financial management

Financial Management Words of Wisdom

A financial plan, whether for an individual, family or organization is a unique document. Despite this fact, there are financial management words of wisdom that hold true for everyone regardless of their financial situation. These financial management strategies can, and should, be integrated into every financial plan. When integrating the following financial management strategies into your financial plan, I have no doubt that you will be able to increase your personal cash flow and increase your long-term standard of living.

“Create a Financial Plan”- Creating a financial plan is the first step towards accomplishing your personal finance goals and objectives. Without a plan, you are more likely to lose sight of your financial goals and what you have to do to accomplish them. This severely limits your ability to achieve financial freedom.

“Spend Less Than What You Make”- Accomplishing your financial goals and objectives takes positive cash flow to be used for paying down debt and growing personal wealth through various investment vehicles. We have more control over how much we spend then how much we make, thus you need to keep an eye on your monthly cash outflows.

“Maximize Tax Efficient Investments”- When implementing a financial plan, there is nothing worse than throwing your hard earned money away. When you choose to pay more taxes than you are required to, you are essentially doing just that. The easiest way to become more tax efficient is to maximize your 401(k) and Traditional IRA contributions.

“Don’t Invest, or Bet, Anything You are Not Willing to Lose”- There is risk in virtually every market and every type of investment. Even though asset allocation can help reduce these risks, your nest egg can still lose a majority of its value in a relatively short period of time. Ensure that you have enough cash to cover financial emergencies.

“There’s an Difference Between a Want and a Need”- Emotions are a necessary element in the human condition, however not your financial plan. Understanding the difference between what you need to buy and what you want to buy is an extremely important distinction. Reducing your spending on what you want to buy is an great way to save a little more money every month.

“Automate Your Financial Management Strategy”- Taking the emotion and tempting spending decisions out of your everyday financial decisions is an excellent way to save more money. You can use tools such as online banking, direct deposit and automatic allocation to painlessly automate your financial management strategy.

“The More Things You Own, The More Things Own You”- Having lots of stuff does not make you richer, its actually quite the opposite. Due to the additional costs of storing, operating and sustaining excess property you will probably end up paying more money than you originally expected. This reduces the amount of money that you can save and invest, crippling your long-term financial growth.

Despite the fact that every financial plan is different, there are a few common financial management words of wisdom that hold true, despite your financial situation.

The Basics of Personal Financial Management

Personal financial management is mix of art and science, as there are many objective and subjective elements to consider. Regardless there are a few basics of personal financial management that everyone needs to understand and implement.

These fundamentals included creating and maintaining positive cash flow, saving and investing consistently and maximizing employee retirement benefits. These pillars of sound financial management will help you improve your financial situation and could lead to financial freedom.

Cash Flow is Everything

One of the largest challenges in the financial planning process is maximizing positive cash flow over time. This is due to the fact that, in most cases, our incomes are capped at a certain level. Quite often it is easier to cut expenses than it is to grow our income. So with that said, to create positive cash flow over time we need to maintain an active role in the execution of our budgets.

It is easy for spending to get out of control. Over time loose budgeting and spending can get us in a financial situation that is difficult to recover, not to mention never accomplishing our financial planning goals and objectives. Positive cash flow is the most important element in personal financial management, ensure that you are spending less than what you earn.

Save and Invest Consistently

No matter the current economic environment, time is on your side. Research has shown that most successful savings and investment strategies are consistent and diversified. Consistent investing (investing a set amount every month) leverages the ebbs and flows of stock market fluctuations.

The most experienced investors and robust trading algorithms cannot predict market moves every time. This is why we must save and invest in the bad times just as often as the good time. This not only ensures that you keep your saving rate as high as it can be, but it also takes advantage of market environments that are advantageous to investors (such as dollar cost averaging).

Maximize Employer Retirement Benefits

Over the years employees benefits, such as retirement plans, have become less and less generous (for the lack of a better word). Employers that once reward employees with defined benefit plans (pensions), have effectively converted their business liability into market risk, borne by you the employee and investor. They did this by reducing the amount of defined benefit plan and started to implement defined contribution retirement plans.

Regardless of this shift, you still need to make a valiant effort to maximize your employee retirement benefits such as your 401k. Tax advantageous plans such as these help you reduce your tax liabilities and maximize your savings rate. These are two very important elements in a sound personal financial management process.

Implementing these three basic personal financial management elements in your financial plan will help you improve your financial situation. These “no brainer” financial planning fundamentals are often overlooked, ignored or underrated. Every expert will tell you that creating a budget with positive cash flow that allows you to consistently save and invest in tax advantaged retirement plans is sound financial planning.

Professionally Manage Household Finances

As we rush through the day commuting, working, taking care of the kids, cooking, cleaning; we barely have anytime left for ourselves. It is when we have to rush to get everything done that we take our eyes off our long term goals.

During a day like the one I just described, managing your finances like a business is probably the last thing on your mind. Regardless of the amount of time you can dedicate to creating goals and monitoring their completion, you can run your finances like a professional. In order to do this all you need is the right tools and a little focus.

The "Secret" Financial Planning Tool

There is a misconception that creating a financial plan involves complex mathematics, computer based algorithms and tons of formal financial education. While these things do not hurt, they are not necessary to create an above average financial plan. However there are a few tools that can definitely help you create a financial plan. Excel, for starters, is an extremely powerful application.

The best part about using excel for financial analysis is that it is flexible and many people already have a version on their computers. In addition there are a bunch of free budget worksheets available at Most of the hard work has already been done for you.

You Don't Need an MBA

In addition to having the right tools, managing your finances professionally also requires some common sense, not a MBA. When managing your finances just remember the following fundamentals: don’t spend more than what you make, save for a rainy day, don’t keep a credit card balance more than a month or two and diversify your investments.

If you choose to live by these simple concepts, at the very minimum, you will be ahead of many of your peers. I will admit that the most challenging part of achieving financial freedom is maintaining financial discipline. This is also why I have automated my own financial planning process.

Leverage Financial Service Technology

With the advances of technology in the past couple decades it have become easy, and in all honesty convenient, to automatically save, invest and pay bills. Direct deposit has even taken away the temptation to spend money before you have a chance to put it in the bank.

In addition, online banking has reduced the complexity of having more than one bank account. All of these services enables us to create an automated financial plan. By creating a process in which your paycheck is automatically divided into different bank accounts helps reduce the time it takes to allocate funds to the different parts of your budget.

My Trademark Automated Financial Plan

So with that said, one of the ways that you could decide to automatically allocate your paycheck is into three different accounts. The first account could be used to pay your household expenses; mortgage, cell phones bills, utilities, insurance and car payments. These expenses usually take up the majority of the average American’s income.

The second account that you could send money to is a savings account. This can serve as your safety fund and once your savings get over a certain limit (let’s say $7000) you could send the excess to a brokerage account to invest. The remaining pay should be deposited into a checking account and be used to pay for gas, food, clothing, entertainment and other day-to-day expenses.

I hope this article helps you manage your household finances like a pro. Chances are you already have all of the tools you need to create a financial plan and budget. Remember to download some of the Excel files as they will help get you started.