Archive for the ‘Budgeting’ Category

The Spending Pyramid: Personal Values and Financial Planning (Part II)

In yesterday’s article, we were able to explore the structure of a spending pyramid a la Robert Pagliarini.

Pyramid_Fig2

Based on Dan Pink’s lecture on motivation (which I embedded in another article), there are three human motivating factors.

  • Autonomy – The urge to direct our own lives
  • Mastery – The desire to be better at something that matters
  • Purpose – The yearning to do what we do in the service of something larger than ourselves

As you begin to think about what motivates you in general, you will be able to rearrange the middle portion of the pyramid (in between basic expenses and miscellaneous expenses) to conjure up a picture that aligns with your own values.

Autonomy: Your Money and Yourself

SPPyramid2_1 Image courtesy of Flickr

If directing your life is what motivates you then debt reduction, financial independence and personal improvement will rank high in your pyramid. The most important thing to you is being in control of what happens in your life and blazing your own path. Therefore, neither owing money to credit card companies nor retiring while being financial dependent sit well with you. As such, most of your spending will be directed at your money going mostly into your pocket prior to anything else.

Purpose: Your Money and Others

SPPyramid2_2Image courtesy of Flickr

For some, being financially fit is the means while the end is the ability to serve others and the community. If the realization that there’s more to life than your own needs, then donations to church and charity will rank high on your list. Those who attend church have a set value at 10% (tithing) and will also donate in others ways. Even if you don’t attend a church, you find that donating towards a cause brings about a certain kind of satisfaction. In addition, these donations can also be used for tax deductions.

Another area not reflected in the pyramid is provision for family (both immediate and extended). I told a story of how my father laid the foundation for my siblings and me to go to college. That couldn’t have happened if he didn’t believe that part of his purpose was leaving a legacy to his children.

Mastery: Your Money, Yourself and Others

SPPyramid2_3Image courtesy of Flickr

Sometimes, motivation lies in being better at something for the sake of just being better (epitome of kaizen). Two of the most popular New Year Resolutions in the U.S.A. are managing debt and saving money. Hence it would appear that most people would fall under this category as most believe that finances matter. This belief combined with the desire to understand finance could be a motivating factor for another set of people. Therefore, Goals and Emergency Reserve would rank higher in your pyramid. Goals motivate towards reaching a pinnacle while mastering personal finances starts with being prepared for emergencies. Personal Improvement would also fall under this category as mastering finances would include studying financial matters and learning from others.

Most of the time, personal motivation will come from a combination of two or all three factors and therefore you will find that your values overlap. In the end, the final picture is letting the things that motivate you in life also motivate shaping your finances. Create your own picture and it will lead to spending habits that are aligned with what you think is important.

The Spending Pyramid: Personal Values and Financial Planning (Part I)

Do you ever find yourself wondering where the time has gone at the end of the day? It starts out bright and you perform the required tasks for the day, but the rest of the time has flown by before you realize it? This is often also the case with money.

In his book The Six-Day Financial Makeover, Robert Pagliarini warns that when spending isn’t planned, it often follows this pyramid with money flowing from the top to bottom and reducing in quantity as it trickles down.

Pyramid_Fig1

Like required tasks of the day, Basic Living Expenses are the first things that normally come out of a paycheck. You pay rent, water and electricity bills, insurance, buy groceries etc. However, if there is no plan in place for the rest of the money, whatever is left over often gets spent on Miscellaneous Expenses such as shopping, entertainment and the occasional dining out. Before you know it, there’s very little left over and this little is stretched into the remaining part of the pyramid. This is the kind of lifestyle that tends to lead to living paycheck to paycheck and a continuous cycling of debt.

Robert then suggested a different sort of pyramid which he termed the “Optimized Spending Pyramid”

Pyramid_Fig2

The top part of the pyramid is still Basic Living Expenses while the Miscellaneous Expenses lie at the bottom. Everyone in the finance field will agree that this should always be the case i.e. Pay bills first and then spend chump change on wants. The disagreements arise in the middle portion of the pyramid and the order in which those items should occur. Should Debt be paid off first before establishing Emergency Reserve? Should I give to Charity or the Church when I have debt piling up? Should I be saving for Retirement when I don’t have an Emergency Fund established? And so on and so forth.

