Money Magic

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Most of us consider ourselves well informed about investments, but if you're like the majority of Americans with outstanding consumer debt, you may need serious rehabilitation of your finances. With the average American carrying well over $8,000 on credit cards alone, it's critical to reassess your understanding of available resources. Like pulling the rabbit out of the hat, you'll find the surprise savings hidden in your personal budget.

Whether you choose to manage your own finances, or seek out the help of a competent professional, your first step should be to get your house in order. Staying in good physical shape requires you to have motivation and discipline--the same can be said for successful financial planning.  With so many details to organize, you'll never know if you truly are the best person to manage your money until you perform an honest self-evaluation.

Rate Your Discipline and Analyze Your Values

First, truthfully rate your level of discipline with the household finances. Analyze how you operate as the CEO of your financial domain.  Maybe you procrastinate, you're too lazy, or money matters are a bore. You know that the longer you wait, the more you waste your money's earning power, yet you still don't do what you should when you should.  Maybe you aren't lazy at all, you're simply too busy (i.e. you've got projects at work, the kids or grandkids have soccer games, the garage is a mess, the dogs need to be walked, etc.). To be effective, recognize your limitations, realistically.  If you frequently pay bills late, your checkbooks aren't balanced, and you often don't know how much money is in the budget, you don't have the discipline to meet the task. As the household money manager, you would be a ship without a helmsman, blindly taking on a vast sea of stress and frustration. Once you've rated your level of discipline–analyze your values and goals.  Put your life in perspective and decide what is most important long term.  Is it providing for family, putting kids through college, financial security during retirement, or all of the above?  Perhaps, enjoying the "better things in life" is important to you; you enjoy luxury.  Your values and goals determine how you'll allocate income and how to approach your planning.  After all, a middle-aged bachelor who prizes entertainment, a flashy sports car, and fine dining will have a decidedly different approach than a suburban husband and wife with two teens and a toddler, or a sixty-five year-old retiree living on Social Security and a pension.

Set a Budget

If you scored high on discipline, then setting a budget shouldn't be difficult.  In order to claim your post as the captain of your financial ship, you must adhere to a budget, without compromising important goals.  Evaluate your system of managing the household finances.  If you haven't already, make a budget sheet that tracks saving and spending.  It only takes a little time.  Make it fun by involving the whole family in creating it from scratch–even if it is just you and your spouse.  By doing so, you tailor your budget to address your specific family's needs and goals.  Create a family "mission statement" or "motto" and write it at the top of the budget sheet.  The mission statement may be broad or narrow, depending on your needs.  A broad mission statement might state the family's goal toward overall financial security, or it might be tailored towards a long-term goal (e.g. paying for the children to attend college).  Underneath the mission statement, list one or two short-term goals.  Short-term goals could include the replacement of an old stereo or household appliance.  As you know, what is important for one family member, may not be for another.  It's like sports–your family is on the same team and each plays to win, but oftentimes, teammates have underlying motives and strategies towards the winning goal.  Put another way, your teenage daughter may understand the need to save for a family vacation during the summer, but she probably wants more money allocated towards clothing.  It's up to you to weigh all input, appropriately.

Once you establish your budget and put it to work, your family can use it as a tool to track money spent in relation to savings.  As monthly savings grow, they will realize the benefits of their cooperation.  A conservative, yet realistic, budget helps you and your family identify areas where you can increase income and decrease expenditures.  As you do so, it becomes clear that excessive spending is a costly sacrifice that hurts the budget with lingering aftereffects.  Strike a balance but don't be a miser. . . It is important to stick to the plan, however, being too rigid won't make anyone happy.  Don't be disappointed if your first budgeting plan doesn't work very well.  As you re-evaluate the budget according to your family's needs and wants, it will become clear where you should increase or decrease spending.  Remember, your circumstances change with the family dynamics, so your budgeting plan, like the oil in your car, will also need to be changed periodically. 

Use Personal Resources

Including personal resources into the budget is a great tip that pays off.  Though your kids, or grandkids, may complain that "hiring at home" is involuntary servitude, utilizing the family as a resource saves precious dollars and it increases income for the family budget. For example, instead of paying for the services of a local hand-wash, get out the hose and wash the car at home.  It only takes a little elbow grease to get the job done and the weekly savings add up over time.  Realistically, with those savings you could pay cash for a new, name-brand washer and dryer at the end of the year!  Also, look around to see where you can allocate your personal resources, by doing your own gardening, window washing, and household tasks you put substantial income back into the budget.  Understandably, if washing the car or gardening is not part of your family's lifestyle, then shop around for a better deal on the services.  Those savings add up!       

