Learning to manage your money

You have no idea how many people are overcome by panic and a desire to run away to hell as soon as I say the word «budget». Sometimes I invite them, partly to prevent them from running away, to play a little and name words and phrases that are associated with it. The most common responses are: «difficult», «cold», «strict prohibition», «offensive», «impossible», «adamant».

The solution I came up with is to change this associative array — well, the approach in principle. How about calling the process of managing your cash flow «value-based spending»? Here’s how this plan might work.

Setting priorities

Start with your monthly net income — the amount that appears in your account every month. Write it down. This is the easiest part. Now make a list of all debts or obligations (mortgage, rent, student loan, car payments, credit card debt, etc.).

If you have credit card debt, your first task is to focus on paying it off as quickly as possible. Such debt is a signal that you are living beyond your means; the exception is an unforeseen emergency or medical problem that forced you to use the loan. Debt needs to be reduced in order to move towards value-based spending.

Subtract your monthly debt from your monthly income. Allocate the remaining amount to other required expenses and savings. The first level is relatively stable, fixed payments. These include food, gas/public transportation, utilities (electricity, gas, phone, internet), insurance (housing, health) and more.

Looking at the amount of your payments, consider whether it is possible to revise some expenses — for example, switch to a more favorable tariff. For each item, ask yourself the question: is this service really important to me and in this volume? Is she really worth the money?

Making a choice

Now is the time to answer one global question: what is most important to you in life and what are you doing to achieve this? It’s about what is valuable only to you. For some, this is the creation of a “safety cushion” for old age, and for some it is an opportunity to educate children, travel, buy a house / apartment, support parents or donate to charity.

Now let’s try to match your values ​​with your opportunities and create an action plan that will bring you closer to your goals.

Most of us have more desires and requests than resources. But the reality is that you have to choose. So it is worth directing the funds remaining after the obligatory expenses to solving problems that will bring you closer to the main goal. And after that, you can plan less obligatory expenses.

Exploring values

Now analyze what exactly you spend money on and how much, and determine the value of your choice depending on the importance of your goal. If you pay for most purchases with a credit card, review your statements for the past six months and rank each item in order of importance using a scale of 1 to 10.

The highest score is given to the purchase that is of paramount importance to you, and the lowest (1 or 2) is given to those expenses that you could easily do without. These positions can be abandoned in the future, and the freed funds can be directed to something more significant. Spending marked with 3-5 points can probably also be eliminated or significantly reduced.

Points 8-10 emphasize the special value of your acquisitions. For example, I have a client for whom it is extremely important to buy quality organic food. The cost of such products is higher than if he bought meat and vegetables in a regular store, but for him this is a fundamental choice, out of the 10 points category. In order not to save on what is important for himself, the client decided to limit expenses in another way — to refuse the services of a cable television company.

Looking for a compromise

The method of examining your spending through the prism of values ​​​​is very effective if you follow some rules. They are especially important in a situation where two people are discussing the family budget, and one partner suddenly decides what should be valuable to the other.

I remember a couple where the wife asked me to tell her husband that he was spending too much on online shopping, and the husband asked me to tell her that too much money was being spent on her make-up. This is definitely not my job.

It is important to agree on everything in advance. Here are some important rules to follow:

• First, agree on your goals. What do you both consider the highest value for your couple?
• No judgment or criticism.
• Start cutting costs from points 1 and 2.
• Celebrate and appreciate progress.
• When you spot a difference in opinion, ask yourself if there is a way to get what you want at a lower price.
• Listen carefully to each other. Apply the principle of Stephen Covey, author of The 7 Habits of Highly Effective People: “Seek first to understand, then to be understood.”
• Do not discuss all these issues on the run. Pick a time that’s convenient for both. Trying to have conversations about money when you’re both tired is doomed to failure. And don’t forget to set a time limit.
• Be ready for change, but don’t expect it to be perfect right away.

By reducing your costs, you can direct the freed up resources to achieve the most important goals.

Don’t forget to create and maintain an emergency fund (EC) in case of unforeseen circumstances. Be aware of the unstable job market, the possibility of replenishing the family and changing your goals. Don’t forget the old adage that the only constant we have is change. This, in my opinion, is a conscious approach to money and financial security.

About the Author: Michael F. Kay is a 25-year financial advisor and founder of an investment advisory firm. After earning his financial planning certification at New York University, he returned there as an adjunct professor and taught taxation in his CFP certification program.