Experiential Platform: how to budget personal finances

Here’s a timeline of this presentation:

The question

The expenses side: What would you cut first in order to survive?

The income side: How could you double your income next month?

In order to derive any benefit, you’ll need to really adopt the mindset implied in the question. Don’t focus on whether it’s possible, but instead on what would realistically be the first expenses to go and the first steps to replacing the income.

Once you’ve made a list for both sides of the question, you’ll want to review it for any areas that seem realistic, even at your current full income. For example, your first steps may include selling an extra car, canceling an expensive cable package, and slashing your grocery budget in half. In this situation, you’ve likely brainstormed areas of your budget where you aren’t spending as optimally as you may like. You may choose to go ahead and try some of those options out, or at least take steps to narrow the gap between your life at 100% income and your life at 50% income levels.

The same process is important when attempting to make the income back as quickly as possible. Realistic options could include enrolling in a course (applying for aid if needed), launching a side business, and/or picking up new clients or leads. Nearly every time I brainstorm options for doubling my business income, I unearth something I hadn’t thought of before. Acting on these new ideas has helped me tremendously in generating new income (even if it doesn’t immediately double it)!

The next time you’re feeling a bit complacent in your finances, try exploring this simple question. What would be the first expenses you’d cut in order to survive on only half your income? What would be the first steps you’d take if you had to earn it back? I think you’ll be pleasantly surprised by the results of this experiment!

Here’s a timeline of this presentation:

The question

The expenses side: What would you cut first in order to survive?

The income side: How could you double your income next month?

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The most important factor of growing up is learning how to manage our money. Chilton (1998) claims that most of us learn money management from our parents along with their values, beliefs, spending habits, and how much they share and teach us about money. Even though most of us listen to and follow the fundamentals our parents instilled in us, we still develop our own values, beliefs, and habits. As we gain our own ideas, and learn an understanding of personal finance we can develop a plan to benefit from proper financial planning.

Financial planning is an essential element to personal finance by setting up goals and a path to meet your goals creating that personal freedom for those who strive for it. Financial planning consists of budgeting, savings and investing in your future. A strong budget allows managing your money to include savings and investing. The key step in knowing how important savings is in a financial plan is you can go far with out it. Without savings you can't accumulate enough capital to invest, or if something were to happen you may have to cash in valuable investment with a huge loss due to unexpected emergencies.
A financial plan specifies your financial goals and sets a path to achieve those goals. With a good understanding of personal finance you have the ability to make your own financial decisions. A good understanding allows you to judge and give yourself sound financial advice. The whole idea of Chilton's novel, "The Wealthy Barber", is to save money now and live better in the future. By making sound financial decisions you can create wealth for the present and well into your retirement and after.

A few benefits of understanding personal finance are being able to protect your assets and income. If something terrible were to happen to yourself or your spouse, the right planning and the knowledge of having the proper insurance is all you need to protect yourself and your family. Knowing how to invest in stocks, bonds, mutual funds, and real estate can produce a substantial return to benefit you in the future. The right understanding allows you to minimize risk and maximize returns. The proper understanding of how to save and invest can lead to accumulate sufficient money to support yourself after you retire.

A true understanding of personal finance allows us to buy the best house for our family, put our children through college, and retire young enough to enjoy the remainder of lives with our loved ones. Getting a financial advisor without the proper understanding where your money is going can be very dangerous. Your ignorance can lead to someone taking advantage of you and your money, which could cause you to lose your entire nest egg. An understanding of how to manage our money, assets, and investments is our responsibility and we can reap the benefits in the long run. When it comes to personal finances "people are reluctant to discuss personal finances outside the family circle, except with financial advisors-bank managers, solicitors, accountants - whose professional standing provides an assurance of confidentiality." (Aldridge, 1998: pg.8)

Usually one does not talk about savings with their financial advisor, because it's always about what are the best funds or stocks to increase their net present value. It is essential to know how much to save and how to make it work for you. Savings can be viewed as short-term goals or long-term goals. A short-term goal is saving extra money for a short period of time for a major purchase, like a down payment on a house or car, possibly a household renovation. These types of items that you would normally save for minimize your payments or avoid an interest bearing loan. Long-term savings goals are plans to have readily available cash at hand, with no plans on spending it unless of an emergency. It's a long-term savings because you can maintain it until you retire and it continually builds dividends. A common long-term savings goals is an emergency fund that should consist of a minimum six months worth of salaries and if able up to a full years salaries. In addition to an emergency fund a sound financial plan should have money allocated to another savings account on a monthly basis.

Credit management is important because you can't survive without it. It's important to consider you can't buy a house, a car, or get a credit card without some kind of credit history. Credit management begins with your first bank account and doesn't end until you die and in some cases it can out live you. You start to establish history with every dollar you save and spend. Starting off right is the first step to establishing a good credit history. You have to manage your credit by paying your debts on time. The better your credit gets the more creditors want to give you and this can be trouble. Your one credit card turns into five cards, as a result you then have a new car loan, and you're using your credit cards to pay other cards and your car payment.

This is a typical situation with inexperienced people who do not know anything about credit. It's very common for a family to go out for a night on the town and take a credit card. A credit card may carry a fee, and also a risk of theft and forgery, but it is very convenient and the free credit period allows money to be held temporarily in a form earning more than a bank account. (Robinson/McGoun 1998).The convenience and safety of credit cards offer you just can't get with cash. Credit cards are the most used form of credit and have the potential to be misused. If you misuse credit it usually will takes years to recover and you have established a bad credit history. Tyson (2006) recommends that you "get all three of your credit card reports, and be sure each is accurate".

