Prosperity Mindset Month - Chapter 4

This month was dedicated to different types of debt that we take on during our life. After we talked about student loans, wedding expenses and mortgages, we will talk about how to plan our monthly budget so we can make sure we pay off all these debts and reach financial serenity.

I know that "budget" is a tough word in Americans' vocabulary. I will endeavor to make it easier for you, my reader, by telling you that by budgeting your money you are not giving up all opportunity for fun and things you desire. You are only planning all your desired purchases and you are also making sure that all your necessities are taken care of. 

I have to agree with the financial experts who tell you to track all your expenses, to the last penny. It is the best way to understand your expenses over a 30-60 day period and to be able to control them afterwards. However, I also have to agree that most of the people (including myself) don't have the patience or the discipline to track every penny spent and to plan where each penny goes. So I have devised a simpler system that has also been sustainable. And I will go over the 3 categories of expenses that I use in my own budgeting:

1. Fixed expenses
This category includes all the payments that are due every month and that have set amounts that cannot be changed, such as: mortgage/rent, insurance payments (all policies: homeowners, car, life, etc), retirement contributions (once you determined how much you contribute), car payment (only after you negotiate the best interest rate available to you), student loan payments, credit card payments (once you negotiate the monthly payments). This is what you must cover every month from your income. You will include all those payments that are a must, and once you have listed them all, you make sure your income goes to them first, before taking care of the next two categories.

2. Flexible expenses
This category includes all the payments necessary every month, that can be negotiated with the companies you have to pay, such as: utility payments (you can control how much electricity, gas or water you use), gas for your car or common transportation (whichever way you need to get around, most of all for work or your business), groceries and any food you eat out (if you have to go out for business meetings), any dues to professional organizations, any other activities that you need to pay for (like children's music and sport activities). 

3. Discretionary expenses
This category is for all the fun spending, such as purses and shoes, or clothes, or any other items you want to collect, as well as vacation money, and money for any other fun family activities. These expenses should not happen before any of the other two categories. I'm not saying to give up all the fun, I'm only saying that these cannot be a priority over the fixed and flexible expenses that you have to take care of every month.

Hope these ideas help you, as you build a better relationship with your money.

Money Friendship Month - Chapter 1

April is the month to make friends with your money. Why? you ask... Well, because it is my deepest desire to see people prospering and making their dreams come true. And if you are buying into the myth "money doesn't buy happiness", you are missing out on a lot of things that money will buy that can bring you happiness: great vacations with loved ones, comfort for yourself and your family, being able to make a difference in someone's life through the charity of your choice, etc.

I chose April to share some tips on how to build better relationships with your money because of the famous "April showers" - in Romania rain is a sign of prosperity because it brings life to the land. So this seemed the perfect time to share some money lessons that I learned throughout my life, by living in 2 different countries, through communism, then democracy and then a different kind of democracy.

While you read my tips and tricks, please take into account that they were developed based on my personal experiences, and the reason why they worked for me comes down to my feelings and ideas about money. You may not share those same feelings, and that is OK. Take it all in, and then adapt it to your own money story, to based on your own feelings about money.

Saving...? Yes, please! 

The reason why most people don’t save is because they decide to save the money they have left after paying the bills and spending on both needs and wants. Most months, they don’t have anything left after spending on things they want – even though sometimes they mask wants as needs. The cliche about "running out of money before one runs out of month" rings true for a lot of people, unfortunately. In this case, even the best intentions are not powerful enough to turn into action.

Most financial gurus will advise to “pay yourself first” and put 10% of the money you get paid into savings before directing money towards anything else; and then live on the rest, to cover both needs and wants. They are correct in explaining that everyone saving by this method will figure out ways for the money to be enough. One hurdle in applying this method is the fact that sometimes people are intimidated by the 10% amount - it sounds scary and then leads to analysis paralysis while people try to talk themselves into it. So, for most people, it may be a better idea to start with a lower amount than 10%, and then increase it every couple of month while getting used to less money available every month.

Depending on how you get the income, you can have an automatic deposit straight from the paycheck, or an automatic transfer from the checking account on preset days. If you get commissions you may consider a percentage of income; whereas, if you get a fixed salary, you may want to designate a set amount. If you are an entrepreneur or an independent contractor and rely solely on commission, it is easier to set up the transfer the day after the commission gets deposited into your account - or better yet, see if your company can direct deposit a certain percentage to another bank account.

The number one thing to remember is that saving takes discipline and you need to build up your discipline muscle if you depend on yourself, and not an employer that forces your saving into a retirement plan, for example.

The strategies that always worked for me were to have a savings account at a bank a little out of the way, where I don’t go very often, or to use an online bank – again one that I don’t use on a regular basis. The one trick that has always helped me to keep the money in savings, is to not look at the money too often. Out of sight, out of mind concept at its best!

Financial Serenity Month - Chapter 2

Let's continue our conversation regarding financial serenity with some ideas for business owners this week.

For the business owners who want to grow their business to the point where it becomes their retirement vehicle, while reinvesting all their earnings back in the business might seem like the smart thing to do, it may prove a disastrous financial sacrifice in the long run. According to the sensible principle of diversification, you should never put all your eggs in one basket; and when that basket is your own business, especially if it is a service-based business that relies heavily on you, that may be a very dangerous path to follow.

A wiser decision may be to save some of the money earned through the business in a retirement account – either pre-tax or after-tax – that will accumulate over time and be there when the business owner is ready to retire. Besides the tax advantages of this plan, the main benefit consists in the fact that the retirement money is not directly tied into the business, and it is protected from any hardships that the business may encounter, plus it will be available when the owner of the business wants or has to retire.

Most people are familiar with the term “compound interest” but that is usually in an abstract sense; they are familiar with the fact that it is important, that it can work in one’s favor or against them. And for the majority of people, that is where their knowledge gets blurry. They do not understand that the more time they have, the more they can benefit from the effects of the compound interest. 

Some of the most frequently used examples show friends who save for retirement at different times. While one starts in their 20’s and only saves for about 10 years, the other starts saving at the same time the first one stops and continues saving until retirement age. Even so, the first friend ends up with more money at the time of retirement – depending on the amounts used and the interest percentage used in the example, the difference can be from a few tens of thousands to some hundreds of thousands.

The difference between the two friends comes not from the amount saved but from the time they invest. The more time you give the compound interest to work for you, the more your savings grow, while the interest gains interest upon interest.

I’m not going to get on my soap box lamenting the lack of financial education from the US school system. Even though it is important to raise the level of understanding for all the people growing up in an economy so very different from the one experienced by their parents and grandparents. While the good news is that more and more people start businesses and/or become self-employed, the bad news is that these people’s financial security and safe present and future is in their own hands, since their employers are no longer present to provide the benefits that will take care of them in the long run.

Most solopreneurs make the decision to put all of their income back into the business in order to build the business. They think that it will all pay off in the future because they will make more money and, in the end, can sell the business. Unfortunately, most of the time, this is not a solid exit strategy. Nobody wants to buy your job. Therefore, the only way to have a sellable business is by building systems that can be followed and duplicated.

For the business owners reading these lines, I would like to suggest a great book that gave me a lot to think about, and made me tweak a few things in the cash flow of my company: "Profit First" by Mike Michalowitz. He uses the principle of "pay yourself first" - so often used in personal finances - and adapts it to the set up of a company. I would encourage anyone who wants to find their financial serenity, to read Mike's book and apply the knowledge he shares. It will change your life - literally!

And if you are an employee, don't despair, there is also a path to financial serenity for you! We will talk about it next week.