This is a question that most of us who have had credit cards or loans in the past have asked ourselves. There is a certain sense of freedom knowing that you won’t have those monthly payments to deal with or the compounding interest to fight against anymore. Who hasn’t thought that life would be better without having to make that monthly car payment? And with all that extra money, just think at how fast you’ll be able to replenish your savings.

Unfortunately, this isn’t usually a good idea. Your savings is your first line of defense against disaster. It’s your heavy winter coat when you’re in a snowstorm, or your suit of armor on a battlefield. Sure you could drop it and try to use your increased speed to get out of the blizzard or take off the armor and try to out maneuver the enemy, and you may even succeed, but one accident and it’s all over.

“Divide your portion to seven or even to eight, for you do not know what misfortune may occur on the earth”   -Ecclesiastes 11:2

“The wise man saves for the future, but the foolish man spends whatever he gets” -Proverbs 21:20

Trying to gain a financial advantage at the expense of your safety net is a hasty approach to a situation where your patience will pay off. It’s better to keep your savings in place in case of an emergency and steadily and faithfully pay down your debt. If you really want to pay down your debt quickly (and safely), you would be better off diverting some of the money that you put into savings each month to paying down whatever debt is bothering you.

“Steady plodding brings prosperity, hasty speculation brings poverty”

-Proverbs 21:5

The rule of thumb is to keep between 3 and 6 months worth of income in savings in case you lose your job. If you’re at a point where your savings could support you if you lost your income, then by all means, pay down that debt. Just be sure that you don’t cripple your savings account in the process.

Why have a budget.

“Whoever can be trusted with very little can also be trusted with much, and whoever is dishonest with very little will also be dishonest with much. So if you have not been trustworthy in handling worldly wealth, who will trust you with true riches? And if you have not been trustworthy with someone else’s property, who will give you property of your own?

Luke 16:10-12

Now that we have systems in place to track our income and spending, we know how to estimate our net worth, and we have our files set up, it is time to tackle the almighty budget. This is the true crucible of personal finance. Not so much the development of the budget itself, but the responsibility and discipline required to face the real numbers and adjust your lifestyle accordingly.  If this is the first time you have created a budget you may be in for a little shock. Most people don’t realize how much money gets spent each month on impulse items, such as fast food and convenient store or vending machine snacks. But this is why having a budget is so important. Unchecked spending can only go on so long before it catches up to you. And when it does, it’s usually sneaks onto your credit card statements at exceptionally high interest rates. A well designed budget combined with the personal discipline required to keep it is the most powerful tool you will ever employ to your finances.

The goal of a budget is simple – to determine how much income you have available over a set time period, and to divide that income up in a way that all of your financial needs are met. Notice I said needs, not wants. HDTV, high speed internet, and a 10,000 minute per month family cell phone plan are not needs. Because each family is different, each budget will be different but there are some important steps that you can follow as a guideline.

1.       Determine what your needs are – Be honest with yourself. Do you really need three cars?  Could you downgrade your internet connection or even cancel it if it really came down to it? Do you need both a home phone and a cell phone? On the other hand, don’t forget about things that help you earn an income. If your job requires you to wear a suit, then dry cleaning may be considered a need. Don’t forget about utilities.

2.       Determine the cost of your needs – Don’t forget to budget for long term items. If a car is one of your needs, budget in the fuel and maintenance costs. Things like clothing and shoes will wear out and need to be replaced as well. These are the things that tend to break a budget if not planned for. Finding your yearly clothing need cost may take a while before you get an accurate number but it still needs to be estimated and budgeted.

3.       Determine your income – I listed this third because often people need to know what their needs are in order to adjust their income. By determining the cost of your needs first you can figure out if you need to work more, less or if you may need to consider changing jobs.

4.       Set your spending – Set an amount for each need that you have. Once that is covered you can start giving some money to your wants. When the money runs out, don’t budget anything else. If you haven’t met your needs then you may need to consider some lifestyle changes.

5.       Get a second opinion – If you’re sitting at your computer at three in the morning trying to put together a family budget on your own…STOP. Most individuals don’t know the true expenses of their family. Ask your wife how much she really needs for school supplies or how much lunch costs for your kids at school. You may not consider life insurance a need but ask your family how they feel first.

