The Money Management Formula

Alchemy!

Last week I sat down and did a quick video for Facebook about newcashview.com.  In that video, I talked about the formula for financial success, for regular people like you and me.  Yes, I do consider myself a regular person, even though I have a law degree and some people think that puts me in a different social class. 

 

The truth is, I grew up in a poor family and everything I have, I’ve worked really hard for.  I’ve made plenty of mistakes and plenty of good choices, too.  On top of that, everything I know about money management I’ve learned on my own, or from watching my clients struggle to overcome money problems worse than I ever had.  Wherever you are on your financial path, chances are pretty good I’ve been there, too.

Through those experiences, I developed my philosophy about money management.  That philosophy turned into a list of things for regular people to do to find their path to financial bliss (catchy phrase, don’t you think?).  I’ve been thinking about another way to teach what I think is the best method of money management, and I eventually came up with this formula:

(ci – ne = s * i) / u = m#

Looks crazy right?  Well, let’s break it down and then I hope it will make more sense.  Let’s start with the “ci” part of the formula.  “Ci” stands for “current income.”  That means the money you have coming in right now.  Now.  Not later, not when you finish your courses at the rodeo clown college, but right this second.  If you don’t have any income at all, that’s another issue that you probably need to address first.  Either way, the income you have now is relevant because your life is happening now.  If all you do is plan, plan, plan and don’t stop where you are to look around and experience what’s happening this very moment, you are missing the point entirely.

 

The second part is “ne” which stands for “necessary expenses.”  Note that I included the word “necessary.”  That means the expenses you HAVE to pay to live (remember, needs vs. wants).  They usually include housing, food, transportation, medical care, communication and maybe education and some entertainment, too.  When I include communication and entertainment, I don’t mean the latest, most expensive smartphone or biggest satellite dish package.  I mean the minimum telephone service and basic cable or internet package.  Lucky for you, these days you can usually bundle them together!  Yay for capitalism!

 

As you can see, the first part of the formula is “ci – ne.”  This means you subtract your necessary expenses from your current income, which then totals “s.”  You might be able to guess what the “s” stands for.  That’s right!  SAVINGS!  This is the money you should be saving, (hopefully, it’s at least 10% of your gross annual income).

 

The next part of the formula is “*i.”  What do you think that stands for?  Can you guess?  That part of the formula means “times investing.”  What in the world does that mean?  It boils down to the fact that you should not just be saving your money, you should be saving it in some kind of investment account, like a Roth IRA.  If you just put your money in a savings account, it’s probably going to earn less than 1% in interest.  However, if you put it in an investment account, you should earn at least five times that amount.  The average rate of return on these types of investment accounts is usually at least 6% over time.

 

Okay, we’ve gone over the first part of the formula.  As you can see, it’s in parentheses.  The reason for that is because when you are doing math problems, you do the part in the parentheses first.  Then, you use the number you get from that part of the problem for the rest of the formula.  Get it? 

 

So, the next part of the formula is “/ u .”  What does that mean?  Well, in math terms, it works like this, you take the number you get from the first part of the formula and divide it by “u,” which for our purposes means YOU!  Let’s call this the “you factor.”  The way it works is, your whole budget should reflect the “you factor,” which will help you determine your magic number. 

 

Here’s an example of what I mean.  The standard rule of most financial gurus is that housing should account for no more than 30% of your gross monthly income.  The key words there are “for no more than.”  If you’re a brain surgeon and you decide to rent a studio apartment so you can save money to finance a medical sabbatical in Africa, go for it!  Put together a budget that works for you and rent that little studio apartment!  In other words, find your magic number.

 

Which brings me to the very last part of the equation, “= m#.”  You guessed it!  That means “equals magic number.”  This is the part of the equation where you factor in those things that make life worth living for you, that give you your purpose.  Like that medical sabbatical to Africa or salsa dancing lessons, buying a hot air balloon, a daily cappuccino or whatever it is that makes you wonderfully happy.

 

In plain English, here is what the formula says:  Take your current income, subtract your necessary expenses and you get the amount you should be saving.  Multiply that savings by investing it.  Then divide your money management formula by the you factor, and that equals your magic number. 

 

I know, you are thinking this sounds like baloney.  You are free to go right on thinking that, for sure.  However, before you hit the back button on your browser, hear me out.  The biggest problem I’ve seen with money management advice in general is it lacks the “you factor.”  Most programs, strategies, plans or other financial devices set standards designed to create consumers, not to teach us how to create lives that fulfill us.  When it comes to money management, I’ve said it once and I’ll say it again, one size does not fit all.

 

Your life is happening NOW.  So, your money should be supporting you in your happy, peaceful life, whatever that looks like for YOU and no one else!  As long as you are doing the basic things (remember, we talked about this in the January blog), you’re golden.  Those things include being debt free by the time you’re 60, building a nest egg so that if you can’t work, you can still pay your bills and building an emergency fund for, well, emergencies.  Don’t forget to help out humanity in some way shape or form, too.  After that, the rest of your life should be about whatever makes you happy, that’s the you factor.  Your personal finances absolutely should reflect that you factor, you know why?  Because we really, REALLY need happy people right now!

 

Well, that’s enough food for thought for today.  If you want to learn more about my philosophy of money management, check out my book Money Basics by clicking here.  Otherwise, stay tuned for more on money management in the next blog post! 

Sincerely,

Joy Alford-Brand

Your Dollar Lama