In the last couple of posts, we’ve been talking about financial frameworks. First, the financial framework for building wealth, then the financial framework for retirement transition.
And beginning now, we’re going to start stepping through those various frameworks over time, unpacking some of the nuances and details thereof. If you remember in the financial framework for building wealth, the floor was money management.
And that’s what we’re going to talk about today.
So, what is money management?
Money management is the planning for and handling of income and expenses in relation to cash flow. Cash flow is critical, to your financial life. It’s the management of cash inflows money coming into your house and cash outflows that which is leaving your house.
You may have heard the expression cash is king, especially in relation to business because if a business gets upside down, meaning that they have more cash going out than they do coming in, its days are limited as a business.
It’s only a matter of time before it goes out of business. Thus, businesses have managers. Chief financial officers or comptrollers managing their cashflow on a daily, weekly, monthly, quarterly basis to ensure that it stays positive so that more is coming in than going out. As we talked about in the stewardshiplesson a couple episodes back, you need to think of yourself as a manager of your personal finances because if all the money comes in and all the money goes out. There’s nothing left to build wealth off.
That’s why they call it wealth building. It’s like laying a brick upon a brick, a layer upon a layer.
Money management is the foundational cornerstone to wealth building and is equally pivotable in the execution of a successful retirement plan.
Today, I want to give you a couple reasons why money management is important.
Your Income
Number one- Your income is your number one wealth building asset.
The national median household income. In North America is about 70, 000 according to a recent Census Bureau survey from 2021. That means that over a 40-year working career. You’re going to bring in somewhere between 2.8 to $3 million. That means about $3 million is going to come into your house, and $3 million is going to go out of your house. Your job is to control basically it as it comes in and as it goes down.
A couple of years ago, back almost 10 years ago now when I was at the CIA, I did this presentation called managing the money you have. And it had a nice icebreaker in the beginning where I went through all these athletes and entertainers, and I went through the statistics of how long they played for and how much they made.
And it was millions, you know, tens of millions, hundreds of millions of dollars and all of them ended up either filing bankruptcy or in foreclosure. And I would ask the question, how is it possible for these people to make hundreds of millions of dollars and end up broke?
And people would sit there and kind of wag their head back and forth in just kind of disbelief.
And I said, you know how they did it? They did it the exact same way the average American does. They spent every dollar that they made!
Because just like you 3 million incomes in your house and the average American ends up broke at retirement.
How is that possible? Because they don’t manage the money that they have.
Money Moves
The number two reason why money management is important because money moves. They call it currency.
So, if you think of like a current, like a river, it flows. It moves. It’s not static. It is very dynamic in nature. The reality is that money impacts just about every aspect of your life. If you go to work, it’s going to cost you money. If you buy, get, or use something for entertainment, it’s going to cost you money. If you buy some food, it’s going to cost you money. You pay for utilities; it’s going to cost you money. Go out with friends, more than likely it’s going to cost you money. Hang out with your family, more than likely it’s going to cost you money.
Money is intertwined to every aspect of our lives. I can tell what a man or woman is into, what they value, what they like, what their hobbies are, what they enjoy by looking at their checking account because it’ll be reflected in where they’re spending their money.
You are a Marketeer’s Target
The number three reason why money management is important is because whether you like it or not or whether you even realize it or not, you live in the most marketed to society in the history of the world.
There are thousands of companies out there striving every day to basically get the money out of your pocket and into theirs.
Sometime back, Erica and I went to London and we went to a grocery store. Well, we went to a lot of grocery stores. That’s something that Erica does, likes to do when we travel, but we went to a grocery store called Sainsbury. And there’s one that she wanted to go to because previously she had watched this documentary on BBC.
And so, she’s telling me about it while we’re there. So, when we got back, we started watching it. Now this was pre-COVID, you know, 2019 or so, but it was basically about the inside of the supermarket, to this company that had been open for 150 years, trying to keep its competitive advantage and the things that needed to change.
Well, one of the episodes they were in April of that year. so, April 2019 and at that time they were planning the dog outfits they were going to sell in the store in Christmas. So, they had all these dogs come in and model all these, you know, different outfits and the executives are picking this and picking that.
