To become successful, you need a strong financial foundation.
To do that, there are a lot of financial best practices individuals can borrow from an organization’s CFO.
A CFO stewards the assets of an organization, accessing and reducing risks, maintaining financial records, and optimizing finances. You’re responsible for many of the same things. Taking a business-like approach to your personal finances will help you reach your most important financial goals and objectives.
My goal is to help you understand what it takes to build a strong financial foundation, and to give you the resources for making it happen. As a financial advisor, I’ve been helping apply these best practices in their lives for 20+ years. I’m honored to be named to Investopedia’s list of the top 100 financial advisors many years running.
That being said, I’ve also made a lot of terrible financial decisions. In my 20s, I didn’t pay attention to my cash flow, never budgeted, and spent plenty of time living paycheck-to-paycheck. I share that because I want you to know where I’m coming from, and that wherever you are, these steps will help get you where you want to go.
Here’s what we’ll cover:
- The three stages of our financial lives
- Your financial foundation
- Exploring and cultivating your financial beliefs
- Understanding your cash flow
- Creating and maintaining your budget
- Improving your credit
Let’s get started.
The three stages of our financial lives
As individuals, we go through three stages of our financial lives; protection, accumulation, and distribution.
During the protection stage, we set our foundation. In the accumulation stage, we save and invest for our short, mid, and long-term priorities. In the distribution stage, we take all the assets we’ve accumulated, and turn them into retirement income.
To be successful, you must pay attention to the individual parts of each stage (insurance, investments, legal documents, etc), and take an integrated approach to our planning. Getting organized and consistently monitoring our financial situation, as a CFO does, allows us to make any changes depending on what life throws at us.
Your financial foundation
You’ve got to know your financial “facts.” These are your cash flow, budget, credit, and beliefs about money, and they make up a significant part of your financial foundation. I’m going to focus on these four elements, but you must also have the proper insurances and legal documentation to solidify your foundation.
Exploring and cultivating your financial beliefs
I want to start here because it will help frame the entire post. Earlier, I shared how I made poor choices and struggled financially in my 20s, and those struggles were directly linked to my beliefs about money. This is one aspect of finance you’ll rarely find discussed in CFO literature, but it could be the key to unlocking your financial success.
I had a wonderful childhood in a middle class home in northern Minnesota. Raised by a single mom who was a schoolteacher, I got more love than I ever could have hoped for. But there was never enough money, and we struggled financially.
Once a month on a Sunday, my mom would “pay bills.” She’d sit at our big, circular dining room table and cover it with all of our household bills. This was a stressful time and my brother and I knew to stay out of her way.
It wasn’t until my mid-30s that I finally connected the dots. The reason I struggled with my personal finances in my 20s was because I avoided them. I associated financial matters with stress and anxiety. When it clicked for me, and I recognized I had that negative belief, I set about changing them.
We all have an operating system, just like our phones. There are programs constantly running in the background, taking care of mindless tasks and deciding on our behalf. Without it, we’d be in trouble because we make about 35,000 decisions every day. Our operating system takes care of the vast majority of them.
Where does it come from? Some of our beliefs were given to us through DNA, others learned through our experiences as adults, but we downloaded the majority between birth and 7 years old.
What if it’s not optimized, or we have limiting beliefs? Here’s the good news; you can change them. It’s possible to change the neuroplasticity of our brains, and to create new pathways or beliefs,
How do we know? The first step is recognizing any negative habits or behaviors. For me, it was not paying attention to cash flow, not budgeting, and waiting until the last minute to pay bills. Once you identify the behavior, work to trace it as far back as you can. Odds are, you’ll end up in your early childhood.
While we’re talking about personal finance, we’ve got beliefs about everything. The more you can recognize any limiting beliefs you may have, the better your chances of overcoming them. When you’re able to replace limiting beliefs with positive ones, you’ve positioned yourself for far greater success.
Understanding your cash flow
Have you ever run out of money? When was the last time it happened?
I’ve been there plenty of times. I grew up in the 90s and didn’t have a credit card or debit card. When I ran out of cash, the spending stopped. Throughout my 20s, I’d go through phases where I lived paycheck-to-paycheck.
Over two-thirds of Americans are living paycheck-to-paycheck. Essentially, that means they’re running out of money towards the end of every month. Breaking free of that vicious cycle requires planning.
A common saying in business circles is, “cash is king,” and it’s true. If a business isn’t properly capitalized, it won’t be able to continue operating. The CFO must ensure there’s enough cash to cover all expenses. The same is true for you and me, so how do we do it?
Auditing your cash flow
Most people don’t know how much money they earn or how much they spend. Do you?
