Financial Knowledge Online

If you have spent any time reading personal finance blogs then you already know the single most important rule to building wealth and getting out of debt – spend less money than you earn. While this is a relatively simple concept, the problem most people have with it is trying to determine what this looks like on a day to day basis.

Is saving money some form of arcane, self-induced punishment; a passive activity that is painful yet somehow necessary? Or is it something more?

Last year, we spent a small fortune on medical bills. It seemed as if every day another doctor sent us an invoice for something they supposedly read, did, or reviewed. Seriously! There were bills to take x-rays, bills to read the x-rays, and bills to review the notes that the doctor made on the x-rays. It is enough to drive you insane. But I digress.

As these bills started to pile up, I started to question my overall philosophy on saving money. Up until then, saving money was something we did to protect us against emergencies. We built up our tiny emergency fund and felt pretty good about doing so. If something happened, after all, $1,000 should take care of it, right?

While it is certainly true that a grand will take care of the minor emergencies in life, it does nothing to protect you against anything larger than a scratch. A few nights in the hospital or a blown engine can completely derail your finances for months, if not years. After the year we had, my wife and I have started to think about saving money in a whole new light.

Why We Are Saving Money

If we really want to achieve our goals, it is crucial that we start actively saving money as quickly as possible. Saving money has to be something that we pursue; not something that just happens to us. Since I am absolutely sure that our money needs specific direction, here is what we are saving for:

Emergency Fund – Dave Ramsey suggests that people start with $1,000. Based on our experience, this is not enough. With that being said, our goal is to start with $5,000. This will, hopefully, help buffer against another bad year.

New Car Fund – We have two cars; a 2000 Volkswagen and a 2004 Explorer. As these cars are getting older, I have noticed that our repairs and maintenance expenses have started to creep up. It is only a matter of time before one of them dies a terrible death and we will need another car. We definitely won’t be buying a new car, but we will need something.

Debt Reduction – After putting away enough money for emergencies and a new-to-us car, we will start tackling our debt. While I hate it all, the debt that really irks me the most is my student loan. I seriously wish someone would have sat down with me and explained that I did not need to borrow the maximum amount allowed.

While most people will agree that saving money is important, it is now the foundation to building our wealth. It will take a lot of effort going forward but I know it will definitely be worth it!

Why are you saving money? How are you actively involved with managing your cash?

Many people struggle with the basic concepts of financial planning. It certainly is not difficult to understand why. When talking about financial planning, many of the so-called gurus spout off theory instead of providing actionable steps that can easily be followed. Sure, theory is fine for the intellectuals out there, but most people just want to know what they need to do.

With that being said, let’s take a few minutes to consider the five things you need to do when developing a solid financial plan.

Assess Your Current Situation

Instead of thinking about where you want to be, it is important that you start at the beginning. Determine where you stand when it comes to your current income, savings, expenses, and debt. This information is a crucial element in matching your financial goals with your current circumstances.

Set SMART Goals

In order to succeed, you need to set extremely specific goals. SMART goals are:

Specific – These goals should provide answers to who, what, when, which, and why. Who is involved? What do I want to accomplish? When do I want this to be accomplished? And so on!

Measurable – How will you know when you reach your goals? For me, reducing our credit card balances to zero is one of our stated goals. If we have a balance, then this goal has not been accomplished.

Attainable & Realistic – It is not possible for us to pay off my student loan by June. It may, however, be possible by the end of the year. When setting goals it is important that it is attainable and realistic given your current financial circumstances.

Timely – You need to set a date that your goals need to be achieved. Otherwise, it would be too easy to create a goal of paying off my student loans in the future.

Determine a Course of Action

While it certainly true that your path will vary slightly from time to time, it is important to determine how you want to get started. After a few months you can adjust your trajectory as needed.

Develop an Action Plan

Now that you know what you want to accomplish, and by when, all you have to do is act on that plan. Don’t waste time wondering whether or not you are headed in the right direction. Once you decide how to proceed, simply get started.

Review Your Financial Plan and Make Necessary Adjustments

One thing you always need to remember is that financial planning is not a static process. It is extremely dynamic and should be constantly evolving. At a minimum, you should reevaluate your financial plan once a year. If you are just getting started, you may want to monitor your progress a lot more closely.

Developing a financial plan does not have to be complicated. By following these five simple steps you will be well on your way to having a solid plan!