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I won’t even say the “B” word that comes up in virtually every conversation about managing your personal finances because it makes so many people shudder. It’s the six-letter word that feels like a straitjacket of misery, the word that means you’ll never again get to splurge on something that sends your endorphins racing.
Perhaps a change in perspective might help. I’ve found that if you spell out the word you can break it down into its basic parts—and it just so happens that these six parts are the most important components of a successful money life. So, here’s something you probably didn’t learn in spelling class:
B: Think of “B” as representing your BALANCE Sheet, otherwise known as your net worth. Net worth represents the difference between your assets and your liabilities (what you’ve accumulated vs. what you owe). As you move through life, your goal is to increase your balance sheet to a degree that it satisfies the outcomes you’ve outlined as most important. For example, retirement, college, buying a home, or other purposes that support your values.
U: The “U” is for UNDERSTAND, as in understanding the basic workings of your money life. You don’t need an MBA in finance or a CFP designation; you just need some basic concepts that will support you in making decisions aimed at adding to your balance sheet. For example, Basic Concept No. 1: you can only increase your balance sheet if you spend less than you bring in. Therefore, you need to understand the key elements of running your household. Know your fixed costs (mortgage, rent, loan payments), your variable costs (food, clothing, utilities) and the costs that you completely control (vacations, gifts, hobbies, etc).
D: This could stand for DEBT, DIFFERENTIATION OF NEEDS vs. WANTS, or for DISCRETION, but my advice is to let it represent DOWNSIDE RISK. Without a clear understanding of your financial life and a fully considered plan, you aren’t adequately considering your downside risk. Let me put it to you this way: What happens if, just as you’re reaching retirement age, you’re faced with a disruption in income, higher than expected college costs, or another unforeseen big expense? What if you’re not prepared for these risks? You’ll have an untenable situation! But it won’t be untenable if you consider the “what if’s” well ahead of time and put a contingency plan in place, along with emergency savings. For example, to mitigate the risk of premature death of a family breadwinner, or disability, or your house burning down, you might want to have insurance. Insurance premiums cost money. How does that fit into your spending in a way that will still leave you with a surplus to increase your balance sheet?
G: You might think this should stand for GOALS, which are the targets of all your hard work. But for spending vs. saving purposes, think of the G as GUARANTEES. In a world in which the variables far outnumber the guarantees, consider what is certain. At some point, you will die. At some point, you will experience changes that will affect your next financial steps. At some point, it is very likely that you or someone in your family will experience physical or mental deterioration. On the other hand, you are not guaranteed a job, a place to live, or robust health or status or much of anything. What do you need to do today to prepare for what is guaranteed or highly likely? Think about how you’ll make life transitions when they’re needed. No one likes to dwell on these scenarios, but a financial plan that includes the worst case will lessen the burden when good fortune takes one of its inevitable reversals.
E: The “E” stands for EVALUATE. You are faced with choices every day. Offers that entice your senses, that add confusion rather than clarity to your life. While the idea of evaluation is simple, it can become a slippery slope of wants vs. needs. In order to clearly delineate one from the other, you must devote the time and energy to knowing, without doubt, what you value most. Let your values become the divining rod when it comes to making choices. Do you need this particular thing or do you just want it? Does your choice bring you closer to that which must happen in your money life, or further away? For example, you might want to fly first class, but the extra cost will prevent you from doing other things that you value to a greater extent.
T: The “T” most definitely stands for TIME. Time can be your greatest ally or your biggest adversary. Time is necessary to accumulate wealth, pay off debt, raise and educate children, and prepare for a comfortable retirement. Harness time and use it judiciously to achieve your goals, live out your dreams and find meaning in your life. If you believe you can kick the can down the road, consider the downside risks of waiting. Then start acting now. You can allocate just a small portion of your spending, putting aside a bit of money week by week so that it adds up over time. But do it decisively and consistently, with your eye on the future.
I’ve found that if you break the nasty “B” word down into what it really means, the concept of using your money in a way that benefits your life plan is not simply a euphemism. Rather, it’s a way of making sure your money brings you what will make you happiest over the long term: peace of mind and security.
