In money management, I divide my finances into three separate parts:
- Money I Need Monthly,
- Money I Won’t Need in the Next Five Years, and the third and most neglected category:
- Money I Don’t Need Monthly But May Need in the Next Five Years
Every dollar I have is in one of these three categories.
Money I need Monthly
The first category is simple- it’s monthly living expenses. Mortgage, tithing, food, restaurants, etc. The money I put into this category is 100% gone at the end of the month. I do not expect to have any of this left over. People understand this category very well.
Money I Won’t Need in the Next Five Years
The second category is one that most people understand as well. Many people have retirement accounts either through their employers or ones they set up themselves. This is money you don’t expect to need in the next five years and you can afford to put it away where you cannot get it without paying penalties. People understand this category as well.
Money I Don’t Need Monthly But May Need in the Next Five Years
However, the third category is the most neglected yet is probably the most important one in succeeding financially. Most people do NOT understand this category, and this is why we see so many people in financial crisis.
The third category- Money I Don’t Need Monthly But May Need in the Next Five Years- is what allows you to be and continue to be debt-free. This is money you use to plan for “life.” Your car is eventually going to wear out. Your roof will eventually need to be replaced. Your kitchen appliances aren’t getting any newer. Christmas is coming this year, just like last year. Vacation is just around the corner.
Many people use debt to handle these things. When the car breaks down, go buy another one- not with cash, but by financing it. When December rolls around, pull out the credit cards and get gifts for everyone. When the roof needs to be replaced or the HVAC unit goes out (which they all eventually will), just take out a home equity loan or credit card it again. See how this works?
However, a little bit of foresight will show that it doesn’t have to be this way. I put a certain percentage of my money into what are called “sinking funds.” I have a sinking fund for my next car purchase. I put $300/month into a car fund because I know my car will wear out. Instead of paying the bank, I pay myself. When it’s time to get a new car, I don’t have to finance it.
We have a roof fund. Our roof is sixteen years old. They usually last twenty. So we know we will need this money in the next five years.
Every dollar my wife and I have goes into one of these three categories. A good financial plan, dividing money into these three categories, will allow you to win with money.
If you need help figuring this system out, book a session with me and let me help you. Debt-free is the new wealthy!
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