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The Second Step in Personal Financial Planning The first step in personal financial planning is controlling your day-to-day financial affairs to enable you to do the things that bring you satisfaction and enjoyment. This is achieved by planning and following a budget, as discussed in the first article in this series.
The second step in personal financial planning, and the topic of this article, is choosing and following a course toward long-term financial goals. As with anything else in life, without financial goals and specific plans for meeting them, we drift along and leave our future to chance. A wise man once said: "most people don't plan to fail; they just fail to plan." The end result is the same: failure to reach financial independence.
The third step in personal financial planning, "Building a Financial Safety Net," is discussed in the third article in this series.
Most Common Roadblocks on the Road to Building Wealth Many Americans will never reach their dreams of building wealth, being financially secure, and being able to retire in comfort. The reason is most often a combination of these seven biggest money mistakes.
1. Having a Thirty-year Mortgage
Where do you find the money to build wealth? Try looking at your mortgage. Millions of Americans think nothing of paying for their home over 30 years, even though the average homeowner ends up paying two-and-a-half times the purchase price of the home by stretching the payments out this long. Having a 15-year mortgage instead of a 30-year mortgage can save you large sums of money and help you build wealth. See page two of this article for examples of how you may be able to save over $100,000 over the life of your mortgage.
2. Giving Control of Your Money to Someone Else ....
Are you handling your money like the wealthy person you are going to be? Are you following the strategy of the wealthier you?
If not, let's tune into what that other you is saying. It is asking you to focus on your dreams. It has a lot of advice and doesn't want you to gag it with credit card receipts. Let's give a listen.
It is easy in the rush of events and the excitement of possibilities to overspend. That's understandable and it's part of how we experiment. But there are two dangers.
Many young adults expect to start life's journey with all the worldly goods their parents probably took years to acquire. A first apartment, for example, must be equipped like their parents' home they just left. Sure, moving into an empty apartment may be a shock after leaving a fully furnished home. But this desire for instant gratification can start risky financial habits that result in a lifetime of overspending and debt.
Your parents probably started out with used furniture or hand-me-downs from relatives. New items gradually were added after taking the time to save the money needed to make the purchases.
If the mention of the word 'budget' makes you groan, think of it not as some nasty chore or way to deprive yourself, but as spring-cleaning. One good financial cleaning and you may have your money life in order for years to come.
Shaping up your financial house is particularly important if your life situation is changing because of a marriage, divorce, new baby or any other event that alters your finances dramatically. Whatever the state of your financial life, developing a sensible budget will allow you to take control of your money. And, that is a great feeling. Spending: Tracking Your Cash Flow
The core of budgeting is realizing your monthly spending needs and habits. Creating a budget means tracking your personal cash flow - that is, how much money comes in and how much goes out.
Do you ever find that your spending decisions just don't make money sense?
For example, you subscribe to a magazine just because it looks good on your coffee table or because you are now eligible to enter a Publisher's Clearinghouse contest. Your decision to subscribe is not a rational one, since you have extremely slim odds of actually being visited by the Publisher's Clearinghouse van and presented with a large check. In exchange for your million-to-one shot at winning, you pay a monthly fee for a magazine that you never read.
Another example is paying for the premium package each month with your cable company so that you receive more than 100 channels, even though you travel or work several jobs and are rarely at home. And there's the health club membership that you religiously pay for each month but haven't attended in years. It is not logical to spend money and not receive anything in return.
You are sitting at your computer on a Friday afternoon busily finishing up your last project of the week. It seemed a little peculiar that you hadn't been given those typical "due yesterday" projects as the clock rolls to 3 p.m. This doesn't bother you much because you are more content thinking about that get-away weekend you and your wife have been planning for months. Suddenly, your boss calls you into his office. "Here it comes," you think to yourself, "that project announcement that will keep me here till all hours of the night." In the usual office setting you sit down. The unforeseen happens, "Your position has been eliminated, you have an hour to gather your things." Like an image from an Ally McBeal show, your jaw literally drops to the ground.
Here are some tips that can help you focus on the reality of the situation by cutting expenses and managing your budget:
* Minimize your budget. Sacrifices are hard to make, but in order to keep the funds manageable without sinking further into debt, you should think about eliminating the following: ...
Make A Monthly Budget One of the keys to successful money management is a monthly budget. Before you consider looking at your spending habits, you must know what you spend your money on. Gather all of your bills and monthly expenses that you are aware of, but don't forget to include incidentals, such as gas and dry cleaning. These variable expenses should also be included in your monthly budget and can be labeled as miscellaneous or however you see fit. Clarify Your Financial Goals
