Personal Finance

Learn about building wealth as well as retirement and estate planning.

Building Your Personal Wealth

Take charge of your finances by developing and implementing a personal budget that tracks both income and expenses on a regular basis.

If you're like many small business owners who are experiencing a good year, you can probably relate to our typical successful entrepreneur's experience:

You feel that your personal finances are in order. You are enjoying a satisfying lifestyle and are able to pay all necessary expenses, while staying on track to meet all your financial goals, including retirement. Still, you're always on the lookout for an idea or two to make things even better.

Does This Sound Familiar?

  • You seem to be doing OK on a day-to-day basis. You generally pay your bills on time, have an acceptable standard of living and are able to meet relatively short-term goals (such as purchasing a new car or going on vacation). You have been able to save some money, but you have the nagging feeling that it won't be enough to meet major long-term goals, like retirement.
  • The phrase "the faster I go, the behinder I get" seems to best describe your personal financial picture. You're working hard and your business is churning out a good income, but you still have trouble making ends meet. What's more, you'd rather not think about how things will be when you retire. What is going wrong?

      Whatever your situation is now, planning can help you to build your financial wealth.

      Creating Your Wealth-Building Plan

      Before starting your small business, you may have had painful experiences with some or all of these personal wealth-draining situations:

      • Stagnant wages (sometimes accompanied by a longer workday) that didn't keep up with inflation
      • Corporate downsizing, reductions in workforce, forced early retirements: a firing by any other name still smells no sweeter
      • Reductions and terminations of employer-supplied health and retirement plans

      We all know that the time to prepare for a rainy day is when the sun is still shining. Because you're reading this, you've likely taken the first step that may enable you to rise above these stresses on your personal financial wealth: starting your own business. 

      While small business ownership is not for everyone, U.S. government statistics show that about two-thirds of the country's economic growth in recent decades has occurred as a result of small businesses. So it seems like you're looking in the right place. A successful small business can provide you with the source of money necessary to plan, and bring about, your financial security.

      Diversifying Your Wealth

      After establishing their own businesses a step to building wealth, many small business owners fail to take the next step: diversifying your wealth. As the saying goes, you don't want all of your eggs in the same basket. Spreading the wealth can reduce the risk of not meeting your financial and personal goals.

      The process of translating a stable and adequate income supply into the achievement of your economic goals begins with financial planning. Through the development of your personal financial plan, you will be able to identify and reach your monetary goals by deciding how best to pay yourself, spend and invest your money, and take advantage of tax-saving opportunities.

      Through this financial planning system, we'll guide you through five steps to allow you to create your own individualized financial plan:

      1. Identifying what you have now. The first step is taking stock of your wealth, income and expenses, and existing planning documents.
      2. Deciding what you want. Next, you have to set your goals and quantify them in terms of dollar amounts, and the time you have to achieve them.
      3. Determining how to get there. This is heart of the financial plan. You need to figure out what you must do to achieve your goals, or readjust them so they become attainable.
      4. Implementing the plan. This may be the most important step for you to take. Many plan, fewer implement.
      5. Monitoring the plan. Even a good plan can sour with age. You need to keep your plan up to date by making sure you investments perform as expected, and by adjusting your plan for changed circumstances.

      What Assets Do You Have Now?

      You've probably heard a journey of a thousand miles may begin with one step, but chances are that you won't know the direction to go unless you first know where you are standing. In much the same way, creating a wealth-building plan starts with a look the assets you have now.

      This plan may be something that you would just as soon avoid. Maybe you'd rather not think about the money you know you should have saved, but didn't, or about some of your investments that haven't turned out as planned. This isn't the time to beat yourself up over your fiscal mistakes; this it the time to prepare yourself for your fiscal future.

      And even if you are satisfied with your saving and investment performance, looking to the future certainly seems more fruitful than dwelling on the past.

      Although any plan to maximize your wealth focuses primarily on the future, you can't completely ignore your financial past. Even if you don't have to make major adjustments in how you handle your personal finances, you'll need to have an accurate picture of what your finances are now, if for no other reason than to gauge how much more money you'll need to meet your various financial goals.

      How do you answer the question: "What do I have now?"

      We suggest that you follow our three-step process:

      1. Create an organized inventory of your assets and liabilities
      2. Identify and organize the documents and arrangements that will affect the creation of a plan to build personal wealth and pass it along to your heirs
      3. Build a current budget of income and expenses

      Take Inventory of Your Assets

      Creating an organized list of your current assets and liabilities is the first step in charting your future financial course.

      For financial planning purposes, you don't need the detailed, whole-house inventory that you might do in connection with your homeowner's insurance policy, or a list of your financial obligations that might satisfy your banker. Your financial planning asset inventory will list the major assets that you have and your most debts or liabilities.