But here’s the takeaway.
In April, they were deciding something that they were going to sell in December – almost 8 months later!
And so, you know, it happens in December, your kind of ditty bop into the store and you’re buying a loaf of bread and maybe, some coffee or something. And then you walk by this rack that you see these dog things.
You’re like, oh, my dog would look so cute in that. And you just impulsively buy it. You know what happened there? Somebody planned to get the money out of your pocket and into theirs. It wasn’t by accident.
They did another episode later in June, they were filming the Christmas commercial that was going to air in December. but they were doing it in June!
You ever walk into the front of a Walmart or the seasonal section of a Target? And you walk in there, and it’s just after Valentine’s Day and all the Valentine’s Day stuff has moved and in comes, the St Patty stuff. So, everything is now green and the day after St Patrick’s day, all that moves out and incomes Easter. So, everything’s like yellow. And then day after Easter, everything moves out and it’s Memorial Day. It’s red, white, and blue.
You know, and all that stuff is basically moving on a queue that isn’t an accident that this doesn’t randomly happen. Walmart plans that stuff all year round and it’s intentionally designed to get you to impulse buy and get the money that you worked hard for out of your pocket and into theirs.
Now I’m not saying you shouldn’t spend money on all those things. I’m just saying they have a plan, and you don’t.
So, what is the antidote to that? What is the planning tool that you have at your disposal?
A budget. Or a spending plan if you don’t like the word budget.
Because that’s what a budget is. A budget is simply a spending plan. And it is the number one tool that you must help you manage your money.
So, I want to give you a couple benefits of having a monthly budget.
Feels like you Got a Raise
Alright, number one. It’ll help you gain clarity and control over your money.
I remember the first time that we did our budget, I felt like we got a raise. We didn’t get a raise, but we felt like we got a raise. Because we had actual clarity on where the money’s coming from. when it’s going to be in our account. And then we had a plan, a written down, unemotional controlled aspect over where it’s going to go and when it’s going to go there.
Because when you walk into the store and you just haphazardly do it, that’s impulse. That’s emotion. That’s spontaneous. That is not control. Control is when you decide ahead of time. And then you execute.
So, the number one benefit of you having a monthly written budget or spending plan is that you will gain clarity and control over your money.
Reduced Stress
Benefit number two, it’ll help reduce the mental stress.
You ever have those times where you have it all in your head and you’re like, I got to do this, and I got to pay that, and I got to save money for this and let me check my checking account. Okay, I got to remember to do that. Remember to do this and it’s all up here and then you forget stuff and then you get upset with yourself that you forget stuff and you’re worried about things because you’re not sure if you have it or not and you’re not sure if you’re going to bounce a check or going to hit overdrafts or any of that kind of stuff.
And, and you kind of get scared and a little bit concerned, but you think it’ll be okay, but you’re not sure. And so, you have all that mental fog going on your head.
Well, you know what happens when you do a budget or a spending plan on paper, you get it all out of your head and on paper.
I remember the first couple of times that we did this, it became so clear at the time we had so many expenses and so much going on.
And I looked down and said, okay, if we just simply execute what we wrote down on this paper, we’ll make it through the month.
The reality is that monsters are always scarier when they’re in the closet. And they’re always bigger when they’re in the closet. But when you open the closet door and you shine the light in there, it’s not really that scary.
Because here’s the thing. Once the math works on paper, if you execute it and you don’t deviate, the month will work out.
Priorities
The number three reason why you should have a monthly spending plan. It’ll help prioritize the important over the urgent. The next couple of episodes, we’ll talk about the four walls.
The four walls are basically the priorities of what you need to spend your money on. So, number one, obviously is food, number two is utilities, number three is shelter, and number four is transportation. Like those are your basic needs of life.
Well, when I first got started coaching. I remember I met with this lady back in Northern Virginia and we were kind of unpacking some things. And she’s like, oh, I can’t wait till, till Friday. It wasn’t really coaching her, but it’s just conversation we were having. And she said, I can’t wait till Friday.
