Live Better, Spend Less, and Save More

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Contents

Chapter...................................................................................Page1 Introduction to Personal Finance.......................................................12 Managing Cash Flow.....................................................................213 Haeberle's Personal Capitalization Ratio and Other Financial Tools.....................434 Creating Healthy Personal Finances.....................................................495 An Introduction to Credit..............................................................676 How Lenders Make Credit Decisions......................................................857 Vehicles...............................................................................1198 Housing................................................................................1319 How to Experience More Benefits While Spending Less Money..............................15110 Becoming a Skilled and Knowledgeable Consumer..........................................16311 A Summary of Spending and Saving.......................................................177Appendix1 Concepts and Tools.....................................................................1952 Would You Rather Be One Month Ahead, or One Month Behind?..............................2073 Monthly Payment Tables.................................................................2134 Remaining Balance Tables...............................................................221

Chapter One

Let's begin our journey of studying money together. As human beings, we tend to overestimate what we can do financially in a year and underestimate what can be achieved over a few decades. Good financial management should increase personal satisfaction today and improve long-term financial health at the same time. This is the ultimate goal of personal finance.

A Strategy for Financial Success: Develop financial habits and skills that contribute to both short-term satisfaction and long-term financial health.

Many people think there is a tradeoff between short-term satisfaction and long-term financial health. This belief is causing many, many people lots and lots of trouble. This book is about how you can have both short-term satisfaction and long-term financial health. Read on and you will see how you can have both. Read on and see how having both is easier than having just one or the other. Yes, I said having short-term satisfaction and long-term financial health together is easier - much easier - than having just short-term satisfaction or long-term financial health.

What you want is to have healthy personal finances today because healthy personal finances today will give you greater short-term satisfaction. I have heard and read this many times: for the end (destination) to be good, the journey needs to be good. If the journey is really bad, it is unlikely that any "end" will be worth it.

The goal is for healthy personal finances today to produce greater short-term satisfaction than thinking only about short-term satisfaction. Healthy personal finances today and every day will make for a much better journey.

Many people, and you maybe one, will need some convincing. This book is intended to convince you. Others need no convincing, but need to know how they can always have healthy personal finances. This book is intended to show you how.

To begin, it is helpful to start thinking about money not as one large category, but as four smaller categories. It is easier to think about and understand a smaller category. Also, the number of variables that a person must manage is reduced when dealing with a smaller sized category. This results in easier management, better decisions, and healthier personal finances.

The four categories of money are:

* Income: The enjoyable creation of a sufficient income.

* Spending: The purchase of things you enjoy.

* Saving: The reservation of a percentage of your income. * Investing: The spending of your money in your name with the objective of increasing your income.

Money as one subject is too big, so it gets confusing. In this situation, a person could say their goal is to have more money. The problem is, this goal is so general that it is difficult to realize. A person cannot wrap their mind around such a general goal. It is hard to get a clear focus on exactly what to do, in order to accomplish the goal of having more money.

Looking at money from the perspectives of the four categories makes thinking about money much easier. The four categories can be used to create a framework for thinking about and managing money. The framework helps to clarify goals. Clear goals lead to good plans and activities to accomplish the goals. Without clear goals, it is hard to get very far.

* Income: You are looking for a way that you find enjoyable to produce a sufficient income. Enjoying your work is very important, since you will likely spend a large portion of your time and energies on your work.

* Spending: You want to focus your spending on those things that bring you the most satisfaction. You want to reduce spending on things that bring you little or no satisfaction.

* Saving: The general rule of thumb is to save ten percent of your income.

* Investing: You want to spend your savings on assets that will increase your income.

The Focus of This Book

This book is focused on the spending and saving categories. These are the two categories that cause people the most trouble. Plus, you need to have spending and saving working for you before your earned income can do you much good or you can effectively invest to increase your income. I am also writing a book that is focused on earned income and investment income. Originally, I had all four categories in one book. The book was getting very large trying to do all four categories in one book. I decided to split the subjects because, in my experience working with hundreds and hundreds of people on the subject of personal finance, I have learned that spending and saving are the trouble spots for the majority of people. Additional earned income does no good and frequently causes even more trouble when spending and saving are not healthy. When spending and saving are not healthy, effective investing to increase income is not possible.

About Financial Goals and Outcomes

I have been mentioning financial goals. Let's consider some characteristics financial goals should have.

1. Financial goals should be clear. It is difficult to reach a goal unless it is very clear. The greater the clarity, the easier it is to determine the steps and activities needed to accomplish the goal. My experience with people on personal finances has taught me this is the factor that causes people the most trouble.

2. Financial goals should be stated in specific, measurable ways. To be a useful goal, the goal needs to be measurable. This is the second most troublesome factor for most people. They may create goals, but they are not measurable. Therefore, there is no way to assess progress toward the goal. When you cannot see progress, it is hard to keep working toward the goal.

3. Financial goals need to include a plan of action to be followed in order to achieve the goals. These are the steps and activities, which are also called processes, to accomplish the goal. I have noticed people usually try to jump too quick to activities and tasks (and time frames). I encourage you to first give attention to the clarity of the goal and then to stating it in a measurable way - then, you can create much better processes much easier.

4. Financial goals need to have a time frame. The time frame is emphasized by many writers. My view of the time frame is, "yes, it is important, but less important than the other three factors listed." I recommend focusing on factors 1, 2, and 3, and keep an eye on the time frame. Excessive attention to the time frame takes attention from the clarity, measurability, and processes (steps, activities) to accomplish the goal.

The most important step is for the financial goal to be clear. Focus your attention on that first.

