How Do You Know Your Finances Are in Order?

It is common knowledge that many of the conversations we have around money revolve around how to earn it, but spending it most time is usually left to your discretion. I guess I can understand why; after all, you did all the work that got you the money alone- that tedious hard work! – So why should anybody get to tell you what to do with it.

However the problem of overspending or underspending is always floating around our heads, and usually, the advice you get to this is that “hey, you need to get your finances in order” – even when most people have no clue what that is. So I have always wondered:

What would it take to get my finances in order?

My answer to this question, stated in this post is primarily derived from Paul Mladjenovic’s book Stock investing for dummies (also available on audible), with other additional sources referenced along the way.

1. To Begin: You Need A Budget

Keeping a monthly budget like a diary provides us with an accurate knowledge of our monthly income and expenses. For me, this is particularly important because I get to know if I am progressing toward my financial goals or not. Ok then, how do we create a budget?

Step 1: Estimate Your Monthly Income

The first step is to list all our income sources and how much we expect to receive from them –easy right? Your income sources could include paychecks, pay from gig work, social security income, etc. If your paycheck amounts differ each period, use a conservative estimate to set yourself up for success.

It’s important at this stage that we only focus on consistent sources of income. For instance, a paycheck from your day job is consistent, but money from the sale of your old clothes is not.

Also, net income also known as “take-home pay” is preferred for budgeting.  This is the money you have left over after taxes and payroll deductions.

Step 2: Estimate your Monthly Expenses (Spend a month or two tracking your spending)

There are fixed expenses and variable expenses. Fixed expenses are those that are the same amount each month e.g. your rent or mortgage, cell phone bill etc. You can always get an accurate estimate for these amounts by looking at past credit card or bank statements.

On the other hand, variable expenses are those with varying amounts each month. E.g. your groceries, eating out, gifts, clothes etc. To estimate variable expenses you may need to spend some time tracking these expenses, to get a more accurate estimate.

Also, you may have expenses you pay for annually, to budget for these, divide the expense by 12, then put aside that amount each month.

Calculating all of the above together would give us our total monthly expenses. However, if you want an easier way to track your expenses, consider looking through this list of budgeting apps curated by Daphne Foreman on Forbes advisor.  

Step 3: Compare your Income and expenses, and Consider your Priorities and Goals

All that’s left to do now is to compare your total estimated income to your total estimated expenses. It goes without saying that what we want is a greater monthly income than monthly expenses. If this is what you have then great!

If however you get a deficit, Paul Mladjenovic offers the following considerations, to help bring your budget into balance:

•  How can you increase your income? Do you have hobbies, interests, or skills that can generate extra cash for you?
• Can you get more paid overtime at work? How about a promotion or a job change?
• Where can you cut expenses? Have you categorized your expenses as either “necessary” or “nonessential”?
• Can you lower your debt payments by refinancing or consolidating loans and credit card balances?
• Have you shopped around for lower insurance or telephone rates?
• Have you analyzed your tax withholdings in your paycheck to make sure that you’re not overpaying your taxes (just to get your overpayment back next year as a refund)?

Step 4: Stick with it.

Regardless of whether you have a surplus or deficit on a budget, the benefits of budgeting are best derived when you stick with the habit. Continuously, tracking your spending, plugging spending leaks, adjusting your budget, and saving money.

The team at Bungalow has this to say about budgeting:

“Having a personal budget that you review on a regular basis is an essential part of financial literacy, and it’s the best way to prevent overspending.”

Bungalow

As the name implies the purpose of an emergency fund is to help you with cash during emergencies.

2. After a budget: Consider setting up an Emergency Fund

This next step up the road is based on the assumption that after deducting my monthly expenses from my monthly income in the step above, I have cash left over to pursue my financial priorities and goals.

The purpose of an emergency fund is to store money that you may need in times of distress. The goal is that you have in your fund at least three to six months’ worth of your total monthly expenses in cash.

Three to six months is considered enough to get you through the most common forms of financial disruption such as losing your job. However, you may consider saving up for a year’s worth if you prefer a more conservative cushion.

Paul Mladjenovic advises that you resist the urge to start thinking of your investment in stocks as a savings account, “this is dangerous thinking!” because If your investments tank, or if you lose your job, you’ll have financial difficulty and that will affect your stock portfolio (you may have to sell stocks in a losing position just to get money to pay the bills). An emergency fund helps you through a temporary cash crunch.

3. Understand Your Net worth

Asides from our income and expenses, our financial well-being is also influenced by assets and debts. Having proper knowledge of these amounts and their impacts on your financial well-being is critical to having your finances in order.

Calculating your net worth is relatively straightforward. Pull out a pencil and a piece of paper. For the computer savvy, a spreadsheet software program accomplishes the same task.

