The One Part of Budgeting That No One Talks About

Personal Note: Budgeting, including household budgeting, is one of the most beneficial practices in personal finance matters. The moment we start experiencing lack of proper control in financial related areas of life, it is very easy to lose our peace of mind, our ability to think constructively and expose ourselves to serious dangers of deteriorating health. As Bern endeavors to make clear in this article, making adequate provision for future earnings, when creating our personal or household budget, is a vital aspect of the all-important budgeting practice; and we cannot afford to do without it if we are truly sincere about experiencing long-term success in our personal finances.

The One Part of Budgeting That No One Talks About
By Bern Walters

The Importance of a Household Budget

No matter if you are a college student, a family of four, just graduated, or you have been in the workforce for any length of time you should have some level of understanding about the importance of money management. The first thing that is considered in the creation of a budget is the present earnings at the time, and secondly, any future earnings. However, in some scenarios this second aspect of the budget process is sometimes overlooked when most people sit down to create a personal or household budget. The reason behind the need to enter a forecast for future earnings is because of possible growth through pay raises and cost of living adjustments sometimes provided by employers.

Furthermore, this second aspect should enter into the future goal category. When building a financial management model, a budget, the present and possible future earnings are only part of the picture. Each financial plan should contain a goal or set of goals with which to set or build the framework and structure of the financial model. The standard entries such as expenses, overhead or liabilities, and earnings equate to cash flow. A budget, therefore, is a roadmap of, and for the direction and amount of cash or earnings, an entity receives and moves. The entity can be any one of the aforementioned to include the possibility of a business.

Large and Small Businesses Do It, So Why Not You

Determining your goals as a family, a postgraduate, or a student means that some thought as to where you see yourself financially in the future takes place. When looking at the big picture, so to speak, this means planning for change and setbacks. The change looked for is the potential of future gains through raises, investments in real estate, buying a home, having a family, retirement, and funding your children's education. This translates into preparing for the bumps along the way or the setbacks by creating savings accounts and retirement funds such as a 401k or a Roth IRA. Life insurance enters into the broader picture of preparing for medical emergencies and even sudden death.

By making a budget and entering a forecast of future earnings, it helps you keep track of both spending and savings and aids in monitoring the path towards the goals you have set. This also helps avoid running into the chance of having to declare bankruptcy. This last item becomes a concern when someone is living beyond his or her means by spending more that they earn. This can happen very quickly and easily where credit is concerned. Which is why budgeting is so important. Having a little debt is healthy where having a lot of debt is detrimental for two major reasons.

Having Too Much Debt

The first reason too much debt is harmful is it creates anxiety and stress to occupy the mind, which in turn can cause a persons health to deteriorate and cause poor judgment in financial matters making things worse. Secondly, the loss of a home and personal possessions can result through having to declare bankruptcy, in a worse case scenario. At present, getting out from under large amounts of debt has become less stressful because more and more people are beginning to realize that setting a budget helps them achieve their financial goals by having a tool to monitor their cash flow.

Yes, having a budget helps diminish debt through the allocation of funds put towards certain areas that need the most attention. This is particularly important where a budget did not exist beforehand, i.e. the debt was realized. This shows the importance of having one in the first place so things will not get out of hand causing in large amounts of debt. However, as a college graduate who is saddled with their student loans, this is the opportune time to sit down and create one. Specifically, after the student enters the workforce full time, seeing the income received and looking at a forecasted scenario that includes debt reduction, cost of living expenses, and investment funding, (retirement and life insurance).

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3 Reasons Why Investing is “Risky”

Personal Note: Robert Kiyosaki is definitely one of my most respected mentors when it comes to personal finance. In his usual straightforward, uncomplicated manner, Robert challenges the prevalent notion that investing is risky. The honest truth is that, as human beings, we are always afraid of the unknown. However, once we gain adequate knowledge and understanding of the unknown, the fear factor is automatically dispelled. Investing is the same: as long as we lack the required training, control and knowledge, we will continue to believe investing is risky.

Written by: Robert Kiyosaki

The importance of training, control, and knowledge

Many people think that investing is risky. When I was growing up, my poor dad believed this. Because he valued comfort and security, he felt that smart people got a good job and saved their money.

My rich dad, on the other hand, felt that my poor dad’s plan was risky. He aspired to own his own businesses and to invest his money rather than save it.

As a young man, I had to decide for myself who was correct, my poor dad or my rich dad. It was not an easy decision. Both men were confident in their opinions, but after much questioning and study—as well as an understanding of what I wanted in life—it was clear that my rich dad’s path was the path for me.

Along the way, I learned 3 key reasons why my poor dad really thought investing was risky—and why it was, for him and others like him.

1. Lack of training

Most people go to school to be trained on how to be an employee or self-employed. School teaches us things like reading, writing, and arithmetic, all good things and useful for the work world. It teaches us how to execute on orders from our superiors and be where we’re told to be at the right time – the mindset of an employee.

School doesn’t teach how money works, or how to have it work for you. It doesn’t teach you the skills necessary to become a business owner or an investor. Those are skills that you must seek out and teach yourself.

As a result, most people simply lack the training necessary to know how to invest in a way that isn’t risky. And without training and knowledge, investing is risky.

2. Lack of control

During the last Great Recession, I’m sure that many people came to believe that investing was risky as they watched their stock portfolio’s tumble. The reality is that most people don’t have a true investment plan.

Instead, they work hard and hand over their money to an “expert” who invests it in some mutual funds, stocks, and bonds. The problem is that these types of investments leave you very little control.

You are at the mercy of the markets and managers. That is a position of risk.

Successful investors, on the other hand, strive for as much control as possible when it comes to their investments. That is why I invest in businesses where I have decision-making power, and it is why I love real estate. In both cases, I have a lot of control over what happens with my investment.

3. Lack of knowledge

Most of us know intuitively that if you want a real deal, you need to be on the inside. You often hear someone say, “I have a friend in the business.” It doesn’t matter what the business is. It could be to buy a car, tickets to a play, or a new dress. We all know that “on the inside” is where the deals are made.

The investment world is no different. As Gordon Gekko, the villainous character played by Michael Douglas in the movie Wall Street, said, “If you’re not on the inside, you’re outside.”

Employees and self-employed people generally invest from the outside. They have limited knowledge of what they are actually investing in. Those who operate as business owners and professional investors have detailed knowledge of what’s going on inside of their business or their investments.

They are the drivers of the business or investment, and because they have the insider knowledge that goes with that, their investments are far less risky.

Moving from a position of risk to a position of security when it comes to investing takes financial education and practice. I encourage you today to take an honest look at your investment position and to take the steps necessary to gain training, control, and knowledge. It will be one of the wisest decisions you can make.