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Do you ever feel like you just don’t want to look at your bank account because you don’t want to know how much is actually there? Ever dread getting a paycheck, because you know every dollar of it will be spent the same day paying bills? Do you live anxiously fearing that the next phone call will be that bill collector demanding you pay him before you pay your rent or feed your kids? Do you want to bury your head in the sand and hope it will all just go away?
We’ve all been there, or at least pretty close to there. I know I have.
These are the challenges we face as individuals as we venture off into the world and have to learn how to manage our personal financial lives. Its like learning to walk– you’re going to fall down a few times before you figure out how to maintain your balance and stay upright. Even when a child finally figures out how to stay on two feet, he does the frankenstein thing and wobbles around– we all thinks its adorable, and it is– but eventually, as the child does it more and more, he figures out how to stay balanced and before long, he can walk, run, and talk all at the same time.
Your personal financial life goes kind of the same way. Obviously there are many of you out there that learned very early how to manage your money, stay out of debt, and build savings. I envy you. For the rest of us, it’s much more of a challenge. We are wobblers. We fall down. We bang our heads on the table and get hurt. We are slower learners.
So let’s learn to walk.
Here are five keys principles when it comes to your personal finances.
1. Pay Tithing and Give
As you discharge this obligation to your Maker, you will find great, great happiness, the like of which is known only by those who are faithful to this commandment.¹
–N. Eldon Tanner
I am a Mormon. I believe in tithing. I believe in giving 10% of my income to my church. This is the first thing I do with my income before anything else. I have been blessed a hundred fold by abiding by this commandment.
If you are LDS or a member of any other christian denomination or of any organization that teaches the law of tithing, then I would strongly encourage you to be faithful to this law. There is something powerful about giving and making sacrifices that allows us to win.
There is more to giving and tithing than simply obedience to a law or commandment. While this is very important, there is more. Giving causes us to think about others and to think less of ourselves. One of the greatest things we can do as human beings is to love others. Giving is one way in which we do that.
As you build wealth, continue to give, even beyond the tithe to your local church. It seems crazy to think that by giving away your money, you will actually gain more. But being a giver and thinking more about helping and serving others will bring more opportunities into your life, which will create more opportunities for wealth building. I’m not exactly sure how it works, I just know it does.
Be a giver.
2. Avoid Debt
Those who structure their standard of living to allow a little surplus, control their circumstances. Those who spend a little more than they earn are controlled by their circumstances. They are in bondage.¹
-N. Eldon Tanner
Live on less than you make.
If you can master this concept, you are already winning. Nothing will destroy your financial security more than overspending and buying things you don’t need with money you don’t actually have. You cannot win financially if you spend more than you make.
Your income is your most important tool for gaining financial security. Do not divide your income into monthly payments by playing the payment game. You will wobble and fall. Avoid debt and set aside money in savings to buy the things that you and your family need— I emphasize need– learn to distinguish the difference between your wants and your needs.
The only exception to having debt is when buying a home. Still, be wise when buying a home. Choose a modest home that you can afford; do not take on more than a 15-year mortgage. Save up a good sized down-payment. Your monthly payment should not be more than 25% of your monthly household income.
If you already have debt, get out as quickly as possible. Develop a plan to reduce your debt. Cut expenses, increase your income, discipline yourself, and focus intensely on paying off your debts. Nothing will create more stress and tension in your life than being in debt. You are a slave to your creditor.
3. Use a Budget
Those who live safely within their means know how much money comes in each month, and even though it is difficult, they discipline themselves to spend less than that amount.²
-Joseph B. Wirthlin
The budget is your guide. The budget will tell your money what to do. It will help you know where you are supposed to go.
Learning to walk: When a child begins to walk, he takes only a few steps before he falls. Usually mom and dad will stand several feet apart and call the child to walk toward them– directing, encouraging and cheering them with every step. As the child gets better at walking, mom and dad move farther and farther apart, eventually stepping aside. Mom and dad are the guide; telling the child where he is supposed to go and how far. This gives the child confidence. Can’t you hear the kid saying to himself, “Yeah, I can do this. I can walk that far!”?
