
So to achieve it all, what will help you more – having a financial plan or a budget? The answer is both!
Wait…But I Thought You Said …
Hey, wait a minute, from your last article, I thought you hated financial planning and basically called financial planning one big marketing scam?
Hold on. What I said was thatI am against financial planning when its sole purpose is to make a sale or to market a financial service. Not all financial planners are about making sales (most are, but not all). In actual fact, a well-documented and thought-out financial plan is an essential element when working toward your financial security. And another important element is a complete and accurate budget.
But First…Think of Yourself as a Business
One good way to view and approach your quest for financial security is to view your personal finances the same way a successful business does – looking at the two important elements: the budget and the financial plan.
A business does not view financial planning and budgeting as an “either / or” proposition. They have an annual budget that guides their day-to-day revenue and expense decisions, and a financial plan that dictates their future goals and long-term decisions.
Step 1: Start with the Budget
Just like a business, you’ll need to start with accurate accounting of your day-to-day revenues, expenses, assets and liabilities. Your budget is critical to your eventual success, as it is the foundation for your business. Here are the two basic components for a complete budget plan: the household budget, and your net worth statement.
The Household Budget: Sweat the Small Stuff
This is where you identify and list all of your day-to-day expenses. Accuracy is critical. The old saying “Garbage in, Garbage out!” applies. Don’t just guess – find a great budgeting software, spreadsheet, or calculator that is comprehensive and detailed.
And don’t settle for a budget that only lists major items. Did you know that most of our reckless, wasteful spending is in the small things (like those daily Timmies or Starbucks pick-me-ups, yet another new hat and so on.).
Your budgeting goal should be the same as it is for any business. In business jargon: “Maximize the value of every dollar allocated to an expense. Wasteful and errant spending should not be tolerated.” Translation?Get serious! Count every penny you waste on the big and little things … because it all adds up to you losing your bottom line!
Your Net Worth Statement: A Snapshot of Your Wealth
Your net worth statement is a snapshot of your wealth by tracking the current value of your assets and the amount of your loans. To calculate your net worth take all of your assets and subtract your liabilities.
So…how do you increase your net worth? You could win the lottery, inherit it, or…like most of us …work hard, watch your spending and pay off your debts.
Step 2: Financial Planning (Even Corporations Need to Dream)
Just like a business, your financial plan should be built around your budget. Your budget tells you how much money you have, how much money you can add to your savings, and how much money you have for paying down your debt.
Your financial plan should adopt a business approach and use real numbers from your budget and net worth statement…NOT estimates. Can you imagine if a business used guesstimates when coming up with a financial plan?
In other words, you have to do some real math. For example, if your net worth is $100,000 today and you can comfortably save $400.00 per month for the next 20 years, at a reasonable investment rate of return of 4% (compounded annually) your financial goal would be $362,047.00.
If this financial goal is inadequate, then just like a business, revisit your budget to see how you can increase your revenue, reduce your expenses, or alter your assets to enhance your ability to achieve a greater financial goal.
Then There’s the Other Stuff: More Than Just Numbers
Finally, after working with all the real numbers, your financial plan should also consider all those things you can’t control – births, illness, death, disability, property destruction, etc. Depending on your personal circumstances, this aspect of your plan may be very simple…or very complex. (This is another article just on its own!)
Remember: Your Dreams Must Be Firmly Planted in Reality!
Attaining financial security requires both an accurate budget, and a comprehensive financial plan. Having a budget without any idea where you are heading is about as useful as having a financial plan without a clue of where your finances are today. (It’s kind of like sitting in a rowboat with only one oar.)
So, if you really want to attain financial security, then start by defining where you are financially today by establishing a household budget and a net worth statement. Then establish and define realistic goals with a financial plan.