It’s simple for the most part but it’s important that you’re honest about the numbers and stop when the money runs out. Part of the reason for having a budget is to keep you from spending more than you have. Your Mint.com account has an excellent tool for setting and tracking your budget but you will still need to follow the above steps to ensure its accuracy.

Be sure not to forget about saving and giving.

“There is never enough left over to save, it has to be budgeted.”

I don’t remember who said that but he’s/she’s right.  The same is true for giving. Don’t forget, this is not our money we are managing, it’s Gods, and he is very clear about our need to give. While the amount of each is up to you these should be listed under your needs, not your wants. (A good rule of thumb for starting a budget is to give 10%, save 10% and live on 80%. Then work on increasing the saving and giving.)

This is just a quick guide to setting up your initial budget. In future posts we will discuss popular strategies and budgeting systems that can help you increase your long term control over your budget. Don’t forget that as your life changes your budget will need to be reviewed and updated

Be sure you know the condition of your flocks, give careful attention to your herds; for riches do not endure forever, and a crown is not secure for all generations.

Proverbs 27:23-24

Our goal of this series is to honor God by taking the first step towards responsible management of the material possessions that God has entrusted to us. In previous posts we discussed how Paul trained himself to serve God with the same intensity that an Olympic athlete trains for the games and how he encourages us to train in the same way because the crown that we receive for our stewardship will last forever.

Today we are going to get right to work setting up our long term filing system. This will work in conjunction with the simple filing system that we set up last week and will give us an organized method of storing vital paperwork.

For supplies we’re going to need file folders. Regular manila folders work great but if you have a few extra dollars I would recommend picking up a few of the thicker, multi-classification file folders. They will last a lot longer and it’s just easier when you can group similar classes of documents into one folder. You don’t necessarily need a file cabinet for this but if you have one sitting around the house I would recommend using it. Many office desks have a drawer or two that are set up for filing as well. If you are using a cabinet of some kind then you’ll probably need to pick up some hanging files in addition to the manila folders. If you don’t have a file cabinet, don’t sweat it, you can pick up an expanding file (or accordion file as they are sometimes called) that will fit all of our needs for around $10. I would also recommend picking up a two-hole punch and some two-hole fasteners like these although they really aren’t required.

How to organize folders

There are several different thoughts on how to label your folders, the most popular probably being the one-account-per-folder approach which means that each bill (telephone bill, electric bill, checking account) is placed in its own folder (along with previous statements). In recent years the tendency for companies to offer multiple utilities has made this difficult. I get my home phone, internet, and cell phone all on one bill which makes it all but impossible to separate them into their own folders. That’s why I prefer the one-company-per-folder approach.

The first thing you need to do is make a list of every company that you have accounts with. Don’t overlook the companies that auto-draft out of your checking account each month. Also, be sure to include things like charities which you’ll want to keep track of for taxes but that may not send you a statement every month.

Once you have your list. Start making files. Label each folder and, with the two-hole punch, install a fastener. Now, if you have paid bills still being stored in the simple file system that we developed last week, go ahead and hole-punch them and put them in their appropriate file. This should be done at least once a month.

Now we have our tracking system and out filing system in place. Next post we will talk about the final step. Making a budget.

Why do we track Net Worth?

Be sure you know the condition of your flocks, give careful attention to your herds; for riches do not endure forever, and a crown is not secure for all generations.

Proverbs 27:23-24

As Christians desiring to be stewards, the reasons for tracking our net worth may be different for us then for the rest of the world. While many people look at their net worth as a financial scorecard, we need to understand it as a summation of what we have been placed in charge of. As stewards, part of our job is to keep track of and manage everything that has been entrusted to our care, and nothing makes you look more closely at everything you have like estimating your net worth. Net worth is also a valuable tool for evaluating the effectiveness of financial decisions and analyzing our financial strategies. But it is important to remember that our net worth is not what determines our success as stewards, nor is it something to get emotionally attached to, it is only a tool to be used to make us better stewards.

Your net worth, in the strictest terms, is the cash value of everything you own, minus everything you owe i.e. if you sold everything including the clothes on your back and paid off every debt, how much cash would you be holding. This number is important because it sums up your financial life. If your individual accounts and assets are battles, your net worth is what lets you know who’s winning the war.

