Managing Your Money Before It Manages You

Learn how to create healthy fiscal fitness in a debt-burdened world.

By Kay Cross, MEd
Mar 31, 2008

It is a beautiful January day in Texas,
and I am sitting in my home at my favorite writing spot (the kitchen table)
with my laptop. At this moment in time, the United States is experiencing its
worst housing crisis in 17 years with a 10-month supply of unsold homes (Deener
2008). In addition, housing starts are down 40% from a year ago, and the
subprime mortgage crisis continues, with more foreclosures on the horizon. Some
economists believe a recovery in the housing sector is 5 years away. Crude oil
is at a record high, and there is a strong probability that the U.S. will
experience a recession this year.

According to the Investopedia.com article “Disposable Income,”
“In 2005, disposable
personal income
[DPI = personal income – personal income
taxes] dipped into negative territory for the first time since 1933. This means
Americans spent their entire DPI and added to debt for further spending”
(Investopedia 2008b). Another Investopedia article states that the personal
savings rate in the U.S. declined roughly 10% from 1985 to 2005, and that the
debt-to-income ratio nearly doubled. The U.S. Department of Commerce found
that, for 2006, American households had a savings rate of -1.0%, which proves
again that they are spending more each year than they make, digging themselves
deeper into debt. Other countries practice much higher savings rates. The
Netherlands, Italy, Norway, Germany and France have personal savings rates of
10% or more, and countries in Asia average rates of 30% or higher (Investopedia
2008a).

All successful businesses have one thing in common—they budget
their money. Why? Because it works. If multimillion-dollar Fortune 500
companies have to budget their spending, then cash-flow planning can certainly
work for you. As the statistics reveal, either the vast majority of Americans
don’t have a budget, or they don’t know how to use one. Debt is not “normal”
and can be destructive if it is not tamed. Ignorance, poor planning and
indulgence are the three personal traits that lead to debt.

Two weeks before Christmas, a news report indicated that, for the
first time, Americans’ number-one goal for the New Year was fiscal fitness, not physical fitness. To catapult
you along the road to financial independence, this article will provide you
with a fiscal fitness program that works by tackling ignorance (no
understanding of finances) and poor planning (lack of a proper budget). As far
as indulgence goes, you must begin applying what you teach your clients in
regard to weight loss and fitness: sacrifice and discipline. Here are my
suggestions on how to manage funds coming in and going out and how to develop a
healthy attitude about the life tool we call money.

The Funds Coming In

Growing up, my
stepdad always said, “It’s not what you want, it’s what you get, that counts.”
Every time he said it, it irritated me. But now I fully understand what he
meant: the real measure of character is what you do with what you already have.
Regardless of how much people earn, there always seems to be a hunger for more.
But it is
what
you do
with what you earn, not the amount you earn,
that determines whether you will be debt-ridden or financially independent.

Create
an Orderly System for Getting Paid.
In order to make it
easier for me to create a cash-flow plan, I began billing clients on a monthly
basis, with payments due on the first of the month. Clients pay for 1, 3 or 6
months of training and/or coaching, and I send out bills by mail each month. By
altering my billing practices to match those of other service providers, I made
it simpler to collect payment without having to ask for it or chase it down.

Sell
Services to Keep Money Coming in.
Tip #1: Sell exactly what your clients and prospects need.
Do they need a combination of coaching and personal training or just personal
training? Do they need weekly sessions or just monthly appointments? Do they
have time for 60-minute sessions, or would 30- or 45-minute sessions work best
for both of you?

Tip #2: Practice
regular marketing whether you need it or not.
There have been times
when I’ve been so busy and had such a waiting list that marketing has seemed
like a complete waste of time. But I have been in business 20 years and have
learned that the slow times come right along with economic recessions. Your
business must stay fresh in people’s minds, so devise a monthly marketing plan
and stick with it. Nothing beats personally marketing yourself at local events.
I also use direct mail to my own personal mailing list.

Tip #3: Sell gift
certificates with a 90-day expiration date.
Sell these incentives to
your current clients for their friends and families. It is a great way to make
their shopping tasks easier, and you might also bring in new clients. Create
five different gift certificates; for example, a 1-hour assessment; an assessment
plus program design and instruction (2 hours); one coaching session; three
coaching sessions; and 1 hour of nutrition basics. Gift certificates can fill
your slow times and give newcomers a taste of your services.

Balance
Your Fluctuating Income.
It would be nice if my income was
exactly the same each month, but it is not. The key to making your cash-flow
plan work with a fluctuating income is to base your budget on your average monthly income from the previous
year,
or on your worst month. If your average month brought in
$4,000, then create your monthly budget based on that. What do you do when you
are depositing more in other months? You set
that money aside as extra
in the same account or move it to a
savings or money market account to keep you from spending it. Then use that
extra to pull from in months when you are depositing less than your budgeted
average.

