Article by Bernard Ng
It's the beginning of 2007, the beginning of a new year. It is also a time when you start to make resolutions or goals for a brand new year.
I am sure among them you might have some that are related to wealth creation or accumulation. (If not, you better start thinking about that now).
One of the easiest and powerful way to accumulate wealth is to follow the "Pay Yourself First" rule, which was one of the teachings Rich Dad taught in Robert Kiyosaki's "Rich Dad, Poor Dad".
What does "Paying Yourself First" mean and how you can follow it? Basically, it means you simply set aside a certain amount of money each month that you will not touch (pay yourself), even before you pay your bills and expenses (pay others)!
Here's a step by step guide which you can follow:
1. From the amount of money you make each month, you decide how many percent of your monthly salary or income you want to set aside. When you get your paycheck, the very first thing you do is to put this amount aside, hence the "pay yourself first".
The percent to set aside differs from individual to individual depending on each comfortable level and wealth target. Most people recommend 10% to 15% of the monthly income to set aside, but I suspect that you might need to go up to 20% or even 30% if you want to reach your financial success.
2. Decide what you want to do with this amount which has been set aside. Many will simply put the amount into their saving accounts. However, the idea of paying yourself first is to use it for your wealth building. You should be looking into investing them instead of just saving them. Saving alone will not help you to reach your financial success.
Let the money earn you more money by investing it. Consult with your financial planner or advisor to decide the kind of investment portfolio that suits you. I would recommend that you setup what is known as an automatic withdraw from your bank account to your investment institution for your investments. This is when money is automatically taken out of your savings or checking account each month and put into your investment.
Generally, you have to select a certain day each month for when the transaction will occur, and it will happen every month on that day, just like paying your bills. In this way, it does not rely on your ability to set aside a certain amount each month. It relies on the computers who automatically invest your money for you. It is also easy once you realize how you don't miss the money.
3. Next, you pay off your bills.
4. Live on whatever is left over from your paycheck. It does not however imply that you need to use up every single cents of what is left. If you have surplus, then good for you. If you have a substantial surplus, then go back and re-adjust your investment amount. Increase you monthly set-aside amount for investment, and let it generate more money for you.
5. And finally, NO CREDIT CARD DEBT! Don't spend on credit. Also be very careful with home equity loans and car loans. It's easy to get into trouble with both. If you are disciplined, you can pay yourself first without running into a credit rut.
First, keep your personal expense low. Don't go out and spend your money on "ego" toys like a new car, a new outfit or a long vacation. Not until the habit of paying yourself first has built up enough assests for you to afford them.
Second, when you come up short, don't dip into your investment to pay off your creditors. Robert Kiyosaki believes that if you are under pressure from creditors, the pressure will actually inspire you to come up with new ways of making money. Look for other ways to tide over.
As you start to build assets, you will see that the income from your assets will allow you to pay for your personal expenses and expanded your means for you to live the livestyle you want.
Paying Yourself First is a simple yet powerful concept. It is so powerful that it could be apply to other area besides money. You can apply these same principle to time. Pay Yourself First if you are a busy working mother.
You need time to take care of yourself so that you can take care of your family!
Bernard Ng keeps a blog "Wisdom of the Rich Dad" at http://www.richdadwisdom.com, where he shares lessons learnt from Robert Kiyosaki's 'Rich Dad, Poor Dad'. Article Source: http://www.simplysearch4it.com/author-articles/11611/1.html
How to control your cash flow, the first and perhaps most important step to financial health.
Your cash flow is how much you make (your income) minus how much you spend (your expenses). Despite this simple definition, producing a cash flow statement can seem like a tough task to complete. And, in doing so, you are likely to discover areas of spending where you need to change your habits, requiring a great deal of self-discipline and sacrifice. So, controlling your expenses as they relate to your income will not always be fun or easy. Why then, you may ask yourself, should you keep reading? Controlling your cash flow is the first and perhaps most important step to financial health. It is crucial in establishing a positive financial situation.
The entire financial planning process is dictated by your cash flow. Your cash flow will influence what your goals are, how much you can invest toward them, how long it will take to reach them, and how much insurance and estate planning you can afford. A positive cash flow allows you to direct cash toward paying down debt, building an emergency fund, and investing toward your financial goals. A negative cash flow, however, is a major “red flag” that indicates you must reduce or eliminate expenses before proceeding with investing and other activities.