The budget will guide you in the direction you need to go and tell you exactly how far you can go. It will give you the confidence you need to live on less than you make and help you avoid going into debt. It will tell you when you are winning and when you need to make adjustments.
A new budget should be made every month. Every month is going to look differently. If you are married, have a regular budget meeting with your spouse before the month begins. Discipline yourself when establishing a budget, but be reasonable. Plan for how much you will save, spend on groceries, utilities, clothing, transportation, insurance, etc.
Being on a budget doesn’t mean you can’t do anything fun, it just means that you plan for it. Know how much money you are spending and where you are spending it. Be intentional about your spending. Don’t be asking yourself at the end of the month where all your money went.
Use a budget sheet to help you create a plan that works for you.
Tell your money what to do instead of wondering where it went.
4. Have an Emergency Fund
Set your houses in order. If you have paid your debts, if you have a reserve, even though it be small, then should storms howl about your head, you will have shelter for your wives and children and peace in your hearts.³
-Gordon B. Hinckley
It is impossible to plan for everything. Every once in a while something unexpected is going to occur– that you can plan on. Have an emergency fund in place for these occasions. If you do not have emergency savings, the smallest unexpected event will derail your monthly budget and throw your plan out of whack. Having an emergency fund in place will help you avoid having to borrow money to cover an unexpected expense. Your Visa or Mastercard does not count as an emergency fund.
Start with a small emergency fund.
If you are just beginning to turn things around by getting on a budget and a making a plan to get out of debt, start with a small emergency fund of $1000. This will give you a little cushion as you begin paying off your debts and getting on a plan. This will prevent your monthly budget from coming off the tracks and will keep you moving forward. Even a small emergency fund will turn a potential emergency into only a minor inconvenience, financially speaking.
If you are out of debt– or once you pay off your debts– build your emergency reserve fund to about 3-6 months of your household expenses. This will give you a large enough cushion to help you manage a potential financial crises like a job loss, a medical emergency, car or home repairs, etc. In addition, it will give you and your family the security you need to continue to pursue and meet your other financial goals and dreams.
The emergency fund should only be used for emergencies. It should be separate from any other savings funds. If you have to use some of the fund for an emergency, make it a priority in the budget the following month to replenish the full balance.
5. Educate your Family
Teach your children while they are young. Teach them that they cannot have something merely because they want it. Teach them the principles of hard work, frugality, and saving.²
-Joseph B. Wirthlin
If you have young children, take advantage of the opportunity to teach them sound financial principles as they grow up. Include them in some of your financial planning meetings. Discuss finances on their level as questions arise. Teach them about saving, spending, earning, and giving. Teach them the value of hard work and the power of financial security.
Teach your children the value of education. Help them understand the importance of getting good grades and going to college. Guide them as they make decisions and plans for college; help them choose a school they can afford and a degree field in which they are passionate about. Teach them how they can create a savings plan to meet their own personal financial goals and achieve their dreams.
If you have adult children who haven’t learned the importance of budgeting, saving, earning, and giving, read my post, Allowance for adult children. Nothing will deter you from reaching your own personal financial goals as an adult more than children who continually require financial support as they grow older.
Too often children grow up and are sent off on their own without really learning how to do manage their own finances. Essentially they are left to learn how to walk on their own, without mom and dad standing close by encouraging and cheering them as they step closer and closer. Be their guide. Give them responsibilities that will allow them to grow and develop their financial muscles.
Ideally, when your children reach the proper age and when they are ready, mom and dad can step aside and watch their child walk, run, and talk all at the same time, financially speaking.
Let’s start walking.
Constancy amid Change, N. Eldon Tanner; General Conference, October 1979
Earthly Debts, Heavenly Debt, Joseph B. Wirthlin; General Conference, April 2004
To the Boys and to the Men, Gordon B. Hinckley; General Conference, October 1998