Adjust
and Raise Fees as Necessary.
Tip
#1: Give yourself a cost-of-living raise every 2 years.
Most
personal trainers and coaches I work with are not giving themselves
cost-of-living raises on a routine basis. These fee increases are absolutely
essential to keep up with the rising costs of utilities, insurance, food, gas,
education, clothing, medical, etc. In general, I increase fees every 2 years by
7%–10% to make up for rising costs. Clients know to expect this from the
beginning, because I state it in my training policies.

Tip #2: Adjust your
fees to reflect your expertise and the local market.
Invest a couple
of hours this month in finding out what your competition charges. Be sure you
compare your education and credentials with those of comparable trainers and
coaches. If you are undercharging and you feel confident and comfortable
raising your fees by 10% or more, do it. You can increase fees only for new
clients or apply the increases to your existing clientele as well.

The Funds Going Out

Fiscal fitness, like physical fitness, is
a daily choice. Will you work out today or make an excuse to skip again,
thinking there’s always tomorrow? Will you create a spending plan and follow
it, or will you once again throw caution to the wind and plan a $3,000 vacation
on your credit card? Attaining your financial goals requires discipline,
sacrifice and hard work—the same exact habits needed to achieve and maintain
physical fitness.

Develop
a Cash-Flow Plan (10
7020).
The first step in financial planning is to create a budget, or cash-flow plan.
We are going to use the “10–70–20” plan. It is a personal spending and savings
plan designed to eliminate debt and work toward financial independence. Before
you begin work on this cash-flow plan, some background is necessary:

  1. Determine your average monthly income based on
    last year’s earnings.
  2. From that number, subtract your income and
    social security tax (some of you won’t have to do that because your employer
    may be subtracting that out of your paychecks). The resulting figure is your
    DPI.
  3. If you are self-employed and have business
    expenses, subtract your business expenses from your DPI (personal cash-flow
    plan = DPI – business expenses). That final number is what we will use to
    determine the 10–70–20 breakdown.

For example, let’s say you and your spouse average $7,000 per
month in deposits, but you need $500 per month for taxes and $450 per month for
business expenses. That leaves you with $6,050 per month to work with. Here’s
how to use the 10–70–20 plan:

Step
#1:
Calculate 10% to be used for savings. In our
example, 10% of $6,050 = $605. There are 3 goals for this savings money:

Goal
#1:
Build up an emergency fund equal to 3–6 months of
essential living expenses.

Goal
#2:
After you have created your emergency fund, use the 10%
for cash purchases (house, cars, anything).

Goal
#3:
You can use the 10% as extra retirement savings, college
funds, etc.

Step
#2:
Calculate 70% to be used for living
expenses.
In our example, 70% of $6,050 = $4,235. To make
this amount work, you may have to drastically cut back on your expenses for a
while. The short-term sacrifice will have huge long-term rewards.

Step
#3:
Calculate 20% to be used for debt
retirement.
In our example, 20% of $6,050 = $1,210. Use this
money to get rid of all debt above and/or including your mortgage. At most, the
only debt you should carry is your mortgage (at least the interest is tax-deductible).
Choose the debt with the highest interest rate, and pay on it until it is gone.
Do not add any debt while going through this process. This will be painful, but
it is the only way to fight your way to financial freedom.

Step
#4:
After you have paid off all debt, or if you currently
have no debt, continue to follow the 10–70–20 formula. Use 10% for savings, 70%
for living expenses and 20% for retirement savings, cash purchases, etc.

Establish
a Retirement Account.
Many of you probably already have a
retirement account. If not, open one after you have paid off your debts. You
can then use the 20% from the 10–70–20 formula to max out your retirement
contributions. After I bought my first home, I decided to pay off my house in 7
years by using the money I would have put in my retirement account to pay as
extra principal with each house payment. In the end, I saved thousands of
dollars! As soon as my house was paid for, I began contributing the maximum to
my retirement account again. Make sure you create a retirement portfolio that
is in line with your goals, time horizon and risk tolerance. Here are some
retirement savings guidelines based on the age at which you begin saving:

20s: 10%

30s: 15%

40s: 20%

50s: as much as possible!

Keep
Detailed Records.
Half the battle in keeping your cash-flow
plan working is keeping up-to-date and accurate financial records. I spend
several hours every month recording expenses in each budget category so that I
know where we stand at any time. My preference is still the ancient method of
writing it down on paper. This year I may actually catch up with the times by
using Excel or another software program. Find a system that you like and use
it. Make record-keeping and budgeting easy by creating your own spreadsheets on
Excel or by purchasing financial software such as Microsoft® Money or QuickBooks®. Enter all your financial data
weekly or monthly and adjust budget categories as you work the kinks out of
your plan.

The Right Attitude

I have noticed
that, in some cases, people’s attitudes about money mirror their attitudes
about life and relationships. They may push things to the limit, seeking aid
only when it really begins to hurt and life starts crumbling around them. Money
is a
tool. We’re served best if we can take that tool, thoughtfully
examine it and decide the smartest way to use it for our benefit. What we earn
is what we have to work with. According to findings reported in
The Millionaire Next Door, “People become millionaires by budgeting and controlling
their expenses, and they maintain their affluent status the same way” (Stanley
& Danko 1998). There is no magic gimmick or lottery win that catapults
people to wealth. It takes hard work and discipline—the same qualities
practiced by the 5-days-a-week guy at the gym who has a great body and very
little body fat. He looks the way he does because he works out 5 days a week
every week of his life!

