Back to Basics: Keep Track of Your Money

Back to Basics: Keep Track of Your MoneyAs I discussed in last week’s post, I want to spend the next few weeks going back to basics on how to get our finances under control.

In my experience, one of the most important skills to develop with your finances is the ability to keep track of your money.

In order to gain control of your money, you need to understand what’s happening with it. How much comes in? How much goes out and for what?

How much money have you saved? How much money do you owe and to whom?

If you can’t answer these questions, you don’t have the level of understanding required to win with your finances.

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So how do you get there? Here are 4 basic, easy things to do to keep track of your money.

The key is that you have to do them consistently:

1. Record Your Expenses

You need to keep a register of where your money is going. You can use the old fashioned approach of your paper checkbook register, computer software.

In many cases, you might be able to do it by using the on-line features of your bank or credit union.

Even if it is a few bucks for a venti latte or you just took $20 out of the ATM, record it and ensure it is categorized properly (e.g., utilities, gas, dining, groceries, etc.).

2. Keep your Checkbook Balanced

Every month, your bank or credit union will provide you with a statement of your checking and savings accounts.

Spend a few minutes balancing your checkbook. It does not take long and it will help you know where you stand with your money.

You can also avoid overdraft fees, find expenses you might have forgotten to record, and also discover erroneous charges due to bank errors or worse, erroneous charges due to identity theft.

The instructions for balancing your checkbook are usually included on the back of your statement.

Do it every month!

3. Maintain a Net Worth Report

You need to know what is the value of your assets (what you own outright such as savings, retirement accounts, property), and your liabilities (your debts such as credit cards, car loans, student loans, and mortgages).

Your net worth is the difference between your assets and your liabilities.

Most financial management tools provide you with an easy way to track your individual assets and liabilities so you can keep track of your net worth.

4. Establish a Written Budget

As you begin to habitually do the actions above, you will begin to gain great insight into where your money is going.

This will help you greatly as you tackle the task of living on a budget.

Remember, a working budget will be the most powerful tool in your arsenal.

This is a simple blue print for managing your money: how much money comes in (i.e., your income) and how much money goes out.

The key is that you have to do it every month before the month beginsYou have to plan it and live it!

As usual, it is always up to you to change your ways. You have to decide that this is important enough for you to do it.

“Be diligent to know the state of your flocks, and attend to your herds;”
Proverbs 27:23 (NKJV)

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Question: What tools are you using to keep track of your money?

Would You Post a “Personal Finance Selfie”?

Personal Finance SelfieHave you been caught in the “selfie” craze?

Recently, Oscar Awards ceremony host Ellen DeGeneres posted the most retweeted “selfie” to this point (over 3M retweets).

With the proliferation of both smart phones and social media, everyone is posting pictures of themselves and sharing them with the people in their networks.

Typically you want to celebrate how you look, what you are doing, and in Ellen’s case, who is hanging out with you.

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But would you post a “personal finance selfie”? Would you be willing to be open and share how well you are doing with money?

Well the answer is probably no, simply because how you are doing with your money is a very personal and private matter. We typically do not like to broadcast that information or even discuss money matters with anyone outside of our own household.

But let’s assume that we could get past the privacy issue. What sort of picture could we create to generate a snapshot of your finances?

I think a “personal finance selfie” could include objective items such as:

  • Annual Household Income
  • Assets (what you own): Emergency savings retirement savings, property equity.
  • Liabilities (what you owe): Consumer debt, Mortgage.
  • Net Worth (Assets – Liabilities)
  • Annual Charitable Giving

Your “personal finance selfie” could also include more qualitative items such as:

  • Are you managing your money with a monthly budget?
  • If you are married, are you working with your spouse on money matters?
  • If you have children, are you teaching them how to handle money?
  • How do you deal with major purchases? Do you use debt or do you save to pay cash for those items?
  • Do you review your credit report at least once every year?
  • Do you have the required insurance to handle the risks to your finances?
  • Have you prepared a will?

So as you evaluate and gather this information, you can get a pretty clear picture of where you stand financially.

And don’t worry, I don’t want to see your selfie. This “personal finance selfie” is just for you.

