Let’s get (back) to financial basics.
Hey fellow-traveler, it’s me, Journey-Man and I am in month two of my financial journey. I am starting to understand there are some basic things I have to know (and do) if I want to fix the mess and manage my finances correctly.
So, can you answer these questions quickly?
If you can’t give detailed and accurate answers to these simple questions, you need to keep reading.
You too may look at people saving and investing and wonder why you just can’t seem to get there. The answer, as simplistic as it may sound, is you probably don’t know the basics. You’ve probably never known the basics.
That isn’t something to be embarrassed about. I mean, if you think about it, if you’ve never been shown or taught the basics of managing your money, how would you know what to do to get ahead? How would you know that making more money won’t necessarily make you wealthy, it rarely does. I know, for example, that my aim in life, when I started working, was to work hard. I sincerely believed that if I worked hard, I would make money. I believed that if I made money I would eventually be rich. That was my naive logic. Work hard, make money, get rich!
But it didn’t work, even when I worked harder and made more money.
There are many people who apply similar logic and end up poor, without enough money to retire or without enough money to survive. I think that some of the hardest workers are the poorest old people. I also think that some of the wealthiest people aren’t really hard workers. Something is wrong here!
The answer seems to me, to be that unless you understand the basics of personal finance, you can work as hard as you can – you may just end up poor and tired.
I’m not sure that my parents really knew how to manage money. I don’t say that to be disrespectful (my kids could have said the same thing a few years ago) because they never really taught me about money. I think my parents passed on exactly what they knew about money and, had I not decided to start this journey, what I would have passed on to my children.
Do you remember personal financial planning as part of your curriculum? I can’t remember that far back but I am pretty sure school taught me nothing about managing my money. I’m sure things may have changed, I am sure that my kids are being taught something about money – but that isn’t going to help me much.
I’m not trying to blame here. My parents did their best, my teachers did their best. But the reality is that I managed to get through childhood and school without a clue (maybe that’s just me, please don’t judge me). When I started earning money, I did exactly what I saw everyone around me doing – I started spending!
We need to break this cycle and map a new path for ourselves and for our children. To do this we need to get back to financial basics.
Eish, is it that simple?
It can be that simple. If you can sort out the basics, you can build a solid foundation and you can actually make your money grow and work for you.
Let me tell you again:-
PS. If you are married, the ‘You’ in all of those questions would apply to both you and your spouse.
When you know what your ‘real’ situation is, when you know exactly where your money comes from and where it goes to, when you really know what your debts are – only then can you start moving ahead. I am not a financial planner (we will keep telling you that and, if you need a financial planner you can find one here) but my personal experience has been that I cannot save or invest when I am paralysed by debt (which comes along with a healthy dose of anxiety, which paralyses even further).
You can make a very simple start to the basics by just knowing your current situation. Do you know your assets and liabilities? These aren’t scary words, they are important words. Often, when we battle with money, we stop just there, believing that we don’t have any assets and therefore this ‘personal financial planning’ is for other people.
Please don’t beleive that. If you don’t have assets (or if you don’t really understand what assets you have) you may still have liabilities and you need to gather accurate and detailed information so that you can fully understand your assets and liabilities.
Assets are those things you own, that have monetary value. These may be a house you own, your bank balance, an investment or some cash you have buried in the garden (we know you do that!).
Liabilities are simply your debts, what you owe and have to pay back. This may be your credit card debt, retail accounts or loans you have to pay back.
You will need to know exactly how much you earn and how much you spend. This sounds so simple but very often we understand what we earn but we don’t (and we often don’t want to) understand what we spend.
If you take your after-tax income and deduct all of the expenses that you have to pay each month (rent or home-loan repayment, travel to work costs, utility payments, your food costs, school fees, your phone costs etc.) you will get to a value that we will call ‘What’s Left’. Don’t include any of the take-away food costs, going out with friends costs or luxury items spending in your ‘What’s Left’ amount.
If you have done this properly you now have an accurate view of what you money you have left each month. Now you need to work out the best way to use ‘What’s Left’.
You will need to work out what ‘bad-debt’ you have. As mentioned earlier, there is a difference between good-debt and bad-debt. Good-debt is debt that is building wealth, this may be a home-loan for example (where you are paying off an asset). Bad-debt is where you have borrowed money to buy something with no long-term value. This would be retail credit card debt for example (paying for groceries on a store credit card and not paying within the required time and thus incurring high-interest rates). Bad-debt usually carries with it high-interest rates, will never increase your wealth and will never provide an income.
To move forward meaningfully in your financial journey you need to deal with this bad debt. You need to identify your bad-debt (do you know the interest rates on those credit cards of yours?) and you need to deal with your bad-debt.
So let’s leave it there for this time.
If you are really serious about changing your circumstances, your financial situation, your life – you need to come to terms with the details of what you own and owe, what you earn and spend, your good-debt and your bad-debt. When you know these things you can move forward. The road to saving and investing is ahead.
Keep going fellow traveler!
Until next time, this is Journey-Man
Working hard, walking hard and taking drastic action. Not just for myself, but for my kids and the next generation of Journey-Men and Journey-Women.
Next time on LSJ* : Back To Basics Part 2
*LSJ : Late-Starter Journey (of course)