How to Build Your Financial House

When you’re first beginning the process of trying to take control of your finances, it can be totally overwhelming. In a world as complicated as ours, you find yourself having to juggle so many payments and fees and bills that it’s hard to know where to start.

But those who won’t care for their relatives, especially those in their own household, have denied the true faith. Such people are worse than unbelievers.

1 Timothy 5:8

The right way to start is by building your financial household first. Get to know what your core basic needs are and take care of them before you worry about anything else. Unfortunately, our complicated world has begun to confuse what a need is, so let me elaborate. Basic needs can be limited to three categories, which make up our roof in the picture below.

Healthy: The stuff that keeps your family alive and in reasonably good condition. This will include groceries and any medicine your family must take. (i.e. medicines for high blood pressure, diabetes, chronic depression, and the like. My acid-reflux medication wouldn’t make this list.) It might also include health insurance and/or co-pays.

Safe: The stuff that keeps you out of the elements and a reasonable amount of security. This will include your basic utility services (such as electricity and water) and your mortgage or rent. You might want to include the cost of necessary home repairs here as well. Don’t include every possible security measure, though. No amount of money can make you 100% secure.

Productive: The stuff that keeps you generating an income and ready to work. This will include transportation, which could be a car, a bus pass, or a good pair of shoes. It will probably also include a phone of some kind. It might include Internet access and an email account, a reliable cellular phone, and a reasonable clothing budget.

In all cases, the goal is to determine a reasonable number for your basic needs. Keep your numbers realistic, and don’t overload any of the categories with fluff you really can do without. For example, a young couple, just married, probably shouldn’t be spending $800 each month for groceries. A $200 per month cell phone contract with all the bells and whistles doesn’t qualify, either. And an Xbox will never be a necessary component to maintain productivity, no matter what anyone says.

Also, you’ll have to plan for different types of expenses.

A good example of a fixed cost expense would be your mortgage or rent. It’s a bill that’s due every month, and the amount owed doesn’t change very often, if at all. They’re predictable costs, and we wish that every core item was a fixed cost expense. Unfortunately, they’re not.

A variable cost expense would be things like gasoline for your car, or your electricity bill. Each month the amount spent on this item is going to change, either because the price of the good is constantly under change (gasoline), or your use varies (electricity). The is the simplest thing to do is put down a number that represents a high average for that item that month. It’s rare that you’ll find yourself at risk of going over.

Items like car maintenance or clothing would be a non-monthly expense. It’s a cost you know will be coming eventually, and you’re socking money away for it now so it won’t break the bank later. Use a savings account and put a little aside every month for each of these types of expenses.

Making sure that you’re covering your basic needs gives your budget a foundation to build on. It shows you that, no matter what else happens, you can keep the lights on, put food on the table, and stay employed. And if you’re not covering your needs, then it’s clearly time to improve your income. Without any margin, you’ll never be able to move beyond the struggle of living paycheck to paycheck. Every dollar earned above that core is the fuel to be used for reaching financial goals, but you have to build your financial house first.

This is the form I built based around the information in this post. I’m using it to help people start getting their finances in order when they’re struggling. Feel free to share it, or this post, with others.

The total you figure from your core needs can be used as a base number for your emergency fund. How many months can you live off of your savings when you’re just taking care of your basic needs? How many months do you want it to be?

Becoming Wise

There once was an old man known for his great wisdom and a young man asked him how he became so wise. The old man said, “I have good judgment.” The young man said, “How did you get good judgment?” The old man replied, “I have experience.” Of course the young man asked, “How did you get experience?” The old man answered, “Bad judgment.”

– Dave Ramsey, EntreLeadership

A failure is a project that doesn’t work, an initiative that teaches you something at the same time the outcome doesn’t move you directly closer to your goal.

A mistake is either a failure repeated, doing something for the second time when you should have known better, or a misguided attempt (because of carelessness, selfishness or hubris) that hindsight reminds you is worth avoiding.

– Seth Godin

Trying something and failing is fine. It gives you a chance to learn something new, which gives you experience, which leads you to become more wise.

Mistakes are fine, too, but they’re an indication that you didn’t close that loop when you were given the first opportunity.

How much better to get wisdom than gold!
To get understanding is to be chosen rather than silver.