How we track it

The bad news is that your net worth changes every day and to keep an exact figure pretty much requires you to be both an accountant and a prophet. The good news is that it’s possible to get a fairly reasonable figure without that much work. Sense Mint.com is already tracking our major accounts for us, all we have to do is figure out what other assets and liabilities we have and do the math. Fortunately, Mint will do most of the work for us. If you played around with Mint.com for a little while after you set up your account, then you may have noticed that there is a place for you to track the worth of your property. In fact, you can track everything from the value of your home to the value of your dishes if you so desire. If you haven’t found this feature yet, click on the My Accounts link at the top of your Mint.com home page and you’ll find a place to add financial accounts, real estate and other.

Now I have no intention of making you sit down and estimate the value of your clothing, curtains and cookware because even if you remembered how much you paid for them, chances are you aren’t familiar with the laws of depreciation and who knows what you would be able to sell them for anyways. There are things that we can find out about though, your house and car for example. In fact, the house is the easiest, and if you have a mortgage payment, you definitely want to make sure to include this. All you have to do is put your address into Mint and it will estimate the value for you. It won’t be exact but neither will any other number that you get short of actually selling your house and writing down what was paid for it. I do follow real estate in my area fairly closely though ( I still have dreams of flipping houses for a living) and the estimate that Mint came back with was in the ballpark for what I had figured – if anything, it was about $4 – $5000 high.

Next we figure in our cars. The easiest way to do this is to look up its Kelly blue book value. Again, this is not an exact value but it is an estimate based on what other similar cars are selling for. So go out to www.kbb.com and answer the questions. I usually use the Private Party Value because I have no intention of ever selling my Jeep to a car dealership. If you regularly trade in your cars or are planning on doing so in the next few years, you may want to use the Trade-In value. Once you have an estimated value, go ahead and put that in Mint.

Next we put in our property. Like I said, it’s almost pointless to put in everything we own because there is no way of knowing how much we could really sell most of our stuff for (assuming we could sell it at all). But there are things you should be sure to find the value of and include, such as boats, RVs, jewelry, collectables, artwork, antiques or anything that is not likely to depreciate in value. Also, there are certain things that should not be included such as items that you could not sell or things that only have sentimental value. Do not include household fixtures or appliances that would stay with the house if sold, those are understood to be included in the value of the home. Also, do not try to attach a value to non-material things such as work experience or the potential value of your education (do include college loans though).

Now that you have the “Big Picture” items in, feel free to add anything that you want. If you really want to do the research and find out how much your curtains are worth, then go for it. Just remember that it’s only an estimate and if it really came down to it, you may not be able to sell them for as much as you think. That being said, it’s a good idea to update the information included in your net worth at least once a year to keep it relatively recent. So if you don’t want to figure out the resale value of your bath mats each year, don’t add them, or in accountant language, assume their resale value has depreciated to $0.

Important

This was where I originally planned on ending this post but I felt it was important to touch on something again. Many people get very emotionally attached to their financial net worth and use it as a scorecard to determine their successes. As Christians, we need to understand that our worth does not determine our success as stewards. Suppose for a moment that a man’s net worth continued to fall year after year because his amount of giving continued to increase. From a worldly standpoint this would be considered financially unwise but from a Christian standpoint he is simply giving what he cannot keep to gain what he cannot lose.

Do not store up for yourselves treasures on earth where moth and rust destroy, and where thieves break in and steal. But store up for yourselves treasures in heaven, where moth and rust do not destroy, and where thieves do not break in and steal. For where your treasure is, there your heart will be also.

Matthew 6:19-21

The world acts from a position of ownership, we must act from a position of stewardship. Our goal is not to become wealthy even thought our duty as stewards may include increasing wealth. So do not use your net worth as anything other than what it is; a tool for determining your financial position and for tracking the direction or your finances. It is not a measure of your stewardship, it is not a scorecard of your wealth, and it is not a figure to devote unhealthy amounts of your time obsessing over.

But godliness with contentment is great gain. For we brought nothing into the world, and we can take nothing out of it. But if we have food and clothing, we will be content with that. People who want to get rich fall into temptation and a trap and into many foolish and harmful desires that plunge men into ruin and destruction. For the love of money is a root of all kinds of evil. Some people, eager for money, have wandered from the faith and pierced themselves with many griefs.

