Money has a basic formula: What I Get LESS What I Need = What I Got.
Its a very simple but important formula. How much will you make this year? How much will you spend this year? These are the first two questions to ask yourself when you are money planning. It is also very easy to calculate as well. The most simple way is to take a sheet a paper and draw a vertical line down the centre. The LEFT side will equal your net earnings (your gross pay after taxes and deductions). The RIGHT side list all your expenses. Once you have completed both sides you should have a clear picture if you have a positive cash flow or a negative cash flow. This is important to know to avoid any financial trouble with a bank or credit card company.
Let's start with the LEFT side, your net earnings. It may not always be easy to determine what your next pay cheque will be. However, always take a good guess.
(CASH STRAP) - Always be conservative - never assume you will make more. Its better to underestimate and have extra cash than to overstate and be short on cash
Its always better to use your net earnings. Let's say you gross $2,000.00 a month and your net is close to $1,600.00 what will happen if you money plan with $2,000.00? You will be short $400.00 a month or $4,800.00 a year! Ouch...and that's how credit card and bank loan problems come to be.
Let's look at the RIGHT side, where all your money is going. Always start with the bare necessities of life...you need shelter, food, utilities and if applicable all your childcare needs. Include your rent/mortgage/condo fees. Don't include restaurants in your food - this is an entertainment. Don't include your cell phone, tv, internet in your utilities these are not as necessary as you would like to think.
(CASH STRAP) - Rent/Mortgage interest rates, food and utilities are variable expenses, which means that they are seldom constant. So when you do your money planning always slightly increase these costs. A good rule is every 3 months a 1-5% increase.
Once you have these basics start including other necessities like clothing, transportation, medical, insurance, and others you can think of. But don't include things like entertainment or dining out or vacations yet...plan those last. You should now see how much money you have left to put aside for your future.
(CASH STRAP) Fashion and SUV'S are overrated...you can save yourself a lot of money by getting by with what you need and not what you want! Besides they way gas prices are heading who wants a to spend $200.00 a week on gas?
The next items you should consider should include things like your savings, retirement, kids schooling, emergency and even taxes. Consider yourself your own employer and pay yourself monthly if you can, or as often as you can. Except don't think of this as money to spend. But rather consider it like a point system in a game - and you need as many points as possible to win. The current high score is 70+ Billion! But start small and aim for 500,000.
(CASH STRAP) The less you owe the more your money can grow. Have as little debt and try to own your assets outright as soon as you can (cars, homes, etc.). Instead of a $400.00 car payment make a $400.00 YOU payment!
Still waiting for me to talk about what cable package or latest cell phone to get - not yet. There is always some small big thing that eats at your money and we hardly pay attention to them. I call these money grabbers and they include things like bank charges, annual dues or subscriptions, license renewals even traffic violations or public library fines. Everyone ends up paying one or all of these throughout the year so you might as well plan for them.
(CASH STRAP) Get to know your banking plans - they are as many and as complicated as cell phone plans. Watching your bank transactions like you watch your voice/data/messaging on your cell phone. You might be amazed by how much you can save by planning your bank transactions.
Remember the saying "what goes around, comes around" this works for money as much as it does for boomerangs. So plan to put some of your money aside to help others. You will benefit a lot more than some savings on your income tax.
At this point we should have a good picture of where our money is going. Hopefully we have more than what we spent, but more than likely we have spent more than half our money already. Which brings us to the cash vacuum - Entertainment. The cost of cable or satellite, cell phones and gaming is quickly becoming the reason for our cash gap in savings. Me and my wife are spending almost $4,500.00 a year just on tv, telephone, internet and secondary cell phones - its crazy! Worst of all, we are locked into these things 2 years and some times 3 years at a time. So choose wisely when selecting what entertainment is worth to you.
(CASH STRAP) If you are looking to buy your first home BANKS and Mortgage lenders don't look at any expenses you have other than your existing debt over gross income. They call this Gross Debt Service (GDS) and/or Total Debt Service (TDS) neither one paints an accurate picture of your financial situation. The trap here is they are using your Gross not Net earnings - look at my first CASH STRAP lesson.
Well folks, I hope your sheet ends up in the positive - if it is in the negative we will work on correcting that for you. Don't get strapped for cash - get the cash strap!
