The current economy and recent news on Wall Street has a lot of people scared and unsure about how to manage their finances. Where should you go to invest your savings? How should you prioritize your debt? And who should you trust for advice?
I always tell my clients, You have to be Real to be Rich.
This means that before you can get answers, you need to take a good look at where you stand right now. Most people behave like an ostrich with their head in the sand when it comes to money. They think if they don’t look at the problem, then maybe it will just go away. Truth is, when it comes to your money, the responsibility is yours alone and no one else’s. If you don’t know where to begin or just want a do-over, the program I will outline for you here can help anyone begin building true wealth.
Creating your Money Map is the essential first step and it can be as easy as 1-2-3.
You can’t do anything about the economy of Italy or the job market in China, but you can take control of your finances. This is what I call Controlling the Controllables. Money is a tool that when used properly, can help you achieve your definition of a RichLife with regards to health, wealth, and personal fulfillment.
But none of it will happen if you keep your head in the sand! Once you take the time to look at your own finances, you will gain not only clarity and control over the situation, but you will be in the top 5% with regards to money management because most people don’t take the time to sit down and do this work.
It’s a lot like the little red star on the YOU ARE HERE! maps found at the mall.
How can you get anywhere unless you know your starting point? You can’t. Any steps taken will be potentially useless and a waste of time and energy. That is why your first action involves taking a look at everything you have now. This will help give you the BIG picture.
In my line of work, we call this macroeconomics. Now you can impress your friends and give them a lesson in micro-verses-macro economics! It works like this: micro means small and takes into account only what is happening now, today. Macro means BIG and takes into account the whole picture of your life. When you know where you are going and why, it makes it a thousand times easier to say NO to those spontaneous, unnecessary purchases because you know what you are saving for.
Creating your BIG picture begins with creating your Money Map.
You can do this in 3 easy steps and here’s how:
- STEP #1: Create a Balance Sheet
Think of this as a list of what you own and what you owe. Get out a piece of paper and divide it into 2 columns labeled ASSETS and LIABILITIES.
Assets are those physical items you own which have a calculated worth in dollars. They include vehicles, real estate, and tools or equipment. They also include your house even if it has a mortgage. List each item alongside its valued dollar amount and calculate a total.
Liabilities include all financial obligations which must be met every month including credit card balances, loans and mortgage payments. List the outstanding dollar amount remaining for any mortgage or loan. Calculate a total.
The difference between these two totaled dollar amounts will give you an accurate picture of your net worth. This will change over time as the value of what you own increases or decreases depending on the market, and more of the loans are paid off, decreasing your liability.
- STEP #2: Calculate an Income Statement
Your Income Statement will also have two sides, one side with what comes in and the other with what goes out. At the top of each side, write INCOME and EXPENSES.
Income calculation will be different for everybody. Some of us have reliable W2’s and predictable paychecks, while others don’t. If you are self-employed, work on a per commission basis, or have seasonal employment, your income will need to be based on an average found by looking at last year’s taxes, or by factoring in all income streams, even those whose yields are unpredictable, and dividing by twelve to find a monthly average.
Expenses include all money that goes out and this is where you might find some surprises. Just how much are you spending each month at Starbucks? To find out, look at credit card statements, paper receipts, and monthly bills. Include fuel for both yourself and your car, bills for phone, internet, and insurance. Also include a category for repairs and maintenance such as regular oil changes. Create a miscellaneous category to include expenses such a birthday gifts and haircuts.
- STEP #3: Identify FIXED and VARIABLE
Not all expenses are created equal! Fixed expenses cannot be changed while variable expenses are changed by you. This is where it can get fun.
To play the BEAT THE BUDGET game, circle or highlight those expenses you can control and identify what you can do to free up that money. For example, bringing a thermos of coffee with you to work each day could free up an extra $150 a month to go towards debt reduction or saving for a trip. The choice is yours! Once you identify ways to free-up the money, where to move it is up to you. This allows you to do what brings about the most peace of mind.
Being rich begins with being real, with looking at where you are now concerning income, expenses and debt. Instead of hoping, wishing or reacting out of fear and uncertainty, you will have an anchor. Creating your Money Map identifies the steps you must take daily to move you towards your goals and objectives. In our next article, we will take a closer look at the how of getting where you want to go by using tools such as:
- Envelope Budgeting
- Debt Prioritization
When it comes to money issues, most people don’t understand why they are doing what they are doing. As a financial advisor, I consider it my mission to help raise your financial IQ so that you can gain both wisdom and wealth. Everyone has a dream, and everyone deserves a chance to achieve their definition of a RichLife. Begin by mastering your money map today!
Take a minute to let me know how you are doing with creating a Money Map for your finances.
I’d love to hear about it!
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