In order to get where you want you to have to know where you are!

In this, we are going to talk about two things everyone needs to track so you know your financial score. One is your net worth and two is your cash flow.

Net Worth

This one is one of the basics to track if you are making progress with money. Thankfully it is also one of the easiest. You take your assets which are things you own and subtract liabilities which are things you owe and voila that’s your net worth.

It’s important to note that net worth is a snapshot in time and will change. Normally we want it to go up over time, especially during the wealth accumulation phase. That being said this can be influenced by market conditions. Meaning sometimes this can be volatile. That’s why this is the only measure. This is why we use our second measure.

Budget and Cashflow

If you made it past the word budgeting congratulations. Most people hate the word budget! I mean ick! Maybe it brings visions of tearful disagreement. Maybe it feels like a prison where you HAVE to use your money a certain way or ELSE. The word alone has a negative feeling to it, doesn’t it? Well, I want to take the feeling back and make budgeting not feel confining but empowering.

Why should you have a Budget?

Because I said so! Just kidding! You have to know how much money is coming in (income) and how much is going out (expenses) To accumulate wealth you have to bring in more income than your expenses. That gap is what we call the saving rate. The higher the savings rate the more you can put toward paying off debt and investing. Many folks call the gap cash flow, net income, or savings rate. For our purposes, we will say cash flow.

Beyond that two resources, everyone has is time and money. We want to make sure that we are allocating our time and money toward the things we value. While I won’t talk about time allocation for your values here. I want us to honestly see if we are putting our money towards the thing we value and the same holds true for time.

How do we budget?

First off, we are all different. That’s why personal finance has the word “personal” at the front. I personally (see what I did there) want to see everyone use a budget (or conscious spending plan) but not everyone’s has to look the same. It can be in excel, on paper, auto-categorized using your credit card statement, using a budget app (I like YNAB), and everything in between.

First Step — Make a list of your values

I know what you are thinking don’t we need to start itemizing our expenses and pinching every penny? And the answer is maybe but… why would we pinch every penny. Money is a resource we use to create the life we want or that God has created us for. I also find if you have a spouse and you are budgeting together centering the conversation around your values is way better than focusing myopically on the budget first.

When you get your values straight your budget and money conversations take on a new life.

Here is my list of values

1. God
2. Family
3. Time Freedom
4. Physical Exercise
5. Adventure
6. Work that Matters
7. Dress Freedom
8. Money

Every money decision I make should be through the lens of these values. Now, this will be personal yours will not be mine. For example Number 7 for me is “Dress Freedom”. I abhor wearing slacks, suits, ties, or any of that ilk. That is important to me. I wore a uniform for years while I was in the Navy and when I worked in corporate I HAD to wear a suit and tie almost every day. I hated it with a capital “H”. I’m a t-shirt and jeans type of guy. That may not be yours. You may fall in the “dress for success” category. Also, you will notice most of these can be achieved in multiple ways. Not just with more money except for maybe the “Money” value. I can run for “free”. I can take cheap trips to live out my value of “Adventure”. If something costs a lot of money and another thing doesn’t and they both provide me with the same values or happiness I will usually choose the cheaper option. (Although not always). When you get your values straight your budget and money conversations take on a new life. Where you are measuring against your values and not necessarily a number. You will ask yourself if you spent money on your values this month.

Second Step — List of Goals

From your values make a list of goals for this year. Every year after this you will have a meeting to redo these and a monthly finance meeting to see how you are doing and make adjustments. I would suggest using SMART goals. If you don’t know what they are google it and there are plenty of articles on them. But the biggest thing is to make sure if you have a partner you’ll need to align on your goals.

Third Step — Track Expenses

Make a budget or conscious spending plan. I use YNAB and think it is one of the best budgeting tools out there. They also have free training, podcasts, and books that talk about how they use their budgeting system to where you could do it yourself without the software. Ramsey solutions EveryDollar is pretty good. The other advantage of YNAB is that it can also track your net worth. The key for this step is to just track where the money is going for 2 to 3 months before making changes. Oddly enough just tracking your expenses and spending will change your behavior.

Fourth Step — Make adjustments and repeat

In this step, you use the budget and start planning where your money will go. And make adjustments. Then you’ll continually repeat these steps over and over again.

Conclusion

This post is part of a series I’m dedicating to helping folks achieve financial independence(FI). I call them the 7 phases of FI, and they are as follows.

1. Know Your Financial Score FI — Telling and tracking where your money goes
2. Buffer FI — Having an emergency fund of at least three months
3. Barista FI — You could live off of a part-time job like at a coffee shop, or if you are dual income, you could live off one person’s income.
4. Retirement FI — You can, with your investments, live off social security when you retire.
5. Peace Out FI — Your side hustle plus your investments can pay for your expenses
6. Lean FI — Your investments can pay your expenses
7. Fat FI — Your investments can pay for your quality of life well above your expenses.

I hope to help you achieve financial freedom please reach out if you want to coach. Right now doing it for free!

If anyone wants to reach out please Contact Me!

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This article is informational; it should not be considered Health, Financial, or Legal Advice. Not all information will be accurate. Consult health, financial, or legal professional before making any significant decisions

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Updated on 11/1/23