Tuesday, February 24, 2009

The 5 Why's of Money Management

Before you rush out to buy that personal finance software you've been fantasizing about, do yourself a favor and play the game of 5 Why's.

Here's how it works: I'll get you started by asking a question, then it's up to you to ask yourself 5 why's.
Are you willing to control your financial behavior in order to achieve financial gain?

Here's an example of how you might respond...
  1. Yes; I'm willing to eat out less often, cancel my unlimited video rentals account, cut back on my cell phone data plan, and take control of my financial life. But most of all, I want to know how much I'm really spending on "stuff." Especially stuff like late fees and credit card interest.

  2. Why? I want to know where my money is going so I can determine the relative costs and benefits realized by each expense. I want to determine the scope of our spending problems with respect to all of my other expenses. I want to have a rational basis for improving my financial life.

  3. Why? Because I've done everything I can to increase my income and, short of working two jobs or winning the lottery, I'm out of ideas. I've asked my family to cut back on expenses, but I have no way to measure their efforts. In short, I want to stop wasting our limited supply of money.

  4. Why? Because other financial goals that I have aren't being realized. My 401(k) isn't where it needs to be. Our emergency savings account is a joke. The college savings account isn't even growing fast enough to get Junior through Junior College. We haven't been on a vacation since we got married. But most of all, I'm sick of living paycheck to paycheck.

  5. Why? Because I haven't decided to make my financial future a priority. I've let things go uncontrolled because it was easy. I keep thinking "next year will be better," but it never is! I'm old enough to recognize that, if I don't act soon, I won't have any options in the future and that scares me.

  6. Why? Because I want to retire early and spend time with my family. I want to work less and play more. I want to know that if I die, my family will be taken care of. I'm sick of worrying that the car will break down at any minute. I'm tired of worrying about events I can't control -- I want peace of mind.
I know you don't want to do the 5 Why's exercise... but it's absolutely critical to your success. You need to understand why you are keeping track of every little expense. You need to understand why you are establishing a budget. You need to understand why it's necessary to make retirement contributions. You need to understand the things that your money management program is going to deliver. This exercise is all about you and your passions. Money management is a life-long activity and it requires your serious commitment.

Communication is critical for couples... Regardless of what specific event caused you to pursue that fancy personal finance software, you need to recognize that without the support of your partner, you are destined for frustration.  What good is financial information if the other person doesn't understand what you are trying to accomplish? Use the 5 Why's to develop mutual goals and build mutual support.

The take-away... If you haven't identifed your personal financial goals, you are swimming directionless in a sea of financial demands that may eventually drown you.  You have the freedom to chart your own course toward financial peace. What's stopping you?


Robert said...

Ionic Adams.....The statement "swimming directionless in a sea of financial demands" REALLY hits home! The five whys used correctly slowly motivates me to take control of my finances,but the pit of dispair that you describe with the above quote, is the real kicker! Thanks for the motivation.