budgeting your best tool for financial success. according to the millionaire next door who really...
TRANSCRIPT
BudgetingBudgeting
Your Best Tool For Financial Your Best Tool For Financial Success Success
According to The Millionaire Next Door
Who Really Are the
Millionaires?
THE MILLIONAIRES
Most millionaires are college graduates.
True. Four of five millionaires are college graduates. Eighteen percent have Master’s degrees, eight percent law degrees, six per-cent medical degrees, and six percent Ph.D.s.
THE MILLIONAIRES
A majority of millionaires work fewer than 40 hours/week.
False. About 2/3 of millionaires work 45-55 hours a week.
THE MILLIONAIRES
Most millionaires inherited their wealth from family.
False. Only 19 percent of millionaires received any income or wealth of any kind from a trust fund or an estate. Fewer than 10 percent of millionaires inherited 10 percent or more of their wealth.
THE MILLIONAIRES
Most millionaires purchase used cars.
True.. Only 23 percent of millionaires drive a current-year (new) car.
THE MILLIONAIRES
Most millionaires work in sports, entertainment, or as CEOs of big companies
False. About three out of four millionaires are self employed and consider them-selves to be entrepreneurs. Most of the others are professionals, such as doctors, accountants, and lawyers
THE MILLIONAIRES
Many poor people become millionaires by winning the lottery.
False. The chances of winning are about one in 12 million. The average person who plays the lottery every day would have to live about 33,000 years to win once. In contrast, you have a one in 1.9 million chance of being struck by lightning.
Sources
Lee, Dwight R., and Richard B. McKenzie. Getting Rich in America. Harper Business, 1999.
Stanley, Thomas J., and William D. Danko. The Millionaire Next Door. Pocket Books, 1996.
Rules for Improving Your Financial Life
Get a good education
Work long, hard, & smart
Learn money-management skills
Spend less than you could spend
Rules for Improving Your Financial Life
Save early and often
Invest for the long term
Gather information before making decisions
What is a Budget?
A spending and savings plan based on an estimate of income and expenses
Purpose:Meet short and long term goals To have controlcontrol!!!!
Budgeting Process
Identify Current Income
Gross Income: Income before taxes are takeout
Net Income: Income after taxes are take out – take home pay
Other Income: Gifts and other income earned
Identify Current Spending
Record your spending habits Review past bank statements, check
register, receipts, tax forms, bills Divide spending into categories such as…
Food Entertainment Rent Car
Label fixed vs. flexible fixed vs. flexible and needs vs. wantsneeds vs. wants
Fixed vs. Flexible Expenses
Fixed Expenses Those that you have already
promised to pay on certain dates and in certain amounts
Flexible Expenses Those that vary in amount and
usually in frequencyWhich is harder to change?Which should be changed first?
Fixed vs. Flexible Expenses
Rent Cell Phone School Loan Insurance Car Loan Gym Membership Savings
Clothing Food Entertainment Car Maintenance Gas Gifts Heat/Water/Power
Fixed Flexible
Create Goals – Savings Plan
Short-term Goals Emergency Funds Large purchase (vacations, TV)
Long-Term Goals (three years or more) Home (down-payment) Education Retirement
Saving and investing must be treated as a fixed expense. Pay yourself first – at least 10%
Simple Budget Format…Monthly Budget
Net Income
Other Income
Total
Fixed Exp
Total
Flexible Exp
Total
Saving & Investing
Total Ending Balance
Creating the Budget
Analyze your spending habits to see where you need to make changes
Identify trouble spots where your spending is higher than average for other similar demographics.
Set budget to meet your goals
Tracking Budget
Track expenses monthly to ensure budget is being followed Excel or other software works great
Adjust budget if needed Be realistic
It may take multiple revisions to achieve a budget you can stick to.
Lastly
Its all about opportunity costs “I can have this, but it will cost me
this.” Reevaluate often to:
Your goals will change as your life changes