1 Timothy 6:6-10

We have been spending the last few days talking about the importance of stewardship and developing a plan to help get our personal finances in order. A lot of this may be extremely basic for some people but because much of what is required to create and maintain a responsible home budget isn’t taught in school, I decided to start from the beginning. If you don’t currently have a system set up in your house then I would suggest reading the previous two posts to help catch up.

The first step that we took was to create a simple filing system and calendar to help keep track of our bills. Today we are going to set up a system for tracking income and expenses. Proverbs 27:23-24 tells us;

Be sure you know the condition of your flocks, give careful attention to your herds; for riches do not endure forever, and a crown is not secure for all generations.

Proverbs 27:23-24

So in light of that, we are going to set up a system to ensure that we can constantly monitor and give careful attention to the condition of our finances.

If the thought of this makes you groan, believe me, I understand. It was many years before I was able to set up a system that accurately let me see where my money was going. But the good news is, it’s only going to take you about 15 minutes.

Create an account with Mint.com

Mint.com is a free, online, personal finance tool that helps you to track multiple accounts with banks, credit card companies and other financial institutions. It also easily allows you to create a budget and see how much you are spending in different categories such as groceries, utilities, dining, gifts, ect.. And the best part is that, after a little setup time, it takes very little maintenance on your part. Each day, it will download your transactions from your financial institution(s) and categorize them according to where the money was spent.

If you have trouble with Mint.com, or you are more familiar with the quicken interface, you can also set up your accounts with QuickenOnline.com. I have used Quicken for years but am personally partial to Mint.com because of its interface and its ability to include the value of my property (such as a house, car, jewelry, ect..) in my net worth. We’re going to set that up in a future post but for now, just be sure to get your major accounts listed. Make sure to include the following accounts:

-Checking Accounts

- Savings Accounts

- Credit Card

- Mortgage

- Loans (including auto and student)

-Investment Accounts

If you can’t get your investment or retirement account in there it should be ok. We’re mainly just trying to get the “high traffic” accounts, that is, the accounts that are used on a regular basis. If Mint.com isn’t set up with one of your major financial institutions, then you may want to try QuickenOnline.com.

Now that we have a method of tracking credit card and bank transactions, that only leaves one area…cash. If you are one of those people who have been using a check card or credit/debit card for so long that you’ve forgotten what cash looks like, then this isn’t for you. But, if you do carry cash for vending machines, parking meters and such then we need to keep an eye on that as well. I’m going to recommend an age old budgeting tradition. Keep a small notepad or even just a piece of paper with you each day for the next two weeks and write down how much cash you spend. It’s amazing how a little change here and there add up.

Don’t forget to keep tracking (and paying) your bills in the mean time. We’re going to come back to those in a few days when we set up our filing system. Next post we are going to discuss finding and tracking your net worth.

          The most common reason that people give for not saving money is, “I just don’t make enough”. From a perspective, this is almost always true. It’s been said that your lifestyle will rise to meet (or exceed) your income. If that’s the fact, then no one really ever makes enough money, and they never will. But those of us who are conscience about our finances understand that it is important to budget savings first and then live within our means. Otherwise, there is never enough left over. I’ve done some simple math to compare the virtues of cutting expenses vs. making more income, so if you’re one of those people who are just waiting until your next pay raise to start saving, you may want to pay attention.

          Let’s assume that Person X is currently making a steady salary. He finally has his life in order and his budget is perfectly set so that he has exactly what he needs to pay his bills. He is only waiting until his next pay raise so that he can start saving. Let’s also assume that person X also has the uncanny ability not to be tempted to increase his lifestyle when the raise comes. That super power alone is enough to show that person X better belongs in a comic book than in the real world, but still, let’s just assume. At the beginning of the year, Person X is given a salary raise of $10,000 per year. Utilizing his super powers, he puts %100 of his pay into savings. But there is one problem, taxes. Person X doesn’t get to keep everything that he makes. Assuming that he gives 20% of his income back to the government he only gets to take home around $8,000 more per year.