Gather all your financial documents, such as bank and brokerage statements and other such paperwork — you need figures from these documents. Then follow the steps below. Review your position at least once a year to monitor your financial progress (is your net worth going up or down?).

Step 1: List your assets in decreasing order of liquidity

Liquidity refers to how quickly you can convert a particular asset (something you own that has value) into cash. If you know the liquidity of your assets, including investments, you have some options when you need cash to buy some stock (or pay some bills). All too often, people are short on cash and have too much wealth tied up in illiquid investments such as real estate. Being Illiquid means that you don’t have the immediate cash to meet a pressing need.

Listing your assets in order of liquidity on your balance sheet gives you an immediate picture of which assets you can quickly convert to cash and which ones you can’t. If you need money now, you can see that cash in hand, your checking account, and your savings account are at the top of the list. The items last in order of liquidity become obvious; they’re things like real estate and other assets that can take a long time to convert to cash.

Selling real estate, even in a seller’s market, can take months. Investors who don’t have adequate liquid assets run the danger of selling assets quickly and possibly at a loss as they scramble to accumulate the cash for their short-term financial obligations. For stock investors, this scramble may include prematurely selling stocks that they originally intended to use as long-term investments.

When listing your assets from most liquid to least liquid, consider the following (provided by the University of Illinois):

• Cash — those things that either are or can be easily converted to cash. Keep in mind that cashing in certificates of deposit (CDs) before they mature may result in an interest penalty.
• Investments — financial assets that can be cashed in or sold for their current market value e.g. own stocks, bonds or mutual funds. Prices will fluctuate with market conditions. Annuities may have surrender penalties. You may also owe income taxes and early distribution penalties on money taken from annuities.
• Retirement Assets — Assets that are held in tax-advantaged retirement accounts, such as 401(k) plans, IRAs, and pensions. You will owe regular income tax on withdrawals from tax-deferred accounts, and withdrawals before age 59-1/2 usually involve an additional 10% penalty.
• Personal Assets — Real estate and personal property that can be sold but usually not as quickly as other assets. Assets such as vehicles, furniture and appliances usually depreciate in value; so they are worth much less now than when you purchased them, even if they are still in good condition.

Liabilities are bills you are obligated to pay in future

Step 2: List your liabilities

Liabilities are simply the bills that you’re obligated to pay. Whether it’s a credit card bill or a mortgage payment, a liability is an amount of money you have to pay back eventually (usually with interest). If you don’t keep track of your liabilities, you may end up thinking that you have more money than you really do. Use the order below as a model when you list your own. You should list the liabilities according to how soon you need to pay them. Credit card balances tend to be short-term obligations, whereas mortgages are long-term.

• Credit card loans
• Personal loans
• Mortgages

Step 3: Calculate your Net worth

Your net worth is an indication of your total wealth. You can calculate your net worth with this basic equation: total assets less total liabilities. Just being in a position where assets exceed liabilities (a positive net worth) is great news. Analyze your own financial situation; your objective should be to increase your net worth from year to year as you progress toward your financial goals.

Step 4: Analyze your Net worth

In his book, Paul Mladjenovic offers the following advice to help in making more positive changes to your net worth by considering some or all of the following:

• Is the money in your emergency (or rainy day) fund sitting in an ultra-safe account and earning the highest interest available?
• Can you replace depreciating assets with appreciating assets?
• Can you replace low-yield investments with high-yield investments?
• Can you pay off any high-interest debt with funds from low-interest assets?
• If you’re carrying debt, are you using that money for an investment return that’s greater than the interest you’re paying?
• Can you sell any personal stuff for cash?
• Can you use your home equity to pay off consumer debt?

Closing Remarks

From the above, the three steps to understanding your financial well-being and getting your finance in order are:

I understand that your real-world affairs may require you to make varying changes to the structure provided here, but I am hoping this would serve as a reasonable background for pursuing your financial goals, especially as we begin 2023 tomorrow. I wish you the very best.

All You Need To Know In order to Master Prioritization

You probably have regrets , You may think of things you should have done but you didn’t do or somethings you did but you did them at the wrong time or in the wrong order.

Establishing your goals/actions in order of importance or urgency is termed prioritizing. You may think to yourself that the reason you don’t do the right things at the right time is because you don’t prioritize.

But this is not true, Everybody prioritizes, it only feels like you don’t because you do it in your head, this leads to constant overthinking and second guessing and eventually a lack of clarity which eventually leads to taking actions not for the results they bring but so that “you can just do something already!”  the effect of this action is not to achieve a goal but rather to end having to think of your decisions.

Things could turn out differently if you don’t skip the vey vital step of “writing down your priorities” and we will explore that in this article.

