Last week I interviewed Tom Rizzo on the show. Tom is a jazz guitarist turned financial advisor with a great story and a genuine concern to help freelancers find financial freedom. There was great advice in that show - I recommend, of course, that you listen to it.
But as I reflected on some of the conversations I’ve had with people who desired a financial tint to the show, I thought that maybe, despite its basic level, for some it was too advanced. And in the effort to get you as much tangible, actionable information as possible - I am giving you “the 3.”
Money is funny. We have to learn to treat it like the commodity it is, we can’t worship it, yet we need it; it drives our opportunities and prospects. Money isn’t “evil” in and of itself, but the “love” of money can be detrimental. Therefore, we need to have a healthy appreciation of it, and understanding of its “value,” and we need a strategy to get it.
Financial freedom is a long haul. But in order to get there, we need to know three numbers: 1. Our Net Worth, 2. Our Budget, 3. Our Goal. Another way is to think of it like a vacation - know where you are starting, what is your vehicle, and where are you going.
Net Worth: Where You Are Starting.
You can’t create a map if you don’t know where the start is. Your net worth is a snapshot of what you have in case something happens. It’s your guide to see where you are on your journey. If your goal is to have $5 million, and your net worth is $4, you know you have a longer journey ahead of you. Or, perhaps, you have the money you need, and that realization that you no longer need to work is amazing.
Here is how you figure out your net worth. Take a sheet of paper or excel or whatever, and add up everything that has real monetary value: Your checking and savings accounts, any retirement or brokerage accounts, the value of your home. Then, subtract any obligations you have, otherwise known as debt: your credit cards, your mortgage payment, your car loan, student loans. Voila - that’s your net worth.
Note on net worth: If it’s negative - that’s OK. Now you know. And if I learned anything from GI Joe - knowing is half the battle. You can then put together a plan to get it positive. Which brings us to budget.
Budget: How You Get There
You need a vehicle to get where you are going. For some it’s a Corvette, others a Pinto. It’s all good - the Pinto gets there faster in this game.
Your budget is how you find the money to save and invest which will get you closer to your goal. I could write a book of names who make so much money yet live paycheck to paycheck. It’s your check and balance, and the consistent way to hit your goal.
Treat your budget like you would a business. Money that comes in - your paycheck(s), is your revenue. Pay yourself. Money that goes out - i.e. bills - are your expenses. If you want to hit financial freedom, the revenue number has to be higher.
Here is how you create your budget: Take another sheet of paper or excel doc, and list out all of your expenses. ALL of them. Don’t just put in the grocery store and leave out the restaurants. It’s time to take a hard look at where your money is going. It’s either being spent on 1 of 3 areas: Needs (i.e. shelter and food), Wants (you don’t need a Snuggie) and You. “You” is where you pay yourself and set yourself up for whatever goal you want.
The budget exercise takes an hour or so but it’s worth it. It’s a hard look at all the crap you have been buying from Amazon; a recognition that $1,000 a month on booze is a complete waste of money; a hard swallow of the fact that if you had invested that money you’d be living in Bora Bora right now. Can’t change the past.
The budget gives you the knowledge and understanding of what needs to happen in order to get to another place. Should you pick up a second job to help save more money over a shorter period of time?