Finance is one of the areas where most people know what needs to be done, but they simply don’t do it. The inevitable result is stress, loss of time, and regret.
When I was in my early adult years, like many others I got into a little financial trouble. From a mathematical point of view, I should never have encountered any issues with anything to do with numbers. (Check out the video below.) If you don’t watch the video, just take my word for it.
Yes, I am good with numbers, but I was bad with money in my early years. The same thing happens to a lot of people. The question is why? It’s because like the food we like to eat, spending is behavior driven. We know we should spend less than we make, but we see ‘things’ we really want, and we are tempted.
It wasn’t until my mid-twenties that I started to get a handle on my finances. I got hold of a copy of Dave Ramsey’s Total Money Makeover, and that was the beginning of an incredible journey towards financial health. I believe every single person can be on their way to financial health by having three things:
Everything is God’s. You may be thinking, I am pretty sure I paid for that television hanging in my house or I pay for the house I am living in every month. The reality is that God allows you to have things. You are just the manager of the things you have.
King David said it best, “a psalm of David. The Earth is the LORD’s, and everything in it. The world and all its people belong to Him.” (Psa 24:1)
Once you have gained that perspective the next thing you need to realize is that money is neutral; it’s not good and it’s not bad. Money is not the root of all evil, as some people misquote scripture; the love of money is. It is okay to have money. It’s not okay for money to have you.
Possibly the biggest missing driver in managing personal finances is not having a deeper purpose for money. I believe one of the biggest issues is not that people want too much, although some do. It is that they don’t want it for the right reasons. Having money just to have money is not a deep enough purpose.
Look at this quote by Woodrow Wilson:
“You are not here merely to make a living. You are here in order to enable the world to live more amply, with greater vision, with a finer spirit of hope and achievement. You are here to enrich the world, and you impoverish yourself if you forget the errand.”
Our purpose for our finances should be God-honoring. These could include furthering His mission in this world, taking care of our families, helping our aging parents, building orphanages, etc.
Having a greater purpose for your finances helps you to say no to the things that would hinder you from achieving that purpose. One of the biggest boosts to your financial health is the ability to say no to buying things you truly don’t need.
It is helpful to have a purpose statement for every important area of your life.
When it comes to money you have two choices: Tell your money where to go or try to figure out where your money went. You have probably had the thought before of where all your money has gone.
[bctt tweet=”When it comes to money you have two choices: Tell your money where to go; or try to figure out where your money went.” username=”justinsetzer”]
Good financial perspective and purpose are great, but without a plan they are useless. One of my favorite quotes on planning comes from the book of Proverbs:
Look straight ahead, and fix your eyes on what lies before you. Mark out a straight path for your feet; stay on the safe path. Don’t get sidetracked; keep your feet from following evil. (Pro 4:25-27)
This verse encourages us to mark out a straight path for our feet or in plain English, plan. Most of what I have learned about planning has come from going through the Financial Peace University, led by Dave Ramsey. In FPU, Dave leads you through what he calls baby steps.
Seven Baby Steps
1. Save $1000 to begin to establish an emergency fund.
You may be wondering, why shouldn’t I start paying down my debts before putting money into savings? The issue here is if you are paying down the credit card, and suddenly find you have to have a break from your job, how would you go on paying for your food, utilities, rent? With your credit card? You would soon be even further in debt.
That initial thousand dollars would serve as a barrier, albeit not huge. A fund to prevent you from slipping further into debt.
2. Pay off all debt (besides the house).
Start by putting your extra money towards paying down your smallest bill. I know you may want to pay off the debt which charges the highest interest first, but you will be more likely to continue, and persevere, by knocking out those small bills first. Seeing them paid off, one by one will give you the motivation you need to keep going.
You may not have anything extra to put towards the credit cards or car payments each month. I would encourage you to figure out a way to add an additional two hundred dollars to your budget each month. You could do this for instance by cutting out two hundred dollars worth of expenses; possibly by canceling cable. You could also pick up a side job for a few hours a week that would give you that bump up.
3. Finish topping up your emergency fund with three to six months’ worth of expenses.
Once you pay off everything but the house, it’s time to build your emergency fund up to have enough to cover your expenses for three to six months in case of a job loss or other unforeseen financial emergency.
The amount you need to put aside will vary according to your monthly expenses, but will probably be between eight and twenty thousand dollars.
4. Invest 15% of your income into retirement.
You are really cooking with gas once you get to this point. You are probably getting pretty excited about your financial future, and you are glad you started the process. It’s now time to turn your attention from the present to the future. At this point, you should invest 15 percent of your income into an IRA. I’m not going to give you specifics on what, or where, to invest, but I encourage you to do your due diligence.
5. Save for your children’s college.
If you have children, now is the time to start saving for their higher education. Families will differ in how they view what portion of the college costs if any parents should help their children with.
6. Pay your home off early.
Once you have paid off all those little bills, it might well be that the only bill left is your mortgage. Now put all the extra money you have been making, or saving, into knocking out that mortgage. You’re almost there!
7. Build wealth and give.
You are now totally debt free and it’s time to use your best wealth building tool, your income, to build wealth and give. As Dave Ramsey says, “you have lived like no one else, now you can live and give like no one else.”
This plan needs to be written down and followed. By following this plan assiduously, I have experienced incredible results. I and my family are almost totally out of debt.
I would love to see you achieve a financially healthy life. If you have the right perspective, the right purpose, and the right plan, you will be on your way to financial health.
If you are interested in the same Excel spreadsheet that my wife and I use to do our monthly budget, download it here.