Thankfully, I had a mom who taught me how to budget money when I
was in high school. I learned early on that when you have “x” amount of
dollars, that is all you have to work with. It wasn’t a cue to go grab the
plastic and charge it. She told me that when she sent me off to college with a
fixed dollar amount to exist on per month, I never asked for an extra cent the
entire 5 years. Why? Because she had taught me to spend what I had and no more.
The borrower will always be servant to the lender, regardless of how wonderful
the opportunity looks. If you want to insulate yourself from high oil prices, a
housing crisis, a banking crisis and a recession, you need fiscal fitness.
Fiscal fitness can be acquired only by eliminating debt and controlling
expenses. Now is the time to decide: Do you want to live debt-laden or free?

SIDEBAR: Cutting Your Losses

Here are some tips to consider when re-evaluating your
budget.

  • Stop
    frivolous and excessive spending (indulgence).
  • Ask
    yourself if you really need those never-ending payments (cell phone, satellite,
    cable, subscription radio, storage facility, etc.)
  • Quit
    living on borrowed money—credit cards. If you can’t pay the bill in full each
    month, you can’t afford it.
  • Stop
    the new-car cycle. According to Investopedia, when you can’t afford to pay cash
    for a new car, that means you can’t afford the car (Investopedia 2008c).
  • Don’t
    buy or live in too much house.
  • Do
    not refinance your mortgage to take cash
    out. You are handing the ownership over to someone else.
  • Get
    rid of things in storage.
  • If
    possible, do not accumulate long-term debt.

SIDEBAR: Live Your Life Now

If your income was reduced by 50%, could you still survive
in your current home? The
following ideas may help you live at or below your means today.

  • Review
    your insurance coverage and deductibles. Does your coverage meet your needs?
  • Review
    your business expenses and business debt. Do you need to do a drastic overhaul
    on that budget?
  • Your
    mortgage payment should not exceed 25% of your DPI.
  • Your
    mortgage, utilities, insurance and maintenance bills should not exceed about
    35% of your DPI.
  • If
    you’re not yet wealthy but want to be, do not purchase a home that requires a
    mortgage that is more than twice your household’s annual realized income.
  • Get
    rid of all consumer debt that is not tax-deductible.

SIDEBAR: Budgeting Expenses

Use the following itemized list to help you determine exactly how your 70% living expenses break down. Remember that if you are self-employed, you will subtract your business expenses (e.g., continuing education, office supplies, rent, marketing, etc.) from your DPI before you determine the 10–70–20 breakdown.

Living Expenses
(70% of your personal cash-flow plan)

Housing (mortgage, taxes, utilities, maintenance)

Food

Clothing & Dry Cleaning

Transportation (car payment, gas, maintenance)

Entertainment

(dining out, movies, magazines, vacation)

Medical Expenses (doctors, medicine, dental, vision)

Communications (phones, satellite, Internet)

Insurance (auto, home, life, disability)

Children (tuition, allowances, activities, lunches)

Gifts

Miscellaneous (personal, hair care, pets, etc.)

SIDEBAR: Habits of Millionaires

  • Millionaires
  • live
    below their means (spend less than they make);
  • have
    a carefully planned budget or cash-flow plan;
  • invest
    15% of their income before they pay bills;
  • are
    goal-focused and have clearly defined daily, weekly, monthly and yearly goals;
  • spend
    twice the amount of time planning their investments than the average person;
  • put
    financial independence over displaying high social status;
  • are
    economically self-sufficient;
  • are self-employed;
  • are college graduates;
  • are disciplined;
  • are grateful;
  • are hard workers;
  • are self-confident;
  • utilize wise and experienced advisors; and
  • practice religious faith.

Source: Stanley
& Danko 1998.

Kay L. Cross, MEd, ACC, CSCS, president of
Cross Coaching & Wellness in Fort Worth, Texas, is celebrating her 20
th year of business.
She is a certified business and personal coach, an IDEA Master Personal Fitness
Trainer and a motivational speaker. She can be reached at www.kaycross.com.

References and Resources

Burkett, L. 2001. Debt-Free
Living.
Chicago: Moody Publishers.

Deneer, W. 2008. Anatomy of a bear market. Dallas Morning News (Jan. 2).

Investopedia. 2008a. The beauty of budgeting.
www.investopedia.com/articles/pf/06/budgeting.asp; retrieved Jan. 25.

Investopedia. 2008b. Disposable income.
www.investopedia.com/terms/d/disposableincome.asp; retrieved Jan. 25.

Investopedia. 2008c. Seven common financial mistakes.
www.investopedia.com/articles/pf/05/041405.asp; retrieved Jan. 25.

Stanley, T.J., & Danko, W.D. 1998. The Millionaire Next Door.
New York: Pocket Books.

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