I said, Oh, why? Why? Why is Friday? She goes, oh, we get paid on Friday. And I said, Oh, okay. You know what? You got some big plans. Yeah. I want to go grocery store. She goes, I haven’t eaten in a couple of days.
I said, what do you mean you haven’t eaten in a couple of days? Yeah. She said, I haven’t had any money to buy any groceries around, but groceries and you know, she had money saved up, but she got pressured by a credit card collector a couple of days before.
And so, she ended up paying the money that she had for food to the credit card.
You know what that is? That is a mis-prioritized application of money. When you have a written plan, you’ll prioritize the important things over the urgency because you get to decide where every dollar goes every month. And you know what you’re going to do?
Marriage Communication
The number four, benefit of doing a budget. It’ll help your communication with your spouse.
The Bible says where your treasure is, there will your heart be also.
When you’re talking about your money, you’re talking about your life, you’re talking about your plans, you’re talking about your dreams, you’re talking about your goals, you’re talking about what you want to do in life, not just about money.
And there’s just something magical that takes place when spouses communicate. I know it sounds crazy.
But you know what should happen in a relationship? You should talk to your spouse and money is a great way to do it.
I remember back when I was in Omaha, I started meeting with this, this a couple, they’re both divorced previously and, and recently got married.
And they said when they met with me and they’re doing a budget, it felt like they’re going through marriage counseling because they were handling their money together. They’re talking about so many things together and it really integrated their marriage. Doing a budget will make a good marriage great and it’ll make a bad marriage good because you’re communicating.
Accelerates Wealth Building
The fifth reason you should have a budget, or a spending plan is because it will enhance your wealth building.
It will propel you up the path to financial success. Those seven steps in that framework, it’ll help you escalate through them faster. But again, if all the money’s coming in and all the money’s going back out and none’s being saved and none’s being paid down on debt and none’s being invested and none’s being allocated towards a college or other savings goals, you’re not building any wealth. And so, you’re going to stay exactly where you are in the future, which is not building wealth.
So, the more control you have over your monthly cashflow, cause remember it is your number one wealth building tool. The more wealth you will build in a shorter amount of time.
Aids in Retirement Planning
The last reason I want to give you is for retirees. Money management will help your future retirement planning. When we go through retirement planning, one of the first things that I ask clients to do is to help lay out their needs, wants and wishes.
So, if you watch that retirement transition framework. In our episode, we talked about needs, wants, and wishes. That is the first thing we must do to get an idea of what we need in retirement. Well, the needs are based upon your household spending for a month, for your monthly and non-monthly expenses.
That’s the foundation. You must have a good idea of what you’re currently spending.
But if you’re doing a monthly budget every time, you’ll know. A lot of people when they start retiring planning, they have no idea what they need in life because they’ve never done any kind of budget. And so, it just paralyzes them in the planning, and they can’t ultimately pull the trigger because they’re just not sure if they have enough.
Or they just wing it and they just come up with some number and they say, oh, I think I live off this or I think I need that. And then that makes them either must save a lot more than they really need or they have a lot less than what they need. And then that puts them in danger later.
That is not a very wise way to transition into retirement.
So, money management, having a budget, doing a monthly cash spending plan will help you understand where your money’s going for retirement planning.
Micro Action
So, your micro action for the week. If you don’t currently do a budget. I want you to think about and identify what is stopping you from doing it?
And, and here’s the thing. You can’t say your spouse, right? That can’t be the reason.
So, I want you to really think, what is it? Is it you don’t know how to? Is it too difficult? Is it you, you have irregular income? You don’t know where your thing’s going? You’re disorganized? What is it that’s preventing you from doing it?
And if you are doing a monthly budget, I’m curious, what is the biggest benefit that you see from doing it?
So maybe leave a comment below on either what’s stopping you or the biggest benefit to help others in their financial journey.
And the next couple of episodes, we’ll dive deeper into money management from a tactic and technique perspective.
But until then, I hope this helps you on your financial journey. If you have any questions, you can leave them in the comments or you can send me an email to mike@ truewealth.show.
And until next time, I hope you have a great day.