Defining  your priorities using the three-list method

To begin this process you will need to write down every single thing you want to achieve in a “Master list”. It’s impossible to prioritize your tasks if they’re all swimming around in your head.

Think of this process as a brain dump. You want to get every possible thing that pulls at your attention out of your head and write them on paper.

After this is done you can then begin breaking them down into monthly, weekly, and daily goals.

Weekly List #1 – The Weekly Calendar

For your  weekly calendar. Make it your basic time budgeting guide. List your courses, work, study time, recreation, meals, TV, relaxation, etc. be flexible, adapt your schedule to changing needs. Keep your schedule handy and refer to it often. If it doesn’t work, change it.

Daily List #2 – The Daily “Things to Do.”

Write down all the things (not on your calendar) that you want to do today . Things like homework due or tests to take or tasks you want to emphasize. Also  include shopping, personal calls, etc. This list is a reminder. Use it to set priorities and to reduce decision-making and worry. If time is tight, move items to your long-term list. Rewrite this list each morning.

Monthly List #3 – Goals and Other Things

This can be one or two lists, a weekly list and/or a monthly list. Put down your goals and things you have to do. What do you want to accomplish over the next month? What do you need to buy? Use this list to keep track of all your commitments. If you’re worried about something, put it on this list. The purpose of this list is to develop long-term goals and to free your mind to concentrate on today.

Trimming Your Lists

Writing down your goals and classifying them is a good start to prioritizing your objectives, the next thing to do is to cut each list to size. There will be some tasks in your list that you do not actually need and some that have been improperly ranked, for  this you will apply the Eisenhower method.

The Eisenhower matrix

Developed by former US president Dwight Eisenhower, the matrix is a simple four-quadrant box that helps you separate “urgent” tasks from “important” ones.

In basic terms, urgent tasks are things you feel like you need to react to right away, like emails, phone calls, texts, or news. While important tasks are ones that contribute to your long-term mission, values, and goals.

When looking at how to prioritize tasks best, ask which one of the quadrants they best fit in:
Urgent and Important: Do these tasks as soon as possible
Important, but not urgent: Decide when you’ll do these and schedule it
Urgent, but not important: Delegate these tasks to someone else
Neither urgent nor important: Drop these from your schedule as soon as possible

Do not hesitate to drop the task classified as “Neither urgent nor important”
Rather than intersperse working on these goals when you have time, you should actively avoid them. These are the tasks that are seemingly important enough to deserve your attention but in reality, aren’t moving you towards your long-term priorities.

Pick a single thing to focus on

This is as straight-forward as it sounds but very difficult to adhere to except with strict practice. Once your list have been set-up. You should make sure that at every point in time you are only doing one task (one thing at a time).

Focusing on one task at a time would eventually lead to more productivity for you in the long run. Do not try to multi-task, as I explained in my previous article on ways you can improve your attention span, multitasking is less effective and can only be pulled off successfully by few persons in the WHOLE WIDE WORLD!

When you focus on one task, after it is done take joy in crossing in off your list then move on to the next one.

Adapting and Flexibility

As you go through these prioritization exercises, it’s important to remember to be flexible. No one knows what the future holds. And ultimately, prioritizing and planning is really just guessing.

Sometimes you might prioritize a task only to have expectations or deliverables change on you. At this point it’s hard not to be disappointed. But you can’t let that skew your judgment.
Humans are especially susceptible to the “sunk cost fallacy”—a psychological effect where we feel compelled to continue doing something just because we’ve already put time and effort into it.

But the reality is that no matter what you spend your time doing, you can never get that time back. And any time spent continuing to work towards the wrong priority is just wasted time.
Sometimes our effort is better used switching boats than trying to fix a leak. Learn from it and move on.

Other Lists For Things You Should Avoid

• Don’t work when frustrated or angry; put feelings on a list and calm down.
• Don’t worry or feel guilty; put problems on a list, unwind and plan for today.
• Don’t look back and regret past actions; put them on a list, relax and look ahead.
• Don’t get sick and blow your schedule; think positive, eat, sleep and exercise.

Handling Distractions

Do you get sidetracked by TV, telephone, friends, sports, boredom, daydreaming? Do you procrastinate? The best way to not do something is to avoid it. For instance if you wanted to study without distractions, you can find a place to study where there is no TV or telephone, Try a library or study hall or mute the notifications sound on your phone, turning it off is also a good idea.

Handling distractions takes a bit of discipline but you will better for it, when you are about to start a task tell yourself that you would not do anything else until the task is completed, if something pops up in your mind write it down in a “to-do later list” and move on with your task.

As with all things practice makes progress and the tips stated in this article are not excluded from this law therefore if you want them to help, you must be willing to practice them. KEEEP LEARNING KEEP GROWING!.

Feel free to comment below.