You are the one who has to be in charge and know what’s happening with your money.

You are the secret sauce to your financial success.

It’s all up to you, so go ahead and take charge and win with money. It is possible!!!

Then send me a selfie of all the fun and great things you are doing because you decided to take control of your finances.

That’s one selfie I would love to see and retweet to celebrate with you.

Question: How satisfied are you with your “personal finance selfie”?

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The Great Financial Numbers Fight: Net Worth vs. FICO Score

The Great Financial Numbers Fight: Net Worth vs. FICO ScoreAre you a boxing fan? I am, although in the last few years I have lost interest in the sport due to the many judging controversies and the lack of really, really great fights.

I recently watched a documentary of the great 1980 fight between Sugar Ray Leonard and Roberto “Hands of Stone” Durán. It was the infamous “No Mas” fight.

It reminded me that while I was growing up, there would always be a great fight on the horizon.

How is boxing related to finances? Well, I think it’s time to have a great fight between two financial numbers. I believe most of the advice offered today by the conventional wisdom is focused on the short term as opposed to the long term impact on your financial wellness.

And focus is key for your finances. You need to pay attention and take control of your money. But remember, in money and in life whatever gets your focus and attention will be what generally improves.

So where should you and I focus? I want to start a great fight (i.e., conversation) about these two financial numbers: Net Worth vs. FICO Score.

Let’s agree that for these two numbers, the greater the number the better the situation. And let’s see which one is more beneficial to your long term financial wellness.

So let’s get ready to rumble!!!!

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Tale of the Tape: FICO Score

What is it? The FICO score simply measures your level of interaction with debt. How much you money you owe, the type of debt, the length of your debt history, record of payments, etc.

Here are the components of your FICO Score (via the FICO website):

FICO Score Components

In other words, the algorithm for computing your FICO score does not take into account your salary, length of time in your current position, or your level of savings and investments.

Why do you need it? Well, if you want to borrow money for anything, a FICO score is one of the key components used by lenders to assess your credit worthiness.

The only reason to really worry about having a good FICO score is because you want to borrow more money. A bigger FICO score means lower interest and higher borrowing limits.

The biggest reason the conventional wisdom says you need a good to great FICO score is to borrow money for a home. But let me tell you this: my wife and I refinanced our home 3 years ago and the FICO score was just one component of the process.

The bank still wanted to know that I had a steady job, that I had enough money saved for a good down payment, and that we had very little or no debt.

Furthermore, the new borrowing guidelines that went into effect this year are taking us back to more traditional lending practices. So, the FICO score is not the main component in whether or not you get a mortgage.

How can you improve it? Well, there is only way to maintain a good FICO score. You have to borrow money all the time and pay it back in time. You don’t want to be late and you don’t want to have “bad debt” on your record.

In other words, you have to be in the endless cycle of having open credit lines, borrowing money, and paying it back. It seems to me that it is like a dog chasing its’ tail: borrow money to improve my FICO score so I can borrow more money.

You could inherit $1M and your FICO score would not be affected. You could work very hard at your job and get that promotion making more money and it would not change your FICO score. You could finish that bachelor’s or master’s degree to get a better job with better pay and your FICO score would not be affected.

You could have $25K in an emergency fund and $300K in your 401K and $100K in mutual funds and your FICO score would not change. And you could own your home and 2 rental properties free and clear and your FICO score would not change.

So the FICO score is all about going into debt and staying into debt. Having a high FICO score means that you are very good at jumping through the hoops of going into debt.

And yes, I know that some insurance companies, landlords, and employers are starting to use the FICO score to determine the worthiness of applicants.

I personally think that’s the wrong element to measure. A low or inexistent FICO score could indicate a person that is not responsible with money.

But it could also represent someone who has no debt, has savings, investments, and has no need to borrow money.

If a company is not smart enough to realize that and look deeper into my financial situation, then maybe I don’t want to be in business with them.

Note: Here is some interesting insight on the use of the FICO score for renting from my fellow PF blogger Devin Czech.

Tale of the Tape: Net Worth

What is it? Your net worth is the difference between your assets (what you own) and your liabilities (what you owe).

