Financial Planning And Budgeting

Personal financial planning and budgeting begins with understanding the current economic situation for the household. Though different families have different financial concerns, certain basic principles apply to the recent college graduate as much as the middle-aged couple with children and the retired senior citizen. A solid economic foundation is built by spending less in expenses than comes into the household whether the income is from a wage or investments. Of course, a young adult has more time to recover from mistakes, learn important lessons, while still saving for future goals such as retirement. A senior citizen on a fixed or limited income may need to be especially careful in tracking expenses to avoid indebtedness. Fortunately financial planning and budgeting resources are readily available for all types of households, whether newlyweds, single parents, or empty-nesters. Online sources, books, magazines, television programming, and seminars provide useful information on money matters.

The apostle wrote to his young protege Timothy these words: "For the love of money is the root of all evil: which while some coveted after, they have erred from the faith, and pierced themselves through with many sorrows" (1 Timothy 6:10). Notice that it isn't money that is evil, but the love of money that is at the root. Money is a tool that can be wisely or foolishly managed. Good stewardship means implementing a workable financial planning and budgeting strategy that takes care of the needs of one's family while also blessing others. A good first step, no matter a person's age, career, or financial status, is to assess the personal economic situation. This is accomplished by making a list of all sources of income, the amount from each source, a separate list of all types of expenses, the amounts of expenses. When calculating monthly income, the net figure should be used as this is what is available for the monthly expenses. The net salary is the gross salary minus federal withholding plus other payroll deductions. To get an accurate accounting of monthly expenses, it might be necessary to save all receipts, plus track the spending of every penny for a month or two. Many people spend much more money than they realize throughout the month. They may be surprised by how much of their cash is spent on high-priced coffee or movie rentals. Of course, the goal is for the total income to exceed the total expenses. If that's not the case, financial catastrophe is almost certainly lurking around the corner.

In addition to statements of monthly income plus expenses, a competent financial planning and budgeting strategy also includes a net worth statement. This financial document lists each asset's value in one column. Each liability amount is listed in a second column. The total assets minus the total liabilities equal the individual's net worth. Assets include property, such as real estate, vehicles, investments, other banking accounts, such items as artwork, jewelry, furnishings, or other tangible belongings. A person may also have intangible assets, such as patents, trade secrets, and/or copyrights. Liabilities include mortgages, the total of car loans, plus credit card or other indebtedness. As part of the ongoing financial planning and budgeting process, the net worth statement should be updated at least annually if not more often. The initial income/expense statements provide a springboard for further money management decisions. By continuing to track income plus spending on a daily basis, an individual can quickly see a snapshot of her financial standing. This process is made easier by utilizing one of the many financial spreadsheet software applications that have been developed especially for individual households.

It seems that many people don't like to prepare budgets or to follow them. But implementing a workable financial planning and budgeting strategy that ensures income exceeds expenses requires the development of some time of spending plan that takes into account weekly, monthly, plus annual expenses. There are so many ideas for creating a record-keeping plan of one's own or consumers can purchase a flexible plan, then modify it to fit their individual circumstances. The plan should have two major expense components: 1) savings; 2) spending (which includes tithing and/or giving). The savings component should include long term investments for future goals such as retirement accounts, children's college funds, etc., plus short term investments for goals such as home remodeling, a major vacation, replacement of vehicles, plus an emergency fund. The spending component, besides charitable contributions, includes regular monthly obligations, regular annual obligations, plus daily living expenses. Dividing the spending component into these three categories may assist in making the financial planning and budgeting process less of a chore.

Monthly obligations are set expenses such as mortgage payments, car payments, utilities, cell phone, plus any other regular occurring items. Fitness club membership fees, minimum credit card payments plus any other items paid every month that remain more or less fixed belong in this category. The total of this amount is deducted from monthly income. Annual obligations are items that are paid once a year, such as homeowner association fees, flood insurance premiums, termite inspections, automobile club or other types of membership fees, and automobile licenses. As part of a solid financial planning and budgeting strategy, the total of all annual obligations should be divided by the number of paychecks an individual receives in a year. For example, if the amount totals $1040 annually, an individual who gets a paycheck every other week would divide that amount by 26. The result, $40, should be placed in a separate account so the money is available to pay these annual obligations as they come due. Daily living expenses includes groceries, clothing, entertainment, plus other miscellaneous items. Since the money has been set aside for the regular monthly and annual obligations, the individual can see how much discretionary money is available. Another aspect of this discretionary money, however, is debt relief. A solid budget strategy will allocate as much money as possible to reducing indebtedness in order to secure a more solid economic foundation for the household.