It’s easy to develop the bad habit of not looking at your finances. When we fear what we’ll find, we tend not to look. Obviously, it’s bad when we don’t pay attention to how we’re spending on our money.
You audit your cash flow by logging into your financial accounts and reviewing your transactions. However long it’s been since you last did this will determine how far back you review. If it’s been a year, look back over the last year’s worth of transactions.
When you’re not paying attention, things slip through the cracks. You end up paying for things you don’t use, or that you no longer value enough to continue paying for. My wife and I fell into the trap of not paying attention to our finances early in our relationship. When we finally ripped off the bandaid and reviewed our cash flow, we found hundreds of dollars of monthly expenses we could easily get rid of.
Look for things you can easily cut out and do it. If you’re unsure about whether you want to get rid of something, take a couple months off of it and see if you miss it. You can always add it back in later.
Break the bad habit of not paying attention and replace it by logging into every account you used to spend money at least once a month. This will help you stay on top of your cash flow.
Creating and maintaining your budget
Just as I failed to pay attention to my cash flow in my 20s, I also didn’t keep a budget. If I’m being honest, I still don’t love budgeting, and my wife keeps ours. But I say with absolute certainty that budgeting is empowering. It tells us when we’re on track to reach our goals, and when we’re behind. A budget will also tell you if you can afford to do things like go on vacation, donate to charity, or make an investment.
Without a budget, a company has no chance of being successful.
CFOs use budgeting to forecast and develop long-range strategies. They create annual budgets and review them quarterly. And they track certain aspects daily.
What is a budget? It’s simply a plan for your money. It helps us to prioritize how we’re using one of our most important resources (money).
There are a lot of ways to budget, none of them are right or wrong. The best budget for you is the one that you follow. You can use a paper document, a spreadsheet, and there are a lot of great apps and budgeting technologies available.
To help simplify your budget, I want to teach you the 50/30/20 budget guide. It’s helped me and my clients get started with budgeting for many years.
The 50 stands for needs, the 30 for wants, and the 20 for financial priorities. Let’s talk about how it works.
Getting started
To start, you need to determine your after-tax income. This is almost as easy as simply totalling up the money that hits your checking account every month. Once you know that number, we add any employee benefit deductions, like health insurance premiums, 401(k) contributions, and FSA/HSA contributions.
That’s the number we’re going to work from. For the sake of simplicity, let’s assume that the number is $1,000.
Needs
Needs are things you absolutely can’t live without. Here are the most common items:
- Housing
- Food
- Transportation
- Medicine
- Insurance
- Child care so you can work
- Clothing
- Minimum monthly loan amounts, as well debt repayments
Based on our $1,000 monthly income, 50% ($500) should be allocated to your needs. Write all your needs to determine if you’re currently within the parameters.
Wants
Wants are things that accentuate life. Here are the most common items:
- Subscriptions
- Travel and vacations
- Food away from home (Eating out and happy hours)
- Entertainment
- Designer clothing
- Designer accessories
- Fancy jewelry
There will be a fair amount of crossover between wants and needs. Clothing is a need, but designer clothing is a want. For example, the cost of a middle of the road business suit may be $200 (Need), but you may purchase one for $300 (The additional $100 would be a Want).
Based on our $1,000 example, 30% ($300) should be allocated to your wants. Write all your wants to determine if you’re currently within the parameters.
Financial priorities
The final 20% of your budget should be allocated to your financial priorities. The most common items being:
- Debt repayments (Contributions above the minimum required payment)
- Saving and investing
No one ever got to retirement age and thought, “I wish I hadn’t saved all this money.” While there’s no limit to how much you can save and invest, 20% is the number you should work to get to.
Based on our $1,000 example, 20% ($200) should be allocated to your financial priorities. Write all of yours to determine if you’re currently within the parameters.
When you’re getting started with budgeting, you may find it to be restrictive or uncomfortable. Those are perfectly natural feelings. Stick with it and I’m confident you’ll have a similar experience to mine; feeling empowered and in control of your finances.
Improving your credit
Credit plays an important role in our lives. Poor credit can prevent us from living where we want, driving the vehicle we desire, or working at our employer of choice. It can also cost us a lot of money in higher interest rates on loans.
Credit cards have made it almost impossible for us to run out of money. We can keep spending and spending, and spending. That negative behavior keeps many of us trapped with the average American carrying over $6,000 in credit card debt. We need to become better stewards of our credit.
Credit plays an integral role in the financial operations of a business, and the CFO oversees it. They’re responsible for the profitability and working capital of the company. Some companies use more credit than others, and every company is mindful of the importance of maintaining a positive credit profile.
