Money Puzzle

A Framework for Financial Success

Wednesday, July 27th, 2011

It’s easy to make managing money more complicated than it needs to be.  That’s because money isn’t just an objective “means of exchange” as the dictionary defines it.  Money is wrapped up in our emotions – our hopes, dreams, and fears.  And our use of it is strongly influenced by the many messages of our consumer culture.

Whenever money starts getting a little too complicated, I like to get back to the basics.  I like to remember that there are only five things we can do with money:

Spend it

Use it for debt payments

Save it

Invest it

Give it away

Very often, when money starts turning into a mess for someone, it’s because they’ve gotten these priorities out of whack.

Getting Our Financial Priorities All Wrong

The order above is the one advocated by our consumer culture.  When we get our first paycheck, our cultural conditioning leads us to think first about what we can spend the money on – where to live, what to drive, where to go on vacation.

When spending comes first, debt always seems to come along for the ride.  There’s a financed vehicle or two in the driveway, a balance on a credit card or two.

If there’s any money left over, we might save and invest some.  And if anything is left over after all that, we might give some away.

This order explains a lot about why so many people have so much debt, so little savings, and more than their share of stress.

A Better Way to Prioritize Our Use of Money

Here’s the order that works much better:

Give some

Save some

Invest some

Then see how much you can afford to spend on housing, transportation, and all the rest.

Have no debt except a reasonable mortgage

Hitting the Money Reset Button

This order is much easier to teach to young people who haven’t started getting their first full-time salary yet.  But what if you’re already out there and your money’s all bunched up because you’ve been following our culture’s plan?

Use my Cash Flow Plan to hit the reset button.  Fill in the “Now” columns to see where you’re at.  And use my Recommended Spending Guidelines (on the same page as my Cash Flow Plan) to fill in the “Goal” columns with an ideal plan.  Then start moving toward the ideal.

It probably won’t happen overnight.  There may be some credit card debt to ditch and a car payment to lose.  It may take some rethinking about how you spend on groceries, clothing, entertainment, and everything else.

But the framework of give, save, invest, spend, and be cautious with debt is the simplest and most effective way of doing the whole money thing I’ve ever found.

Move toward it and you’ll move toward a financial life that works amazingly well.

Do you follow this framework?  If so, how’s it working for you?  If not, what’s the biggest roadblock standing in the way?  Let me know by leaving a comment.

Know someone else who would benefit from this article?  Please forward a link to my site.  And if you haven’t done so already, you can subscribe to this blog by clicking here.  Two or three times a week, you’ll receive ideas and encouragement for using money well.

Categories: Credit/Debt, Planning, Smart Spending

3 Responses to “A Framework for Financial Success”

  1. Melissa says:

    You have such great advice. My husband and I have been following this financial path, and when we have additional money during some months, we give extra away and use it to pay down our house. I am thirty, my husband is twenty-eight, and we will have no debt including our home as of July 2012!

  2. N,M. says:

    Thank you for your good advise. I have also followed this financial path and i am debt free. I will never spend again based on future earnings.

  3. Matt Bell says:

    Melissa – Wow, you guys are doing great. To be completely debt free at that age will be amazing. Great job!

    N.M. – Thanks for passing along a great lesson – not spending based on future earnings. Plenty of Realtors tell people they’ll grow into their mortgage. Ugh!

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