Q.I make a good living but just can’t seem to figure out where the money goes each month. How do I get back in control?
A.There is no silver bullet when it comes to long-term planning. Being responsible with money takes hard work and discipline, but the long-term rewards more than compensate. That being said, there are four principles to wise financial planning that can apply to any income level:
Spend less than you earn
This is where a spending plan can be useful (notice I didn’t say budget). A spending plan is the same concept as a budget but it is more than just a “limit” on what you can spend each month. It is a plan where you decide in advance where the money will go.
You may have heard the expression, “Give every dollar a name before you spend it.” There are really only five categories where money can go: taxes, giving, long-term savings, debt repayment and lifestyle expenses. A good spending plan will aim to have at least 5 percent of your income going to long-term savings. That being said, it should also include line items for things you enjoy for fun. If it is too rigid, there’s a good chance you will sabotage your own plan.
Minimize the use of debt
Simply stated, borrowing less now creates more freedom later. Imagine what life would be like without that car payment every month, or better, no mortgage payment. Plus, you may be surprised by how much interest expense you avoid by paying a mortgage earlier than scheduled. It may take hard work and extra room in the spending plan to accelerate loan payments, but the resulting freedom is a sweet reward.
Establish liquidity (emergency savings)
When life happens, wouldn’t it be great if you could be your own banker? Having a reserve will help minimize interruptions to the spending plan. The general rule of thumb is to have three to six months of living expenses in a separate savings account at all times. Your emergency savings should be just far enough out of reach to avoid the temptation to spend impulsively, but accessible enough for true emergencies, like unexpected medical bills or a leaking roof.
Think long term
This is perhaps the most important principle, because it provides perspective. Imagine that life is a glass bowl, the important things in life are big rocks, and the daily minutiae are grains of sand. If we pour sand in the bowl first, and then try to add the big rocks, they won’t fit. But if you add the rocks first, then pour in the sand, the sand will flow around the rocks to fill in the gaps, and everything fits in the bowl.
Don’t let the sand of life crowd out the more important things. Dream. Set goals. And talk with your trusted adviser about creating a plan to help you live your life on purpose.