The 10 Building Blocks for Your Financial Future
by Matthew Barbis ’94
The following was excerpted from The 10 Building Blocks for Your Financial Future, a book/CD-ROM series written by Matthew Barbis ’94. We will excerpt the remaining chapters in the coming newsletters.
Introduction
The purpose of this program is to introduce and reinforce some basic financial fundamentals that help investors of any age achieve their financial goals. Currently, it is not uncommon to become overwhelmed with financial noise from the media, the Internet, investor newsletters and common gossip. We’ve all heard stories of how wonderful everyone’s investments performed during the run-up in the stock market from 1995 to the peak and burst of the technology bubble. We’ve become inundated by the countless stories of how the stock market ravaged everyone’s investment portfolios in the last year and a half.
What we haven’t heard, though, is how the common investor who remained focused during that time had performed with a very strict, disciplined approach to investing with a personally tailored asset allocation model that met their individual goals and expectations. It is a common mistake to forget that the stock market goes up and that it can come back down.
What do you need to do to prepare yourself for that contingency? These days, you cannot escape everyone’s desire to adapt to the daily conditions of the market: Should I move to cash because international affairs look strained? How much should I have in bonds? Large companies look attractive right now because they have under-performed the market year-to-date since the bubble burst. The comments and questions often fly aimlessly.
The 10 Building Blocks for Your Future introduces the 10 concepts that lay the groundwork for a solid financial future. There are no get-rich-quick schemes; no secrets that no one ever told before; no hedge options or contrarian investment styles; just plain vanilla concepts to guide you toward your financial goals.
Chapter One: Monthly Budget
All buildings are erected with the end in mind, yet all start with the very same principal: build a solid foundation. In personal finance, there is no better place to begin than with the establishment of a monthly budget. I want to begin by changing the perception from a monthly budget being a pair of handcuffs to a key to your financial freedom. A monthly budget will set you free once developed. Here are a few important items to keep in mind:
1. It will provide you with an awareness of what you are actually spending.
2. It will provide you with a guideline for moving forward.
3. It will provide you with the means to develop a definite plan.
Awareness is probably the single most overlooked factor when determining your monthly cash flow (the money that you earn each month versus the money that you spend each month). Once we become aware of our spending patterns, we truly begin to understand and differentiate between needs and wants.
One way to do so is to examine your monthly check register in your checking account. …
Keeping a personal notebook with you for one month will always provide you with an eye-opening experience. Many people never realize where their money goes each week or month; they just know it goes. For me, personally, I have found that my largest expenses are incurred at restaurants, delis and 7-11.
For example:
Monday: Breakfast $2.43 for coffee and 2 eggs on a roll
Lunch $9.43 for a large unsweetened iced tea and grilled chicken sandwich
Dinner $34.50 for dinner for 2
It now becomes clear that I have spent $46.36 on meals for that day. If I continued this pattern, then by the end of the workweek, I would spend around $232 just on food. …
Once we have become enlightened by what we are spending our hard-earned dollars on, we may then start to use this to our advantage by applying it to our future. You will start to evaluate the need for your money to be spent on each category inside the budget. Now spending that $5 a day on breakfast doesn’t seem so feasible and it might be time for you to spend a fraction of that cost on the items necessary to prepare it and wake up 15 minutes earlier each morning. … In the financial realm, you may need the discipline to save more consistently when, in fact, you had been wantonly spending your hard-earned dollars on unnecessary items that neither improve your daily living nor add to your money in savings.
Chapter Two: Emergency Fund
Very often, the investors question how much money they should have in cash. The answer to this differs for each person. Each and every investor has separate and distinct situations that are unique to their individual goals and objectives. There have been some rules to assist investors, but again, you must determine your needs and goals during the analysis of your monthly budget. The monthly budget number that you discover will be specific to your individual financial needs and become the most accurate number to move forward in your planning.
Now that the hard part is behind you, you may start to prepare your contingency plan. Everyone seeks to become financially independent. The establishment of an emergency fund is perhaps the most important step that you may take to attain your financial independence.
An emergency fund is the money you set aside for just that – emergencies. This can be the unexpected bill that the oilman placed in your hands after you learned that your oil burner ceased. It can be the price that you will now have to pay to replace all four tires on your car due to the harsh road conditions from the worst winter in years. Most importantly, the emergency fund will be the total of your monthly budget number multiplied by three, six or 12 months of the year …
The beauty of extending an emergency fund beyond a three-month duration increases your independence exponentially. Normally, you want to have as little as three months worth of expenses on hand, but to really protect yourself, you should have six months of expenses on hand in cash, which means in the bank, readily available for easy access. If you are an entrepreneur and own your own business, you should extend that emergency fund out to 12 months worth of expenses.