Understanding credit and your current situation
A credit score is a number from 300 to 850 that measures your credit-worthiness; meaning your ability to pay back the money you borrow.
Banks want to lend money to people who are likely to pay them back. With that in mind, the cost to borrow money for someone with a credit score of 850 will be less expensive than the cost for someone with a credit score of 300.
A credit score above 700 is “good,” and working to get a credit score of at least 620 is a wise initial goal because that will allow you to do things such as quality for a conventional home loan.
As I mentioned in the opening, the better your score, the lower the cost of borrowing money.
To understand your current credit situation, there are a handful of things I want you to do which will help us a later on:
- Get a copy of your credit report. You’re legally entitled to a free copy every year from sites like AnnualCreditReport.com
- Figure out your credit score. You can contact your existing lenders (Credit card companies, student loan providers, auto loan providers)
- Get your personal budget together If you don’t currently keep a budget, you can learn how to develop one here)
- Get a total accounting of all your existing financial accounts (Credit cards, bank accounts, auto loans, home loans, investments, etc)
What are the factors that go into my credit score?
There are many factors which go into your credit score
- Your history of bill payments (Do you make your payments on time)
- How many credit accounts you currently have
- How you’re using your credit (also known as utilization)
- How long you’ve had your credit accounts
- Recent applications for new credit
- Any negative history such as collections, foreclosure or bankruptcy
Again, these are objective measures lenders use to determine how likely someone is to pay back the money they’ve borrowed.
How do I improve my credit score?
There are a lot of ways to improve your score, some of which may seem obvious
- Properly use your credit and make all payments on time. If you’re able to set up automatic payments, that can help ensure on-time payments
- Reduce your utilization to 30% or less. If you have $10,000 of available credit, bring your balance to $3,000 or less
- Pay off existing debt
- Keep old accounts open
- Reduce the number of new credit applications. If you must open new accounts, proactively try to open them around the same time
How long does it take for my credit score to go up?
When you start properly using credit, your score can improve in as quickly as three to six months.
Negative events like foreclosure, collections or bankruptcy can stay on your report for seven to 10 years.
Your credit improvement plan
I’m going to provide you with all the resources you’ll need to improve your credit, but you need to make an important decision; are you ready to do what it takes?
The first step to making any important change is to make that decision to do so. Whatever brought you here, ask yourself if you’re really ready to do the things it will take to get where you want to go.
The next step is to take an integrated approach. I can give you all the tips and tricks to improve your credit, but it will take more than that.
Here are the steps to follow:
Get clear on your goals and values. This will help you figure out where you want to go and why. We have a Goals Course and a Values Course which you can access at no cost.
Know your facts. You need to understand your cash flow and your budget. This will help you to know which (if any) changes you’ll need to make.
Get out of debt. This is a key priority for many Americans. Not only will it improve your credit, it will improve your peace of mind as well. We have a Get Out of Debt course which you can access at no cost.
On top of the course, one of our Partners, Woven, has a great app that can help you get out of debt faster and more efficiently.
If you’re able to qualify for a 0% credit card, consolidate all of your balances onto one card.
A personal loan could also make sense to pay off high interest rate credit cards and consolidate all your consumer debts. You can explore options with one of our Partners, Best Egg personal loans.
Go through your credit report. It’s estimated over 40 million Americans have discrepancies on their credit reports. When going through yours, here are some things to look for:
Accounts which shouldn’t be there
Accounts which have been closed but are still appearing as active
Addresses, phone numbers and or names which shouldn’t be there
All of these things should be treated as red flags and should be dealt with immediately.
One of our Partners, Dovly, can help you to clear up any items which should not be on your report. I also encourage you to listen to these past LifeBlood podcast episodes on how to best handle your credit.
- Make any necessary changes. If you’re living paycheck-to-paycheck and there’s no money left over at the end of the month, you may need to make some temporary changes. Are there opportunities for you to earn more money? Are there any ways for you to live on less?
I know from personal experience how lousy being in debt and struggling with credit can be. Because it plays such an important role in our lives, it’s imperative you pay close attention to yours.
Closing
If you follow these steps, you’ll create a solid financial foundation to build on. As you’re working on the areas you need to work on, be patient with yourself. This is a worthwhile endeavor that may take longer than you like.
You’re someone who can be financially successful. Get to work.
If you’re ready to take control of your financial life, check out our DIY Financial Plan course.
We’ve got three free courses as well: Our Goals Course, Values Course, and our Get Out of Debt course.
Connect with one of our Certified Partners to get any question answered.
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Check out the LifeBlood podcast.
If you’d like to dig deeper, check out our Get a Budget, The Right Coverage, and our Improving your Credit courses.
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