3 steps to master personal finances

If you can’t manage your personal and family finances, it’s fair to say that the added complexity of starting and owning a business will be overwhelming.

The most important business decision you will ever make is to treat your personal finances with the the same level of respect and rigour that you would in a business. Aside from choosing a life partner and having kids, your personal finance decisions will have the greatest impact on the opportunities, experiences and time that you can provide for your family.

Fortunately, what is daunting, deliberately complicated and confusing can be reduced to some very simple 20Minute tasks, and an honest 20Minute conversation.

Let’s step you through a simple process and provide you with a simple 20Minute tool that will give you a financial snapshot of your current personal / family finances, your net worth, how much free cash-flow you have to invest in your business, and an understanding of how much cash you need to maintain your current lifestyle.

Lets get started by downloading the 20Minute Wealth Creator Spreadsheet

Step 1 What’s our Net Wealth?

Every business has a Balance Sheet, providing a snapshot in time of the cash and assets the business has, what money it owes, and a magical number at the bottom telling you what the business is worth.

It’s the same for an individual/family. We all need to know where we stand. What money do we have in Superannuation? What do we owe in credit cards? What equity do we have in our home?

Today, what is our net wealth?

At 20Minutes we have made this process very simple. All you need to do is complete the 20minutes Wealth Creation Template on the first sheet of the template.

Start at June 2015, and simply add in the numbers working from top to bottom.

What cash and money do we have in bank accounts?
What assets do we have? – Home, cars, boats, motorbikes etc.
What investments do we have? – Superannuation, shares, child investment bonds, family trusts
What do we owe on our credit card?
What do we owe on our mortgage?
What do we owe on our HECS? – Student loans
What do we owe on our Car?

All of this information is available in your various statements, online banking platforms etc.

Now we know our net wealth (bottom line of the spreadsheet), and and have a solid information base for benchmarking and assessing our personal finances.

Step 2 20 Minute Conversation
One of the hardest and most rewarding conversations you can have with both yourself and family is a conversation about how we manage our money.

Building a business and /or managing a family is a team effort that requires everyone to be on the same page.

Conversation 1 – What are the Financial Principles that you are committing to?
Changing your behaviour, committing to a course of action is much simpler once you have agreed to some principles that will guide you through the traps of consumerism. Will you have a credit card? Will you buy furniture on 60 month interest free terms? Will you take out personal loans to fund that trip to Bali? Will you use a credit card to fund your new business? Will you save a certain percentage of your income to invest?

After getting into the credit card trap cycle, I adopted the following principles and every time I need to make an important financial decision I follow these principles:
1. No credit cards (and do everything in your power to pay it off as quickly as possible)
2. No interest free purchases
3. Put all utilities/bills on direct debit or fortnightly payments set up with the biller
3. Put 10% of income aside for investment

Conversation 2 – What is your Wealth Creation Strategy
Are you happy to live week to week? Are you a good saver? Are you chasing just enough income to fund your lifestyle of choice? Do you want to own investment properties? Are you interested in shares? Are you developing a career that has the opportunity for future pay increases.

For our family we decided that we wanted to start of by:
1. Saving 10% of our income.
2. Build up a small base of money to cover emergencies and provide a good nights sleep.
3. Invest $100 per week into building an investment portfolio that will give us some options for later in life.
4. Build our own business, combined with an investment portfolio and superannuation to create an income stream that will provide our future income (passive income is our dream).

Conversation 3 – What do you want in the next 12 months? 
A new table? Family holiday to Queensland? A week at Christmas down the coast?
Here’s where you list all the bigger ticket items you would like to do and buy in the next 12 months.
List them, discuss them and prioritise them as a family.

Step 3 Managing your Cash Flow 
The biggest challenge in making the step in starting your own business, pursuing a new career or growing your family is not having enough cash flow to maintain your desired lifestyle.

In the 20Minute Wealth Creation Template we have made it very easy to develop a basic budget and cash-flow forecast for the next 12 months.

Simply work through the the next four sheets in the template. Enter your average monthly after tax Income, any one off incomes earned through the year (tax refunds, trust distributions, annual bonus, sales commissions etc.), your average monthly expenses and your planned expenses from your 12 month priority list.

Once completed, you will now have a 12 month cash-flow forecast waiting for you on the following sheet, providing you with the key information you need:
1. Do we have sufficient income to meet our desired priorities in the next 12 months (is the number in the bottom right corner positive?)
2. How we can plan major purchases throughout the year to maintain a positive cash-flow
3. If we change our income by leaving employment to start a new business, we can easily see how much cash we need to have saved or will need to generate immediately to maintain our current lifestyle.

Once we have completed these three steps, we have established an easy system to manage our finances over the coming years.

Every 6 months all we need to do is:

1. Take 20Minutes to update our Net Wealth in the Wealth Creation Spreadsheet
2. Have a nice dinner with your family and revisit the three questions in our 20Minute conversation
3. Revisit our income and expenses and ensure we have the cash-flow to fund our priorities in the next 12 months.

This simple process of basic 20Minute tasks will put you on a path to mastering your personal finances and preparing you with the discipline and structure to manage you own business. 

Now you can start educating yourself about superannuation, compound interest, investment properties, shares, dividends, slashing your costs etc.

Join the conversation by posting your comments, tips and ideas!

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