The other day I was thinking about this blog and it occurred to me that it’s all well and good for me to be posting monthly progress updates and tracking how I’m doing, but what does that do for you? On the surface, it helps to show you that it’s possible to come from behind and start making progress. I want to show you how I set myself up to succeed. Let’s get started.
State the Problem
In most engineering problem solving exercises, we start by defining the problem. If we don’t have a clear idea of what it is that we’re trying to solve, then we’ll never have a way to measure if we’re successful. We don’t have to start with a lot of detail at this point. Let’s just establish a good high level statement.
For me, it would look something like this: “I am a 40 year old engineer with a good salary, a wife, and two kids. We are a single income family. We have a mortgage, car loan, student loan, and some credit card debt. We contribute to 401k, but other than that don’t save much. It often feels like we are living paycheck to paycheck.”
That’s a nice concise statement about the current situation. Now we are centered in our situation and can move on to the next step.
Draw a Picture
Getting a visual representation of the situation can be very helpful. In the case of personal finance, we’re not really talking about literal pictures but we do need to gather as much data about our situation and lay it out in an easily viewable manner.
There are tools that businesses use to view their financial situation and I believe we can adopt the same for ourselves. A budget is nice, but it shouldn’t be our only tool. Let’s take a look at building a balance sheet and a cash flow sheet. Google Sheets has some nice templates for these and I will cover each in more detail in following posts.
For now, we’ll just establish what each one is and what it can do for you. The balance sheet is a list of your assets and liabilities or quite simply the things you own that have value (assets) and the things you own that cost money (liabilities)
The cash flow sheet will show your income and expense for a period of time. I track it on a monthly basis. Where budgets establish how much you should spend on each category for the month, cash flow will show you how much you did spend. It’s important to know both.
There are also online tools available that will help you aggregate all of this data and give you visual representations. I currently like to use Personal Capital for this. You can set up your account there and link it to all of your relevant financial accounts.
List the Requirements
The requirements document lists all of the goals for the project. I like to think of it as a checklist that I can go down and when everything is marked off, I’m done. Sometimes the requirements change mid-project and we need to adjust. That’s OK. In project management terms, I feel like we should take a more agile approach to this anyway.
I started my list with the longest term goal at the top. It looked something like this:
- In ten years, when I’m 50, I’d like to be financially independent.
- In five years, I’d like to be able to step down a notch to less stressful work
- For 2015, I want to accomplish the following:
- Reduce overall debt by 10%
- Invest 10% of my earnings
- Reduce the amount of credit card interest paid to $0
It’s a simple start. I like that. Sometimes if we make things too complex or start with too may requirements, the project will feel overwhelming and we’ll never get started. Start small and build over time.
Design a Solution
Here is the not-so-tricky tricky part. We have a problem. We have a picture of our current conditions. We have some requirements for the solution. How do we solve the problem?
I think there are a lot of approaches that could be employed here. There are really only two options to consider: Make more money and have less expense. Of course, there are a lot of ways to go about those two things but it really is just that simple.
There are a ton of other blogs with great ideas for both sides of the equation, so I won’t get into that here but maybe I will in some later posts.
It’s All So Much
This may be the longest blog post I’ve ever written. The long and the short of it is this: Understand your situation, determine what you want to achieve, then formulate a plan for getting there.