Prosper Newsletter: December 2006 > Financial
You understand that the following information is educational in nature and is not intended to be legal, accounting, or tax advice. You are responsible for your own financial decisions and should consult your own legal, accounting, and tax advisors before making your financial decisions.
Course Enables Intellectual Change for Kansas Couple!
Prior to beginning this course, I think Chuck and I both knew intellectually that using credit was not a lasting solution, but hadn't made a commitment to changing those habits that were getting us into trouble. Our debt wasn't entirely due to trying to obtain things we didn't need. We have taken on some big projects: Finding help for our daughter who is mentally ill wasn't inexpensive. We are also raising her children. (3yr and 5 yr) We also helped our younger daughter get through college and paid for her wedding. Then there was the new sewer system last fall that didn't just mean getting a new sewer ($4,000), but the replacement of our entire front yard and sidewalk. The list goes on...
We haven't taken expensive vacations, built a big fancy home with all the furnishings. Nor do we drive expensive new cars or eat out a lot. We really aren't even trying to impress anyone... but there are a lot of things that we have begun tightening down on that will make a difference in our future. We also aren't making new debt.
What this program has given us is accountability and encouragement; with the support that will help us achieve our goals. We have stopped using credit as a means to buy things we can't afford.
We have established a budget and are doing pretty well and sticking to it. We have made changes to our car and homeowners insurances (i.e. increasing the deductibles) that are saving us money every month in premiums. We are pretty much on a cash basis now. We are only four months into our debt reduction, but if we stick to the program, we should be out of debt in approx. 5 1/2 years. (Including paying off our home) We have learned that it truly is possible to be out of debt in less than 6 years. Prior to this course, it seemed hopeless. Our coach is very personable, encouraging and knowledgeable. We are on our way to being debt free. Our debt freedom date is May of 2012. Thank you---
- Paula C.
Topeka, KS
Cash Flow Management
One of the most important aspects of personal finance is cash flow management. A family unit or individual, financially speaking, is very similar to a small business. It is obviously critical that a business manages its cash flow efficiently in order to maintain profitability. Yet, why is it that when it comes to personal finance, so many families are failing? The most common answer is that most people simply do not take the time to track, monitor, and budget. Successfully learning to manage your personal finances like a well-run business is really the key to personal financial management and control. Creating a system that allows you to manage and track spending on a daily and monthly basis is the foundation for successfully building a position of wealth and freedom from debt.
Most of us know how much money we make each month, the emphasis however needs to be directed towards where the money goes! It's not so much how much you make, but rather how much you spend! Tracking your spending and living within your means is the essential key to achieving your financial goals. Tracking how your money is spent will help you determine if you are in a negative, positive or neutral cash flow position and identify inefficiencies for you to correct so you can get into, and maintain a positive cash flow position.
Many people struggle to maintain a positive cash flow on a monthly basis. Essentially, there are two ways to increase your cash flow position monthly. First, minimize your spending. Second, increase your income. Naturally, focus should be directed toward doing both, however, I would like to emphasize two areas that most people fail to consider that could dramatically increase cash flow position monthly.
Income Taxes and Insurance
Income Taxes-unfortunately, most people do not understand how they are taxed with respect to their income. Many people enjoy the fact that they get a tax refund each year. But let's think about it for a minute, aren't you paying the same amount of taxes regardless of whether too little or too much is withheld from your paycheck? By overpaying, you are allowing the government to keep your hard earned money, interest free! You could be keeping that money and putting it to work by eliminating debt or building investments. A rule of thumb: For every $600 received from federal tax refund, you can increase you withholding allowances on your W-4 by one. This increases your monthly cash flow by $50. For a detailed and specific calculation, go to www.irs.gov and use the withholding calculator to determine what your allowances should be on your W-4.
Insurance-raise your deductibles on auto and homeowner policies. By increasing the deductible to $500 it will save 30% on premiums; $1,000 as much as 60%. Eliminate duplicate medical coverage and save $100. Drop death, dismemberment and loss of sight coverage from you auto policy and save $50.
Financial Vision
It does not matter what you do to become debt free or financially independent if you don't have a purpose in doing it. If you don't have a purpose for doing it, it is almost all for nothing.
Napoleon Hill stated: "There is one quality that one must possess to win, and that is definiteness of purpose, the knowledge of what one wants, and a burning desire to possess it." All of these items are needed to accomplish great things.
It has been found that about 3% of American's have clearly defined, written goals, and less than 1% can identify their primary goal and objective in life.
Vision is the ability to see the future. This is important because you need to know where you are going. A vision is the map you follow to get from point A to point B. If you are going on a trip, it would be much faster to get a map, speak to people in the area, or talk to truck drivers that could give you short cuts than it would be to head out and point your car in the general direction you are going. You will get there either way, but one way is much faster and easier.
Socrates said, "The life which is unexamined is not worth living". Your vision needs to be in line with your goals and values. Each time you make a decision, write down what happens. If you fail, write down why. Learn from it. Improve on it the next time. Spend a day just thinking. A great commercial investor, Peter Daniels, schedules one day a week just to think. It may help to pick a special place to go and think. Take a little bit of time for yourself, and do whatever works for you.
Vision allows you to see past the moment and the current situation. Look at where you are going in the future, and use it to develop clarity to identify where you need to be.
Define in specific terms what your purpose and goals are. Do this in the present tense. Nothing has yet happened in the future or the past. Everything happens in the present, so write your goals in this tense. Use words such as:
- I am...
- I have...
- We have...
You can then fill in the gaps after your have your vision down. This is similar to connecting the dots on a dot-to-dot puzzle. You have all the dots and know where you want to go, and you then just connect them to make the path.
Goals are very important because these are the dreams that you have, and you need to put value and clarity to them to help you accomplish your vision. Make them challenging. It is better to shoot for the moon and hit an eagle that to shoot for an eagle and hit a rock.
You might try the 'SMART' method of setting goals. Write the word down on your paper, and you can fill in the terms:
S- Specific-every goal must be specific. If you goal is general, you will have general results. If it is specific, you will get specific results.
M- Measurable-make sure it is something that you can measure so you know where you are.
A- Attainable-goals should be challenging, but also must be attainable. If your goal is unrealistic, you are likely to give up.
R- Recordable-record your results and progress as you work toward your goals. Reporting your progress, even if it is just to yourself, then you know where you are going and can hold yourself accountable.
T- Time-each goal must have a timeline. Otherwise, it is just a dream. Dreams are great, but you need to put a time limit to achieving them and make your dreams into goals.
The main reason people under perform is because of fuzziness, or a lack of clarity on their goals. Take a look at your vision mapping process. Identify which areas you need to improve upon, and set goals for each of them. Also include steps to achieving those goals. Review this plan frequently. The more often you review and adjust it, the more clarity you will have.
Thomas Edison is a great example. It took him 11,000 tries to invent the light bulb. What would have happened if he had given up on any of the first 10,999 tries? When asked about his invention and success after so many failures, his reply was that he did not fail; he just found 10,999 ways not to invent the light bulb. This is a great example of the perseverance it takes to plug on and continue working on your goals.
