2012 Money Play

As a new year approaches, it is a great time to starting talking and thinking about your finances for 2012.  There are some things that you and I want to consider now for 2012:

Develop a budget

It is going to be important to develop a budget for 2012 and to stick to that budget as best as you possibly can.  Here are some things you can do right now to construct your budget. 

1.      Log onto your bank account.

2.      List all of the things you have spent money on from January 1, 2011 until now (include all the transactions in your accounts – checks, withdrawals, debit card usage, bank fees, etc.)

3.      Categorize all of your expenses into the following categories for each month: Housing (mortgage, insurance, real estate taxes, rent, utilities, repairs to home, etc). Transportation (automobile expenses including insurance, taxi/cabs, bus or train fare, etc). Meals (meals purchases at work, groceries, etc.). Entertainment (meals outside of work and home, movies, subscriptions – magazines, NetFlix, etc). Travel (vacations). Personal care – haircut, salon, spa, etc. Investments – any amount you spend on investments outside of job sponsored retirement plans, this includes savings and life insurance. Miscellaneous – anything else which does not fit in any of the above categories.

4.      List your monthly take home income.

5.      Subtract your total expenses from your total income.

6.      Are there any negative months?  What happened in those months? Was there some level of emergency? Were there any months that were profitable? Did you break even in some months? What happened in those months?

7.      Take another sheet of paper and a calculator and figure out how much of your annual take home salary is being spent in each of the eight expense categories. 

8.      Compare your results to what I call a typical budget: Housing should consume no more than 30% - 37% of your take home or net pay. Transportation – about 20%. Meals – between 15% and 20%. Entertainment – 3% to 5%. Travel – 5% to 10%. Personal care – 3% to 7%. Investment – 5% to 10%. Miscellaneous – 3% to 5%.

9.      If your percentages don’t match up with those in item 8, you should consider adjusting your expenses accordingly.

10.  Stick to the budget you created in 2012. Don’t go astray from the path.

Get out of debt

Debt grows faster than your income so it is a mandate to get out of debt as soon as you can.  With the rate that the world’s economy is going make it a priority to retire your debt as soon as you possibly can.  This includes student loans as well.  I would suggest opening a separate bank account where you pay your debt from and call it your DSA - Debt Shrinking Account.  Make extra payment if you can to shrink your debt faster.  Email me for more advice on this.

Develop a plan to save and invest

Now that you have your budget and DSA in place you will need to develop a plan to save and invest.  The 5% to 10% that is being set aside for investments should be split in half between investments and savings.  Your savings here would be your “rainy day” fund.  The way the world’s economy looks we are in for quite a few rainy days in 2012.  It is always best to be prepared.

Speak with a financial advisor on what you should use the other half of your funds to actually invest in.

Watch the markets

This doesn’t mean only the stock market.  But watch all the markets.  What are you looking for?  You are looking for opportunity, an opportunity that can catapult you and your family to the next level.  With the other three items, mentioned above, in place you now have the ability to not only watch the markets but also take advantage of some of the opportunities that are presented to. 

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Tightening The Belt

With America's credit rating being downgraded it should be a clear clue to each of us that we have to make some changes.

What types of changes are necessary? There are three changes that I believe we should make immediately.

Change the way we view credit.

With the average American household being in more than $16k in credit card debt we need to see change. Many view credit as a means to access more cash when they don't actually have the cash. This is the wrong mentality to have.

Credit is designed to assist a responsible person or business to use the bank's money while theirs is being invested. The idea here is that you and I should only use credit cards if there is an extreme emergency and we don't have the cash or if our money is being invested in something that is earning more of interest than we are paying the bank. If neither of these are the case, then we should keep the plastic in our pockets.

Change our posture on needs and wants.

There has to be a clear definition for each of us as to what a “need” is and what a “want” is. Here is the way I view the two. A “need” is something that is essential to survival (i.e. shelter, clothing, food). A “want” is anything outside of a need. For instance, I need shelter but I may want to live in one of the most exclusive zip codes in my city. This is where many people get it wrong. It is human, especially in America, to confuse a need with a want.

The second part of the definition is that once the “need” has been meet and there is the financially wherewithal to afford anything else, we can then and only then, explore the acquisition of any “wants.”

Do you have a clear definition of the two? If not, you have to develop one and prioritize your needs over your wants.

Change the manner in which we spend.

This bleeds from the second point. We have to learn to live beneath our means. Typically the first step in doing this is to learn to live on eighty percent of our net income. After mastering that, the next step is to live on fifty percent of our net income. How do you do that you may ask?

This can be accomplished by following the items in this blog, creating a budget and sticking to them both.

You can do it!
Go get 'em!