The fact is there is not one correct answer. Even when there is an answer that makes sense mathematically, it can be hard to tailor emotions to the arithmetic. This is where personal values come into play. A bible verse says

“Where your treasure is, there your heart will be also.” (Luke 12:34)

The order of priority simply depends on how much value you place on each area of the pyramid. If it’s more important to you not to owe anyone anything, you will find yourself focused on Debt Reduction. If you care a lot more about things going on with the less-privileged in your community, Charity will rank higher in that pyramid. If you care a lot more about developing your skills e.g. learning new software for your job or improving your reading skills, Personal Improvement will rank higher on the list. Whatever the case may be, this portion of the pyramid will be ordered entirely on the things you value most.

Money, like time, if not planned wisely often trickles into the areas of life which don’t rank high on the priority list. Therefore establishing a plan is important, but more important is that it should be your own plan. When the created plan is yours and based on your values, you’re more prone or at least have a stronger desire to follow it.

As a follow-up to this article, tomorrow I will connect Dan Pink’s talk about the three aspects of motivation and relate it to how you can begin to arrange the middle portion of this pyramid to fit you.

Note: I found out this morning through Get Rich Slowly that Robert Pagliarini is offering his E-Book Plan Z: How to Survive the Financial Crisis as a free download. I haven’t checked it out but his Six-Day Financial Makeover was easy to read and comprehend and I expect this book to be the same.

How to use Microsoft Excel to manage finances

In a previous article, I mentioned how to use online sites to see and keep track of how your money is spent. Another way of managing finances and tracking expenses is done using Microsoft Excel. On the Microsoft Office site a search for “Personal Finance” in templates will yield a list of different templates that can be used. In this article, I will show how to use this template (Download Here) to create a monthly budget. Even without an overall grasp of Excel, this template makes life easier as you don’t have to do any calculations, just plug it in and the spreadsheet does the rest.

Excel_Overall

The template is divided into four main areas:

  1. Income
  2. Itemized Amounts
  3. Total Cost
  4. Balance

Income

Excel_1

At the top of the spreadsheet is the Income Section, the money in (link) part of the equation. It is divided into the Projected Monthly Income and Actual Monthly Income. The value of the Expected Income is placed into the Income 1 box (shown here as $1000). If more than one source of income is expected, the other amount(s) can be placed in Extra Income. This is especially useful if paychecks arrive biweekly or when income is generated from more than one source. The total is automatically summed in the Total Monthly Income.  Once the actual paycheck is received, these values can be placed in the Actual Monthly Income section.

Itemized Amounts

This is the best feature of the spreadsheet. This section is divided into

  • Housing
  • Transportation
  • Insurance
  • Food
  • Pets
  • Personal Care
  • Entertainment
  • Loans
  • Taxes
  • Savings or Investments
  • Gifts & Donations
  • Legal

Each of these sections is further sub-divided into other areas.

Excel_2

Most areas of spending are covered in the sections and sub-sections and the names can be changed to better reflect your own costs. Just like the income section, the amounts are divided into Projected and Actual. In addition, when the Actual value is below the Projected value, the Difference shape will remain a green circle. However when the Actual value exceeds the Projected value, the Difference shape changes to either a yellow triangle (difference is less than $20) or a red diamond (difference is greater than $20). Finally, the total is automatically summed up at the bottom of each section.

Total Cost

Excel_3

After all values are placed in the Cost Section, the respective totals are calculated at the bottom of the spreadsheet. If the Total Projected Cost is less than the actual value, the difference in cost shows up red and in parenthesis to denote a negative value (as in the graphic shown above).

Balance

Excel_4

This section is the difference between the Income and Expenses. If the Projected Cost is greater than the Projected Income, the Projected Balance will be negative and will appear in red. The same applies to the Actual Balance. The above Actual Balance here is negative because while I was making this spreadsheet, I didn’t put in a value for the Actual Income.

Overall, this spreadsheet helps to better plan your finances and make sense of how your money can be spent in the coming month. Like planning and organizing time, organizing finances in this manner help to get a better picture of where you can spend less and cut costs. I hope this tool can be as useful to you has it has been to me this past year.

Note: The Savings Section of the spreadsheet (although subtracted from the income) is still part of your Networth, but is here as an expense because it’s coming out of the paycheck.