In addition to credit cards you have various types of loans. You have personal loans, car loans, house loans and school loans which all build your credit history. Credit management affects what kind of loan you have available and the terms of the loan. With bad credit, loans have a higher interest rate and they can take longer to pay off. Once you learn good credit management you can use it to your advantage in financial planning. Wisely choosing the best loans and terms of your choice vise the creditors is an advantage. When doing your financial planning, the amount of credit you can afford to have is very important because it can lay the framework to a successful financial future.

Buying a home may be the single biggest investment you will ever make, so the decision should be taken very seriously. As claimed by Chilton (1998) it is said that about ninety percent of the world's millionaires have become millionaires through real estate. (pg. 60) With that said not everyone is ready to buy a house. When it comes down to it the decision is it better to buy a home or rent? In addition Barnes/Jaret (2003) states achieving the "American Dream" has often been associated with living in a thrifty manner, accumulating savings, and subsequently purchasing a home of one's own, which then appreciates in value and becomes a large component of one's personal wealth. When it comes to purchasing a home there are a lot of factors to be considered.

First the larger the down payment the better chance you have of getting the home you want. You need a house to meet your needs and a house you can afford. A house provides security and it represents your own little piece of that "American Dream". Every month that you pay into that a house you can say you own just a little bit more of that dream. With a little luck as the years go by, your house appreciates in value. Once you pay it off or sell you can feel like you made a difference in someone's life, to include your own. A down side of owning a home is you can tie yourself to a location and into a deal that you can't get out of easily. "Patience is always one of the most valuable attributes in investing, and nowhere is that more true then in real estate. It may go down, but it seldom stays there indefinitely." (Chilton pg. 62)

Determining the amount of life insurance is the most important in financial planning because the amount can focus the way you chose insurance. There are two methods of determining how much life insurance is needed. The first income method is a general formula for determining how much insurance based off your income. The income method suggests you multiply your annual income by ten. This is a straight line method that doesn't take into account a single person salary vise a family of four which will require more life insurance. The second method is a budgeting method, which determines your life insurance needs by considering your future budget based on your household's future expected expenses and your current financial situation.

The budgeting method takes into account your annual living expenses, special future expenses, debt, the job marketability of your spouse, and the value of your savings. Robinson (1998) highlights, in budgeting, we treat all sources of income identically and add them up. However, a formal model based on some theory of smoothing lifetime income and consumption would allocate a large part of any windfall into savings rather than expenditures. Once you have established the amount you need for life insurance, you have to consider what kind of life insurance that best suits your needs. When it comes to your financial plan, investing is an intricate part in securing your future. Money management is about short-term and long-term planning, and having a nice size nest egg, as you get closer to retirement.

Chilton (1998) recommends to not throwing all your eggs in one basket. To avoid living pay check-to-pay check, we have to plan and learn to invest in our future. In today's market you have so many choices that you can invest in. Depending on your willingness to take risks and where you want your money will set the basis for you individual investment portfolio. Some of the most common types of investments are IRA's, Stocks, and Bonds; each type of investment has its advantages and disadvantages.

Chilton (1998) recommends indulging in the stock market. Stocks are very popular and can be a risky investment and can produce a larger return or break you over night. A stock is a certificate of partial ownership of a firm. With the Internet, the option of buying stocks is easier than ever and has introduced new opportunities to an individual investor. It uses to be that you had to look for professional help but now it a few clicks away. Stocks are riskier investments but yield higher returns. Common stock is basic stock sometimes giving you rights to vote and elect board members who will run the company. Preferred stock guarantees you to receive dividends over the common stockholders. The downsides to stocks are the price of stocks can drop and you can lose an entire investment.

Another way to make yourself more financial set is to watch your spending as sated by Tyson (2006). Tyson recommends reducing spending in order to become more financially set. Simple ways to avoid spending money are as simple as using public transportation, using regular unleaded gas and servicing your car. Also it is important to avoid buying clothes that require dry cleaning, not indulging in the latest season's fashions and to keep accessories to a bare minimum.

No matter how you decide to save money and invest money, it should be made to fit as part as your financial plan. Both Chilton and Tyson make very good points about spending and saving, what to invest your money into and what not to. I have learned a lot about my personal finances through reading these two books. I found that Chilton's book was more of a story and more personal, then Tyson's to-the-point facts about finance. Out of the two books I think that I learned more from Tyson's, but both were enjoyed. Also both books made me realize that really I am investing in myself and my future.

References:
-Aldridge, Alan (1998) "Habitus and cultural capital in the field of personal finance." University of Nottingham

-Barnes, S & Jaret, C. (2003) Sociological focus The "American Dream" in poor urban neighborhoods: An analysis of home ownership attitudes and behaviors and financial saving behavior. Purdue University and Georgia State University

-Chilton, David. (1998) The Wealthy Barber. Roseville, CA: Prima Publishing.

-Gill, Suveera (2005) An Analysis of defaults of Long-term Rated Debts, Vikalpa volume 30

-Robinson, Chris and McGoun, Elton (1998) The sociology of personal finance. Financial Services Review 7

-Sandlin, Jennifer (2005) Culture, Consumption and Adult Education: Education for adults as a political site using a cultural studies framework. Texas A&M University

-Tyson, Eric. (2006) Personal Finance for Dummies 5th Ed. Hoboken, NJ. Wiley Publishing, Inc.

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how to budget personal finances

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