As you now know, spending less than you make is vital to your financial health. To get started, lets divide how you control your cash flow into three easy steps: develop, budget, and act.
Develop
The best way to begin is to jump in and actually develop a statement of cash flow. Specifically, this is a list of all your income and expenses over a given time period, usually one year. Though it may take some effort, forming a proper statement of cash flow requires great detail—the more detail you put in, the more accurate and helpful it will be. You will need to know all of your income sources, as well as how much you spend on everything, from utilities to dining out to dry cleaning.
Getting started can be easier than you think. Begin with broad categories, then work your way down to details. First, list all of your income and expense categories. For example, you may have the following larger categories: “Income: Salary, Dividends, Rental Income. Expenses: Utilities, Mortgage, Education, Entertainment, Car.” Then, to each of the broad categories, add detail with more specific subcategories. For example, you may list these subcategories: “Income Subcategories: His Salary, Her Salary, Dividends from Stock Portfolio. Expense Subcategories: Water, Electric, Mortgage Interest, Mortgage Principal, Sports Tickets, Dining Out, Gasoline, Car Wash.” Once you have all of your subcategories listed, simply assign realistic estimates of how much you earn and spend over one calendar year. You now have a statement of cash flow (Cash Flow = Income - Expenses).
Budget
Now that all of your income and expenses are listed in your statement of cash flow, it is time to perform a thorough evaluation with the objective of spending less than you make. Since what we earn is usually out of our immediate control, you should concentrate on reducing or eliminating expenses. Unfortunately, many people only spend time and effort on trying to earn more instead of adjusting their expenses. This is wrong. If you have a negative cash flow, you must start with cutting and reducing your expenses—this is where you can quickly and more easily have a positive impact on your financial situation.
First, cut the obvious expenses, those that are not essential. Expenses such as Toys, Dining Out, Entertainment, Travel, Artwork, DVDs, and Clothes, can quickly be cut from your expenses without a major impact on the vital things. You will make the most difference by forcing yourself to give up those expenses that you do not really need. You must be completely honest with yourself when deciding what is essential and what you can live without. The success of your budget, and ultimate financial plan, depends heavily on your ability to recognize and admit what is not an essential expense. And remember, amounting credit card debt to pay for things is not a solution—this will only lead to even greater cash flow problems in the near future.
Once you have examined your optional expenses, take time to analyze and reduce your essential expenses. Look for better rates or ways to consolidate. As an example, by calling your phone company, you may find a plan that fits your needs for less than you currently pay. Or, by consolidating debt or refinancing you may be able to reduce your monthly payments or interest rates.
After getting to a point where you have excess income, you now have a budget! You can use this excess cash flow to start eliminating debt, establishing an emergency fund, and investing toward your future. Having a budget and a positive cash flow is very powerful and is the first step in improving your financial condition.
Act
After you have developed your budget, adhering to it is the real essence of controlling your cash flow. Sometimes this is easy, and sometimes it takes great motivation and determination. If your budget requires you to give up certain luxuries that you enjoy, you may have to find other less expensive ways of indulging yourself. There is no magic to this—no special planner, no creative way of arranging your statement of cash flow, no new technology that will do it for you. It takes simple grit and willpower. You must spend less than you make.
The general order of expenses should be:
1. Pay your necessary expenses,
2. Pay down debt,
3. Pay yourself (through establishing an emergency fund and investing), and only then
4. Indulge. Your budget is your framework to make this happen. Keep close track of all your expenses.
Utilize a budgeting software program, such as Microsoft Money or Quicken. Keep your receipts, diligently record every expense, and monitor your cash flow to make sure you are sticking to your budget.
You, and only you, can do it. It might not seem easy, and it might not seem fun. But, getting your financial situation under control is powerful and will be very positive for both your finances and you.
Conclusion
Remember, controlling your cash flow is a vital part of financial planning. The reality of achieving financial goals starts with a controlled cash flow. Analyzing your expenses and developing a budget is necessary in order to best control your cash flow. Spending less than you make may not seem exciting or enjoyable, but it is doable through a process of: developing a statement of cash flow, budgeting, and following through. Be sure to update your statement of cash flow and budget at least annually—your financial position will look better and better!
Written by CitrinGroup Staff 04/03/06
Article by Bernard Ng 