          Now, let’s assume that Person Y is in the same situation. The only difference is that instead of waiting for his next pay raise, he changes his lifestyle to allow him to start saving now. He sells his newer car and buys an older model for cash; he cancels his satellite TV and subscription to “Yacht Magazine”, he starts clipping coupons and buying only what he needs and at the end of the year, he is able to budget $10,000 per year to go directly into savings. Sense his budget was based on his take home pay and not his salary; he doesn’t have to figure taxes into the equation. He has effectively given himself a 20% return on his savings over person X, and the only difference is the taxes that he didn’t have to pay on the money he saved.  As much as I would like to start computing the interest that each person earns over the years, I think that it’s clear who is going to come out ahead.

           The numbers that I chose for this example were picked to make the math simple but the point is clear. A penny saved is worth more than a penny earned because you don’t get to keep the entire penny that you earned. In fact, depending on your tax bracket, a penny saved may be worth 1.1, 1.15 or even 1.4 (or more) pennies earned, and when those pennies turn into dollars, the difference is astounding.

Once upon a time…

A young man wanted to build a house. He had never built one before and didn’t know quite what to expect but he knew that this would be the house he lived in with his family for the rest of his life, and that it would continue to shelter his family after he was gone.  Because this was such an important undertaking he decided to get some advise.

First, he went to the lumberyard to ask the Lumberjack what he should build his house out of. The Lumberjack listened to what he needed in the new house and explained to him how lumber was the best choice for all his needs. He had a very compelling case. Lumber was strong, a natural insulator and cheap enough to be replaced as needed. A lumber house could meet all of his needs.

 His mind was pretty much made up but because this was such an important project he decided to go ahead and get a second opinion. So he went to the brickyard and told the Bricklayer what he needed in a house and asked what he should build it out of. The Bricklayer listened intently and considered the mans need. After a few moments, the Bricklayer explained how the only way the man would get everything he needed out of a house was to build it with brick. The man listened to his advice and saw that he had a very good point. Brick is very strong, waterproof, can endure the elements and lasts a very long time. A brick house could meet all of his needs.

His mind was made up but just to make sure, he thought he would get one more opinion. He went to the Masons shop and told him about his dilemma. The Mason listened intently to the mans story then told him that his best bet was to build his house from stone. It was long lasting, very very strong and always available. The man had finally made up his mind.

When the man went home that night he told his wife about his day. He was very proud of himself because he got the opinion of three professionals before making up his mind to build a house out of stone. His wife thought for a moment and asked him, “Dear, are you sure you spoke to the right professionals”? “What do you mean” he asked. She answered, “It seems to me that a bricklayer would be an expert on bricks, and a Mason on stone, but none of these professionals are true experts on building a house”. The man stopped and thought for a few moments about what his wife had said and then asked her, “But who would I ask about building a house”? “Why, an architect of course” his wife answered.

The man knew his wife was right and set off the next morning to see an Architect. The man explained everything he needed in a house and how he wanted the house to take care of his family after he was gone. The Architect listened intently and explained to him that for a house to do everything the man wanted it to, it would have to be built of wood, brick, stone, steel, aluminum and many other materials. He worked with the Architect to ensure that the final design met all of his requirements and the Architect offered his advise on several areas that the man had not considered. When all was said and done, the man not only had a very well thought out plan for a house that met all his needs, but he also had someone to go to when things in his life created changes in his plans.

Soon after, the man and his family built their new house with the help of the Architect. And they all lived happily ever after.

THE END

While this story was obviously fictional, the message is something that we can easily apply to our finances. When getting advise on financial matters, be sure to ask the right people. I have had many meetings with insurance agents, mortgage companies, investors, and tax accountants and all of them seem to know exactly what I need to make sure that my financial planning needs are met and that my family will be taken care of when I’m gone. However, I’ve found that the best financial plan incorporates more than just an insurance agent or mortgage broker can offer. A full financial plan requires a full financial architect. Someone who is knowedgable  in many, if not all areas of personal finance.

Be sure you know what areas your financial advisor is fluent in before you trust your families future to his planning and advise. And beware of the roaming insurance agents who knock on your door and claim to be able to help you protect your families future. They may know their trade well and make a convincing case but be sure you get some advice from an architect before you make your final decision.