Join Jim Stice for an in-depth discussion in this video The importance of personal budgeting, part of Finance Foundations.
- Okay let's talk about prudent lifestyle for a moment. The most prudent thing you can do when it comes to financial flexibility in financial spending is to keep your fixed costs low. It turns out fixed costs are exactly that, they're fixed. If you get a big house payment, you're going to have a big house payment for a very long time. A big car payment the same thing, and those things are due every single month. These are lifestyle choices that constrain your financial flexibility.
If you've got a large house payment there are less things you can do with the money that's remaining. House payments, car payments, installment payments, Cable, internet, phone bills, all these things add up. The more your income is pledged to meeting fixed costs the less financial flexibility that you have, so keep your fixed costs low. In addition to having a prudent lifestyle let's talk about budgeting, nobody likes to talk about budgeting. Turns out if we don't track our spending our spending gets away from us.
When it comes to budgeting it's a pretty simple equation. We have inflows and we have outflows. If our inflows are higher than our outflows, we have a surplus. If our outflows are higher than our inflows, we have a deficit. Now you tell me which is easier to increase your income or to decrease your spending? For most people you have more control over your spending than you have over your income, but if you want to have control over your spending you need to track your spending. That brings us to budgeting, a budget has two essential elements.
First, you got to write things down. If you're not tracking your expenditures how do you know how you're doing? If you're not writing it down how can you keep track? Now tell me this, what happens to the following if you don't measure or monitor it regularly? Your weight, if you don't monitor your weight it doesn't tend to go down it tends to go up. If you don't monitor your checking account balance it tends to go down rather than go up. If we don't keep an eye on them they're going to go typically in a direction we don't want them to go, so step one in budgeting we've got to write it down.
Step two, we've got to develop a plan. We've got to write that plan down. It turns out a plan that is not in writing is just a wish. We've got to have a plan to reduce debt. We've got to have a plan to start saving. Saving for emergencies, saving for retirement, saving for investments. A prudent lifestyle and living within a budget give us financial flexibility. We've got to track our expenditures. It turns out to spend less than you make you need to track what you spend.
- Understanding financial statements
- Managing finances in the short term
- Analyzing risk and return
- Obtaining short-term and long-term financing
- Understanding the stock and bond markets
- Comparing the Facebook and Microsoft IPOs
- Working with financial institutions
- Using capital budgeting
- Creating simple personal saving and investment plans