Net Worth = Value of Assets – Total Liabilities

Why do you need it? Well, it is very simple. As you go through life your financial position is better when you have more assets that you own free clear and very little in liabilities.

Think about this. When you are 65, would you prefer to own your home free and clear or be facing retirement years still carrying a mortgage?

Would you like to have the freedom to choose when to stop working or having to work because you still need the money to service your debt?

The greater your net worth, the more options you have to do what you really want to do in life.

How can you improve it? You have to work to increase your assets and reduce or eliminate your liabilities. In his must read book, “Rich Dad, Poor Dad”, Robert Kiyosaki explains it this way:

“In financial reporting, reading numbers is looking for the plot, the story. The story of where the cash is flowing. In 80 percent of most families, the financial story is a story of working hard in an effort to get ahead. 

Not because they don’t make money. But because they spend their lives buying liabilities instead of assets.”

 So how do we do this? How do we put our focus on increasing our net worth?

  • Increasing your assets: Get on a budget (spend less than you make), save money for emergencies, invest for retirement and for college. Invest for wealth building in mutual funds and real estate.
  • Reducing your liabilities: Pay off your credit cards, car loans, student loans. Stop borrowing money. Pay off the mortgage early.

 

The Decision

Well, for me the decision is very clear. I am going to focus on improving my net worth and not worry about my FICO score. I will keep an eye on my credit report and check it at least once a year for accuracy.

The FICO score has a limited scope and it’s focused on the short term. And I don’t want to live my financial life using the crutch of debt.

I want to focus on the long term. And I can impact my net worth by taking charge of my finances. I can focus, take control of my money, and really influence my overall financial wellness.

In my mind, net worth is the clear winner in this fight. It is the true measure of winning with money.

Question: What do you think? What number will be your focus?

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Winning Money Habits: Track Your Money

Winning Money Habits: Track Your MoneyHappy New Year!!! Did you make any resolutions to improve your finances in 2014? If you did, I want to offer you a little help.

In my experience one of the most important skills to develop with your finances is the ability to keep track of your money.

In order to gain control of your money you need to understand what’s happening with it. How much comes in? How much goes out and for what?

How much money have you saved? How much money do you owe and to whom?

If you can’t answer these questions you don’t have the level of understanding required to win with your finances. Learning to track your money is a winning money habit you should develop.

So how do you get there? Here are 4 essential tasks you need to do in order to track your money consistently:

1. Record your Expenses

You need to keep a register of where your money is going. You can use the old fashioned approach of your paper checkbook register, computer software (e.g., Quicken), or in many cases, you might be able to do it by using the on-line features of your bank or credit union.

Even if it is a few bucks for a venti latte or you just took $20 out of the ATM, record it and ensure it is categorized properly (e.g., utilities, gas, dining, groceries, etc.).

Having a historical record of your expenses will help you with your monthly budget, especially as you get started.

2. Keep your Checkbook Balanced

Every month, your bank or credit union will provide you with a statement of your checking and savings accounts. Spend a few minutes balancing your checkbook. It does not take long and it will help you know where you stand with your money.

You can also avoid overdraft fees, find expenses you might have forgotten to record, and also discover erroneous charges due to bank errors or worse, erroneous charges due to identity theft.

The instructions for balancing your checkbook are usually included on the back of your bank statement. Do it every month!

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3. Maintain a Net Worth Report

You need to know what is the value of your assets (what you own outright such as savings, retirement accounts, property), and your liabilities (your debts such as credit cards, car loans, student loans, and mortgages).

Your net worth is the difference between your assets and your liabilities. Most financial management tools provide you with an easy way to track your individual assets and liabilities so you can keep track of your net worth.

As you make progress with your finances, your net worth is the true measure of winning with your money.

4. Live on a Written Budget

As you begin to habitually do the actions above, you will begin to gain great insight into where your money is going. This will help you greatly as you tackle the task of living on a written budget.

A working budget will be the most powerful tool in your arsenal. This is a simple blue print for managing your money: how much money comes in (i.e., your income) and how much money goes out.

The key is that you have to do it every month before the month begins. You have to plan it and live it!

Question: What else do you do to keep track of your money?

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