By Roger Whitney
The intersection of your finances and your life is where real personal financial management should take place.
Easy to say, hard to do? It shouldn't be. You have much more control over your financial well-being than you may think. The key is to stop worrying about the events of the day and concentrate on making smarter choices. Most people are too outward-focused. They spend their time watching what's going on in someone else's world -- 24-hour news, Facebook, YouTube, reality TV and other media distract us from our own lives.It's an easy thing to do. Let's use the recent government shutdown as an example. In all likelihood, it's going to have little to no long-term impact on most families' financial future. Even so, most of us have dedicated more time to thinking about this, which is now wrapping up after two weeks, than we have to budgeting our money this month or trying to grow professionally.
Focusing on outside events whose outcomes we can't decide distracts us from the things we care about most and then making the little decisions to move us toward them. The good news is it doesn't have to be this way. If you want to make better financial decisions, start applying a business-like process to your personal finances. Taking control of your financial life is boringly simple -- it has nothing to do with the government shutdown, picking the “best” investment or predicting the next move in the markets. You only need to look inward, identify what you care about and make daily decisions that are in line with your goals.
Here are three simple steps you can employ to do so, beginning now.
Establish your priorities
Like a business, you need to set clear short-term and long-term priorities. Financial priorities are similar to goals, but you have to acknowledge that what you care about will change over time. That means you need the appropriate framework.
Suppose you're nearing retirement. If so, your priorities may be to fine-tune your lifestyle budget, pay off the mortgage, establish an emergency fund and explore part-time work options. If so, all financial decisions should come from this foundation.
As your life unfolds, your priorities will change. They may even change dramatically, but that’s fine. Review them as a family annually and make adjustments. The key is that they should always be relevant and important to you.
Manage your lifestyle
A business manages its cash flow, and you need to do the same. Consistent, positive cash flow is the lifeblood of any business, and it will be for your household, as well.
Your lifestyle choices can have the greatest impact on your financial security and growth. In business terms, this is your cash flow -- what you bring in (income) and your overhead (spending). What's "normal" today is to spend close to or more then you bring in, financing the rest of your lifestyle via debt. This is a choice. Living this way provides immediate gratification, but offers very little financial flexibility. One small mishap (furlough, health issue, etc.) can cause major financial consequences.
If you choose to live below your means by spending less then you earn, you can take this free cash flow and pay down debt, save it or invest it. No different than a business. Have clear priorities, and you'll make better lifestyle choices.
Build your net worth
The third way you can be like a business is by consistently updating and reviewing your balance sheet or net worth statement: It's the most important financial tool you have to evaluate your financial life.
A net worth statement is a list of all the assets and debt you've accumulated over time. Update your own statement every six months, and review it in the context of what your stated priorities are. It's the cumulative result of all the little financial decisions you make, and if you're using your priorities to guide your choices, it will show up here.
Remember, personal financial management is about knowing what you and your family care about and having a process for managing the uncertainties in life. You can't directly control the economy, taxes, interest rates, the stock market, recurring debt-ceiling debates or the fretting of ratings agencies about the U.S. Treasury. But you can control what you spend the bulk of your time thinking about, and, more importantly, the decisions you make that will enable you to ride more confidently through the rough patches.
Keep the focus on what matters, not on the noise.
Roger Whitney, CFP, CIMA, CPWA, co-founded WWK Wealth Advisors, a Registered Investment Advisor, in Fort Worth, Texas. He has specialized in investment management and planning for 23 years. He's on Twitter @roger_whitney.
- Personal Budgeting