Managing Personal Finances

A course in managing personal finances, in a perfect world, would be required for all high school graduates. But this world is far from perfect and many teens are unprepared for the economic realities of adult life. Even their parents may be struggling to keep up with rising mortgage payments on a variable interest rate loan and multiple credit card obligations. Yet the basic principle is both easy and unyielding. Successful personal finance means that the income has to exceed the outgo. In other words, households need to bring more money into the checking account each month than goes for expenses. In even fewer words: people should live below their means. Of course, this is often much easier said than done. The high level of indebtedness and low savings rate in this country attests to the fact that millions of people need help in this area of life. Fortunately, multiple resources are available to help anyone get a, perhaps belated, education in managing personal finances successfully. Financial software programs and spreadsheets can be very beneficial in tracking household income and expenses.

For most young people entering adulthood, the most important financial considerations are getting a car, funding post-high school educations, and handling credit card accounts. These young adults have more autonomy in managing personal finances than ever before and the thrill of making purchases and financial decisions can lead to economic mistakes. To quote the wisest man who ever lived, King Solomon: "To know wisdom and instruction; to perceive the words of understanding; To receive the instruction of wisdom, justice, and judgment, and equity; To give subtilty to the simple, to the young man knowledge and discretion. A wise man will hear, and will increase learning; and a man of understanding shall attain unto wise counsels" (Proverbs 1:2-5). Young people need wise instruction from competent and respected adults so that a solid economic foundation supports sound and prudent decision-making. The amount of money isn't as important as knowing how to wisely allocate the available income. This is the secret of managing personal finances in such a way that debt doesn't become a problem.

For example, the best kind of car belongs only to the driver. This vehicle may not be brand new, have leather seats, or the latest state-of-the-art sound system. But without any car payments, the thing just seems to run better. Getting an education without student loans may be difficult, but efforts should be made to obtain scholarships and grants so that the final amount isn't an astronomical figure that overwhelms the new graduate. Young adults, especially college students, are bombarded with credit card offers. But managing personal finances with wisdom means saying no to even the most tempting reward programs. It's a financial tragedy for young graduates to leave college with not only a giant student loan obstructing their financial futures, but also mounting credit card debt. Another temptation arises when that first paycheck from that first "real" job arrives -- young adults want the same standard of living as mom and dad, forgetting how long it took mom and dad to reach that point. An increased standard of living may mean paying more than they can afford in rental or house payments, trading in the paid-for heap for a shiny new, straight off the showroom floor set of wheels, new wardrobes, and extravagant spending. When the high monthly expenses catch up, and they most certainly will, the young person may lack the wisdom to appropriately correct the situation. And how sad to be facing financial difficulties at a time when the future should be bright and exciting.

Fortunately, many resources exist for the person who is willing to take managing personal finances seriously and to make the necessary changes to improve her financial situation. In a way, it's very simple. Money comes into the household through income which can increased by working additional hours at the current job or by getting a second job. That money can be either spent or saved. Personal financial experts almost unanimously agree that, except for tithing, people should pay themselves first by putting a certain percentage of income into some type of savings or investment account. (Tithing comes before any other expenditure.) The remaining money needs to go first to the basics of shelter, food, and clothing. Monthly debt obligations need to be paid, too, but only if the person owes money to creditors. Those living debt-free lifestyles have many more choices of how to allocate the additional money they have. Some choose to save for financial goals, others to be a blessing to others through additional giving, and many choose to accomplish both. Being debt-free should be the primary goal of managing personal finances for young people, old people, and people in between.

For a young person just starting out, the time is perfect to set achievable financial goals. There are very good principles to follow and the wise individual will seek wise advice when making financial decisions. All teenagers want a car, but a cheap dependable vehicle provides transportation just as well as a newer model and without the monthly car payment. Borrowing money for an education may be considered more of an investment than an expense, but even this indebtedness should be approached as a last resort to avoid receiving a giant debt as a graduation present. Cash in the bank is better than credit cards in the wallet. Young people who are managing personal finances need to be wise savers and spenders so that their financial futures are built on a solid economic foundation.

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