Then as you continue to think about your clear goal, the details of measurement, plan of action (processes), and the time frame will emerge. At any point in time, try to be as specific as you can and still feel OK about what you are doing. If you don't feel OK, be a little less specific for now, while maintaining your focus of clarifying your goal. Over time, you will become more and more specific about your goals - this is clarity. It is like a picture that comes into focus; at first everything is fuzzy, then the large things in the picture become clear, and finally the details of the picture become clear.

Factors That Impact Personal Finances

There are 12 factors which can have a major impact on an individual's personal finances. Not every factor will apply to everyone and some people may have additional factors to add to the list. Each person needs to know what their list is at any given point in life. Here again, development of this type of list will reduce the complexity of decisions and improve the quality of decisions. Improved decision quality will result in more satisfying outcomes - not only financially, but personally too.

1. Live below your means. Spend less than your income.

2. Allocate time, energy, and money efficiently and effectively in ways conducive to building financial choice, freedom, and independence.

3. Decide if financial independence is more important to you than displaying social status.

4. Become proficient in targeting market opportunities.

5. Choose the best occupation(s) for you.

6. Choose the best partner/spouse for you.

7. How many children are best for your situation?

8. Know how to manage risk.

9. Know how to manage debt.

10. Know how to protect assets.

11. Know how to manage your health.

12. Should you set financial goals? Or, operate with no financial goals at all?

Risks You May Face

There are some risks that you may face when improving your personal finances. The idea is to become aware of what the risks are and then to take steps to reduce the risks. Depending on your particular financial situation, your risk from one or more of the following may be greater or smaller. It would be helpful for you to become aware of where you face greater risks (and begin reducing the risk) and to appreciate those areas where you face less risk.

* Inflation Risk: Often inflation can work against (but not always) investment and savings returns. Inflation can increase the market value of a house and other slow depreciating assets.

* Interest Rate Risk: Changing interest rates can affect the value of assets, change the amount of interest expenses, or change the amount of interest income.

* Income Risk: Injuries, outdated job skills, and other situations could threaten regular income and job security.

* Personal Risk: Health, safety, and other personal related risks could affect a person's personal finances.

* Liquidity Risk: Investments with high return potential, such as private equities or small businesses, may be illiquid and difficult to exit.

* Economic Risk: Economic cycles such as recession or growth may affect a person's personal finances.

Defining Personal Financial Planning

* The most important goal of financial planning is to develop healthy personal finances, which creates financial choices in life.

* Financial planning is the process of managing financial resources to achieve economic satisfaction.

* Financial planning is the process of creating, protecting, growing, and transferring wealth.

* Financial planning allows a person to become financially independent.

* Financial planning is the efficient and effective management of financial resources that enables an individual to:

Enjoy the process of producing an income

Make good purchasing decisions by choosing the best value based on a life plan and not on short-term economic constraints Create a surplus of money

Select the best investment choices

Protect the wealth that has been accumulated

Plan for an efficient and enjoyable retirement

Effectively transfer wealth at death

What is Financial Independence? A good definition of financial independence is: a person never has to do something that they do not want to do to acquire money, and this same person is never forced to not spend money when they really want to because of a lack of money. Many people think that financial independence is about having lots of money. Financial independence is not about how much money a person possesses, but rather about the person. Money can be lost. Personal qualities, skills, attitudes, thoughts, and emotions determine financial independence.

Some thoughts that tie into financial independence:

You cannot solve money problems with money.

Work like you don't need the money.

Developing Financial Independence

* Financial independence is a state of mind.

* Financial independence requires clear goals.

* Financial independence requires a process, program, or plan of action so financial resources are available to realize goals.

* Financial independence is about understanding where you are financially today, knowing what you want out of life, and knowing how you will produce financial resources to fulfill your desires.

* Financial independence is created when a plan of action is implemented - not necessarily when goals are realized.

* Financial independence is having professional freedom in your career so that you are not dependent on one employer and can pursue appropriate career development.

Enjoying the Process of Producing an Income

One of the surest ways to increase one's enjoyment of producing an income is to see results from the income. This means satisfaction from the money spent today and a sense that financial health is being maintained. Conversely, how can a person enjoy their job if there are constant money hassles, problems, and pressures?

I have worked with a number of people that thought their problem was a job they did not like that did not pay enough money. When they first started studying money with me, they were sure this was the case. After learning more about money, they realized it was not the job or the money that was causing the problem; it was spending and saving. Once they were able to get spending and saving working for them, they liked their job much better and were much more satisfied with their income.

Factors that Influence Personal Financial Planning

1. Internal Factors are each person's individual values and life situation.

2. External Factors are economic factors, such as interest rates (the cost of borrowing money), inflation (a rise in the general level of prices), economic growth or recession, and the growth of the Gross Domestic Product (GDP).

Individual Values

Why should you think about your values when considering your finances? Because you will do more and act more quickly when you understand how your actions relate to your values. People do not get bored or lose motivation with their values. Therefore, intelligent and effective financial management and planning must start with a clear understanding of our values.

Values define a way of life. Does your financial behavior - those repeated actions and decisions you make - match your values? We will work to gain a clear understanding of how your financial actions relate to your values. To be able to do this, you must develop some basic financial skills.

For example, say a person values security, but they overspend. Overspending forces the person to live from paycheck to paycheck, meaning the person is living their life in massive conflict with their values. The outcome of this conflict would most likely be big-time stress and personal conflict.

Consider your values first and stuff/things second. Stuff or things may be nice, but I encourage you to let your values drive your financial decision-making. Your values should determine your financial goals. Values are different from goals, things, or stuff to do or buy. Goals tend to be about doing and having or they involve stuff or things. Below are lists of some values and goals to help in clarifying the difference between the two.

(Continues...)

Excerpted from Live Better, Spend Less, and Save Moreby William C. Haeberle Copyright © 2009 by William C. Haeberle. Excerpted by permission.
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