Take control of your finances by creating a budget

It's clearly a budget. It's got a lot of numbers in it.  ~George W. Bush

I know you have to be thinking that I am kind of crazy posting the quote that I did.  However, in 2008, it seems like the Government took this type of approach when handling the finances of the country.  Not only are we currently in a recession, but the current steps taken to get us out of this predicament is highly flawed.  I mean after all, we have given over 300 Billion dollars to companies and have no idea about what they are doing with the money.

As much as we would like to blame the government for all of our problems, that would be ignorant to do so.  I mean in retrospect, 2008 was a year that most Americans paid for previously bad decisions.  Whether it was being caught in the "oil" rush, buying the biggest SUV possible, taking out an ARM loan to re-finance the house or even buying the big screen TV on credit, Americans have learned this year really how vulnerable our economy and personal finances are.  The Jones's are no longer the family to be and keeping up with them is for the birds.

We are far from the times of good job security as many people on Good Morning America reported that they feel like they were "disposable" once they were laid off by their job.  However, there is a silver lining, going through these times helps us to reconsider how we evaluate ourselves.  We learn new and improved ways to define ourselves and not tie ourselves down to nothing more than a specific job.  

2009 is a new year and the mood of America, based off the latest choices we have made as a country, demonstrates that it is time for a change.  We are moving from a consumerist nation to a nation who is re-taking control of our personal finances.  It is time to get back to making the choices that secure our financial future rather than impede it.  It is time to do what Americans do best: become innovative, make the best of what we have and change for the better.  

One of the best choices you can make to take control of your financial future is creating a sound budget.  Although this sounds like a daunting task, you can accomplish this by completing five steps:

1. Track Spending
   
• The most important step to developing a budget is tracking your spending.  This will allow you to identify holes of your income and help you isolate spending problems areas in your life.
• Steps to Track Spending
1. Each time you buy something, SAVE THE RECEIPT.  Even if it is a pack of gum, a utility bill or whatever, take the receipt and file it away in an envelope, a folder or a filing cabinet.
2. At the end of a 30 day period, collect each of the receipts and figure out general categories most of the receipts can be grouped into.
• Example of categories
1. Utilities
2. Mortgage/Rent
3. Eating Out
4. Gas
5. Groceries
6. Discretion Funds
7. Savings
8. Retirement
3. Once you have developed your categories, use a spreadsheet program like Microsoft Excel or Google Spreadsheets, put the date of the receipt and the amount into each category that is most applicable to.
4. Add the totals of each category and develop your estimated monthly expenditure for each category.
2. Prioritize
• For most of us, budgeting will require us to make sacrifices in order for us to abide our plan.  Whether it is cutting back on eating out so we can save more for retirement, or wearing sweaters in the home so we can lower our gas bill to spend more money at our discretion, we have to prioritize what is important to us.
• The most helpful thing you can do to help with prioritizing is develop a goal or an end point of what you hope to accomplish.
3. Be Realistic
• Although most people have good intentions with the initial development of a budget, a lot of time people fail due to having goals and expectations that are not realistic.
• Rome was not built in a day and neither will having the "ideal" personal financial situation.
• Patience is your friend and just by following a well thought plan, you will be able to eventually reach your goals.
4. Use Automatic Accounting
• Automatic accounting automates your budgets.
• Not having to worry to about your money and actively touching it can reduce the stress in money management.
• See the following article for more information about "Automatic Accounting".
• Automatic Accounting
5. Evaluate and Re-evaluate
   
• Although you may invest a lot of time to develop your initial plan, things change.  You may get a pay increase, you may lose your job or you even may take on a new financial responsibility.  
• There has to be a re-evaluation period that takes place to look at your current plan and make changes to accommodate whatever new changes you experience in your life.

Although many corporations are really hurting right now due to this current economy, some are still staying afloat.  They accomplished this by determining a budget that was tailored to their personal situation and stuck with a sound plan that continues to work for them.  In addition to that, they took the necessary steps to adjust to the current economic situation.  Unfortunately, many companies that tailored themselves to become more like their competition and did not change from their ways have caused them to fail.

Remember, 2009 is a new year and it is time for you to take control of your situation.  It is no longer a time to make excuses or blame our current situations on someone else.  We must hold ourselves accountable for the decisions that we make.  Starting today, make a decision to change for the better.

Stay Disciplined!

By the way...we do workshops too!

So to step away from one of my regular posts, I just wanted to bring to your attention another great resource that you can use on your journey to personal finance freedom. We, in the Pamplona Finance Group, typically hold a monthly - quarterly workshop about a personal finance topic that we receive input on from our members. The workshops are free of charge (for now) and all we ask is that you come out ready to participate and learn.

The video above is a trailer from the latest workshop done in September. (Please forgive my video editing skills) The workshop was very interesting and informative. The presentation was delivered by our very own Marc Wilson who is passionate about taking the proper steps to secure his financial future.

If you would like more information about our workshops, please join our subscription list by adding your email to the section labeled "Google Groups" on the right side of the page. We send out the information about our workshops to members who are subscribed to our list.

We really encourage you to come out to learn as well as share any information that you want. In addition to that, this is a good way to network as well as meet some potential accountability partners who can help you achieve your financial goals.

Stay Disciplined!