– Proverbs 16:16

What mistake are you making again and again? What do you need to learn from it?

Quick Hits of the Week

• Last week, Dan Miller and his son Jared released their new book, Wisdom Meets Passion. The need for passion was a big thing for me to get my head around. See, I don’t hate doing my job, but I don’t have a passion for it. When I sought out purpose in it, I couldn’t easily lay my hands on it. Nothing about it moves me or frustrates me. I can’t see myself ever leading there. I realized I needed something more, and I began moving towards work that I could celebrate. I’m looking forward to getting this book and reading through it. Jared seems like a remarkable young man with a fresh voice that will only add to his father’s already impressive insights.

• What if everyone actually had only one soul mate, a random person somewhere in the world? Our chances of finding them would be stupidly small. We should be really glad that we can make do with most of our fellow human beings.

• It was announced last Friday that Paragon Studios, developers and maintainers of the long running MMO game City of Heroes, was being closed down immediately. City of Heroes will be shut down on November 30. Now, this was sudden, the reasons given by parent company NCSoft were vague (“a realignment of company focus”), and unsurprisingly the extremely loyal core fan base has responded with vary degrees of shock, sadness, and fury. There is an online petition calling for NCSoft to keep the game alive. There are grassroots plans to try to get the game under a new studio. However, the consensus is that these efforts have a slim chance of succeeding, despite what NCSoft’s mission statement might claim. I’ve played City on and off over the last several years. I’m going to miss it when it’s gone, and I’m going to miss the characters I was able to create. I don’t know if I’m going to find another game to replace it. I loved being able to fly.

• I love this kid’s entrepreneurial spirit. I hope he never lets it go.

Is there something valuable or important or cool or funny or weird or awesome out there I missed this week? I can’t hit it all, but you should let me know about it by dropping me a line or sharing it in the comments below! I’d appreciate the heads up. Leave your replacement game suggestions in the comments, too.

The Best Defense…

As a financial coach, one of my key responsibilities is to teach you, my client, strategies to overcome your financial troubles and to start succeeding with money. When that happens, it frees you to be more generous and more available to follow your dreams. When that happens in the lives of enough people, it can change the world, and I love being a part of that.

But, I digress.

And I really just want to discuss that word strategy. It’s important. When you’re choosing a strategy, you are deciding on a plan of action, and developing tactics to fall back on when things don’t go according to that plan. Every winning strategy has two key components: Offense and defense.

OFFENSE

This is your income. However it is that you go out and bring the money home is time spent on the offensive.

And we spend a lot of time and effort on the offensive.

We work long hours to earn overtime and get big bonuses.

We fight and negotiate for better raises and compensation.

If the money is good, we move into management. We might even change careers altogether.

There’s nothing wrong with having a great offense. In fact, without it, you’re not even in the game at all. You need to put forth your best effort if you want to succeed. Never sell yourself short when it comes to your income.

However, beware the opposite problem. You can’t spend all of your time and effort on the offense. There’s a common misconception that if you earn enough income, your money will take care of itself. That if your offense is good enough you can ignore your…

DEFENSE

… and that’s a lie.

Your defense is all about your spending. How well you control every dollar leaving your home is time spent on the defensive.

And we don’t usually focus a lot of time or effort on the defensive. Spending still happens, because it has to, but we don’t like to think about the when, where, and why about each dollar that leaves.

Off the top of your head, do you know how much you spent on food last year? What about clothing?

How much do you annually spend on your electric bill? What about your mortgage payment?

How big a chunk of your yearly income do each one of those items take?

Being great on defense means not only knowing how much is going where, but also being careful and frugal when spending.

This is where I spend most of my time when coaching people. When a family is forced to come face to face with their poor spending habits and complete lack of defense, when they see how little they must have to survive, and how much is being wasted, they’re free to change. Their budget becomes the key to achieving goals and their ultimate success.

So, how’s your strategy? Is your offense hurting? There’s only so much you can cut before you have deal with your income. Don’t neglect your offense.

Is your defense in shambles? No matter how much you earn, you will always find ways to spend it if you don’t have a plan. You have to start making a budget. Don’t neglect your defense.

Questions: What’s your strategy? How’s your defense? Get political and think about how great your city government is on offense and defense. How could changing individual families habits affect the community you live in?