Protect Your Property,
Protect Yourself

Your savings may help you towards that goal of owning a luxury SUV...but you must also "save" the things you already own.  Of course, everyone knows that insurance is vital to protect your belongings.  To guard against the risk of loss, evaluate whether you have properly insured your home, car, and property.  It sounds elementary, but you might be surprised to find what is not covered.  Don't take someone's word for it, read the fine print on your insurance policy and ask questions.   If something unexpected occurs, you don't want to bear the consequences.  Make sure the premiums you pay translate into "true" coverage. 

Even more critical than protecting property, protect yourself and your family--they are your best assets.  Maintain appropriate levels of healthcare coverage to cover general health concerns.  When reviewing your policy, find out if your plan covers prescriptions, routine checkups, and hospital care.  Also, plan for unexpected health issues.  If your spouse unexpectedly needs surgery or contracts a major health problem your finances could seriously dwindle.  It is critical to plan for such contingencies, especially when you consider the staggering statistic that at least one spouse in 70% of all senior couples will need 24-hour nursing care at some point in their marriage.   An extended stay in a nursing home can cost more than many people earn in a year!  Investigate your options for immediate and long-term healthcare coverage; it will provide you with the comfort that you aren't "living on the edge" with your money and your health.  

Keep Records, Keep Them Simple

You might say that financial records give you a history of your life.  They show you where you've been relative to where you're going.  Watching money grow requires properly recorded data.  Simple record-keeping is best.  If papers are scattered everywhere and your records are overly burdensome, you probably won't do it.  Schedule a time and frequently update your records so the information doesn't become overloaded and confusing.  If you haven't already, create a spreadsheet to input all your accounts, investments, insurance policies, and information about collectibles or holdings.  This is important when your spouse or family members need access to sensitive financial data and phone numbers in an emergency.  By properly recording important data, you prevent unnecessary stress to you and your family.  (F&H gives you access to free tools that organize your records online.  To learn more about these tools visit www.fhri.org.)

Get Smart

Records give a picture of life, but the picture is much more grand with proper investments.  To be a successful investor you need to be educated and utilize independent judgment.  Billionaire tycoon Charles T. Munger said, "The game of investing is one of making better predictions about the future than other people. How are you going to do that? One way is to limit your tries to areas of competence. If you try to predict the future of everything, you attempt too much."   In other words, if you want to be competent in a few areas, you'll need to learn about them.  And while safe investments can be sound investments, it's not always true that "you can never be too safe."  There are better ways to save than others.  Just as you wouldn't put your entire retirement into a low interest bearing savings account, you also wouldn't risk everything to speculative investments. 

By identifying your wealth versus risk in relation to your age, you track the strengths and weaknesses of your investment plan.  Whether it's real estate, mutual funds, or annuities, keep in mind that competent investors are generally good with numbers.   To be a competent investor you should have the ability to pinpoint the most important bits of data in relation to your overall financial plan.  Focus on avoiding financial losses before you analyze prospective gains.  If you limit investment to one area of industry or to one particular type of stock, you risk too much.  Good investors don't become emotional, rather they wait patiently for the return on their investments.  Slow and steady generally wins the race for long-term portfolio growth, but knowing when your investments are consistently outperformed by others is equally vital.      

Bringing It All Together

Young or old, managing money is a concern we all share. Each of us needs to be confident in our decisions, yet protective against unnecessary exposure to risk.  But before plunging out there on your own, or even with the help of a seasoned money manager, your best bet to a financially winning future lies within...A comprehensive look into your own state of financial affairs is the first, most critical step to managing your money. Whether its setting forth a household budget, establishing goals, or protecting your health and property, there are a variety of details a money manager might not care to handle, or might not know to consider when creating your investment strategy. Once you have settled these "bread and butter" financial issues, thoughts can turn towards investing your dollars in the most beneficial manner. Perhaps by focusing your attention on managing your finances, you'll find you are the most prepared to create an investment strategy, or maybe you'll still wish to rely on help from a money manager. Whatever the case, you'll take heart in the knowledge that you know all there is to know about your money...And that is an invaluable, if not magical, part of any sound investment strategy.