Prioritizing Finances and Investments

"A wise man should have money in his head, but not in his heart."
Jonathan Swift (1667 - 1745)

One of the key points to success in your personal finance is learning to prioritize what exactly to do with your money. This is one of the harder things to do because it requires patience and self discipline to stick to a plan that you have created. In this article, I will be sharing with you my list of priorities in relation to my personal finances and goals as well as explain why I chose this particular ranking.

Below is the ranking of importance in my personal finances:

1. Checking AccountSavings Account (directly linked to checking account to prevent overdraft)
2. Emergency Fund (In high-yield savings account [e.g. HSBCDirect, INGDirect])
3. 401(k) (through my employer)
4. Roth IRA (Reputable Mutual Fund company [e.g. Vanguard, TRowePrice])
5. Mutual/Index Funds (Reputable Mutual Fund company [e.g. Vanguard, TRowePrice])
6. Individual Stocks (Through an online broker, refer to post "I have money, now who do I invest it through" for more information)
   

Checking Account

The checking account is the first priority because typically this is what most people use to pay their expenses and bills such as utilities, rent/mortgage, car payment, etc. It is important to have this account funded properly at all times so that bills are paid on time and bills can be paid in full without having to overdraft this account. This is also typically the account that most people choose to have their paychecks deposited to. I personally allocate funds from this account to fund my other accounts.

Savings Account

The whole purpose of my savings account is to prevent any type of overcharge fees from my checking account. This account is insurance for my checking account so I do not incur any unnecessary fees, further depleting my usable income. I typically keep this account a little above the minimum balance as specified by my bank so I do not incur any fees for it.

As mentioned earlier, since this account is only used as "insurance" it should not be constantly withdrawn from to cover back-to-back overdrafts. Since most savings accounts are covered by Federal Regulation D, you are limited to 6 overdraft transfers a month. For more information and details about this regulation, please click on the following links:

Regulation D FAQ
Regulation D
Regulation D Offerings
Regulation D -- Rules Governing the Limited Offer and Sale of Securities Without Registration Under the Securities Act of 1933

Emergency Fund

The Emergency fund is the most important account I own. It contains approximately 5 months of my take-home salary that will hold me over in the event that I lose my job, become disable or encounter a major unplanned expense. The Emergency Fund is an account that I do not have easy access to. Since I have it all online with HSBCDirect, it takes approximately 3 days for me to receive money from this account once I have requested it. This is perfect for this type of account because that typically discourages me from using this account for anything else besides an emergency.

The reason I suggest keeping an account like this directly with an online bank is due to the fact that there is a stable interest rate that usually pays more than standard bank account. In addition to that, you do not have to worry about your money invested dipping below your original amount deposited. This refutes the idea of using a personal Individual Retirement Account (IRA) as your emergency fund due to the fact that IRAs are volatile and run the risk of being "down" at the time that you need to withdraw from it.

401(k)

The employee sponsored 401(k) is typically the "nest egg" that most people use to retire. Since this money is taken out pre-tax, it adjusts your taxable income and has potentially tax benefits that can make the difference in the amount of taxes you owe the government at the end of the year. In addition to that, most employers contribute some form of matching up to 6% of the employee's contribution (which translates into FREE MONEY). There is a 15,500 limit by law (reference) that you can contribute annually to this fund. However, I have set my own personal limit to 15% of my annual salary. This was done so that I can continue to invest my money through other investment vehicles.

Roth IRA

The Roth IRA is probably the best investment vehicle possible besides the 401(k). Typically, the 401(k)'s benefits exceeds the Roth IRA only due to the fact that most employers offer some type of "matching" plan for employee contributions and because the 401(k) can lower the overall taxable income. However, if the employer does not contribute to the employee's 401(k) at all through matching, then the benefits of the Roth IRA mostly outweigh that of the 401(k). The biggest benefit of the Roth IRA is that it is not taxed at all when it is withdrawn (pending that you meet your eligibility to withdraw requirements) For more information on some of the benefits of the Roth IRA, refer to the following links below:

Roth IRA by Wikipedia
401(k)/IRA Matrix

Mutual/Index Funds

For beginning investors, mutual and index funds are the best introduction into the stock market. The reason why these are the best way to enter into the market is because it offers the two key requirements in successful portfolios: Diversification and Low-maintenance. Typically index funds are better than mutual funds because they usually have a lower Expense Ratio ,with a comparable amount of diversification. Also, these are great for the buy and hold strategy where one can contribute a set amount of money each money to a steady investment to allow it to grow over time.

Individual Stocks

The last financial priority should be investing in individual stocks, however this is commonly one of the higher priorities on most people's list. I, too, am guilty of mis-prioritizing this particular vehicle and was severely burned by this strategy. Individual stock picking requires a lot of research and time that most people are not able to invest. It is very rare that novice stock investors will be able to beat the S&P Index fund's average return rate approximately 15% in their first year of trading. My recommendation is to fund the higher priority vehicles first and then use any left over money (that you do not mind losing) to play individual stocks.

Overall, my priorities may not fit your financial situation. Different people have different needs and goals that they have set as to what they want to accomplish. This particular methodology works well for me and has so far allowed me to stay on top of my finances as well as plan for my future. Please let me know your thoughts below and any other strategies that you have in the comments section. Remember...stay disciplined!