      Listing Your Assets

      Because you'll use the information derived from your asset inventory to analyze and possibly realign your investment strategies, the entries for your investments must be fairly detailed. Investments are assets that you hold with a view to their likely appreciation in value (such as real estate or collectible coins or stamps) and/or generation of income (such as stocks, bonds, CDs or rental real estate). If you are married, you should also note whether each asset is owned by you alone, or jointly with your spouse. If you like, you can also list assets owned solely by your spouse to get a more complete picture of your family's financial situation.

      For each asset, record:

      • When each investment was made
      • The purchase price
      • The estimated current market value
      • The amount of yearly income that it earns (if any)

      Personal effects such as clothes, electrical appliances and furniture will be listed under a "personal effects" entry. The emphasis of such a list is on your investments.

      Here is an example of a portion of a simplified asset inventory:

      (1) (2) (3) (4) (5) (6)
      Asset Date acquired/
      Price per unit
      Market value now (per unit) Units bought Total value (col. 3 x 4) Yearly 
      income from asset
      Personal effects various various __ $15,000 none
      Twin Lakes Power 9% 40-yr bonds 1-3-98/$925 $1,260 5 $6300 $450
      Econo-Eat common stock 4-24-05/$24 $13 100 $1,300 $10
      Coin collection about $750 over 
      several years
      $2,600 __ $2,600 none
      Life insurance: $100,000 whole life policy 12-28-03/$900/yr premium __ 1 $5,000 
      (cash value)

      Listing Your Liabilities

      Your list of liabilities should include a brief description of each liability, including:

      • The creditor to whom you owe the debt
      • When you incurred the debt
      • The interest rate you must pay on the debt
      • The amount of the unpaid balance of the debt
      • The amount you repay each month (or whatever repayment period)
      • If the debt is secured, list the security (such as your house or your car)
      • The date when you expect to have paid off the debt

      After you have completed the inventory of your assets, the next step in constructing your financial plan is to come up with a current personal budget of income and expenses.

      Properly Handling Your Existing Arrangements

      Some of your existing arrangements may be changed easily, such as most wills and trusts. Others, such as contracts and marriage dissolution agreements, may be difficult or impossible to amend. Still others, such as variable annuities or mortgages, can be changed if you're willing to pay some kind of penalty or fee.

      To begin, you'll need to:

      1. Locate and organize any documents and other evidence of your legal obligations and relationship
      2. Ensure you account for these arrangements wherever they would be relevant to your wealth-building and wealth-distributing (at your death) plans

      For example, after you take a look at your legal obligations and arrangements, do you have to amend your personal budget to reflect money that you have to pay out, or will receive? Or, do decisions that you have made regarding the form of legal ownership of property (such as joint ownership, or choice of legal entity of your business) have an impact on how you can transfer wealth to your chosen heirs during your lifetime, or at your death?

      Here are some of the items you should scrutinize:

      • Marriage dissolution agreements. Alimony, property settlements, pre-nuptial agreements and child support agreements fall within this category. Whether you receive such payments, or are the one required to make them, they will have to be factored into financial and estate plans.
      • Business organization documents. Your business' organizational form (sole proprietorship, partnership, limited liability company or corporation) impacts your exposure to legal liability, how your business is taxed and several issues relating to constructing a financial and estate plan.
      • Business transfer/continuation agreements and plans. Any documents pertaining to your plans and agreements aimed at continuing or disposing of your business (including insurance policies to implement such plans) should be on hand.
      • Contracts. Contracts (including those that may require a continuing monetary outlay by you, and those that may provide you with an income source) can be expected to affect your current personal cash-flow situation. If the contracts are large, and of long duration, they may also have to be factored into your plans for passing on your wealth to your chosen heirs.
      • Wills and trusts. Having these documents available will be necessary when you begin work on putting together a plan to dispose of your wealth to your chosen heirs at your death.
      • Joint ownership property. Knowing what assets are held in joint tenancy or in tenancy in common is important for planning your estate.
      • History of making large gifts. If you have made any gifts of money or property worth more than the amount of the annual exclusion ($13,000 in 2010 and 2011) to individuals, or have made large charitable gifts, you'll want to collect records of these gifts (including any federal gift tax returns you filed). This information will be needed by you—or your advisors—to create your estate plan.

      Accounting for Oral Contracts

      Business owners frequently deal with contracts and other legal obligations (such as leases and purchase orders) both in their business and in their personal dealings. Usually these obligations are evidenced by a written document. But what about oral contracts? Are they only worth the paper they're not written on, or can they be legally enforceable?

      The short answer is that if all of the legal requirements for a valid contract are met, an oral contract can be legally enforceable. However—and this is a big however—the legal rules that govern oral contracts strictly limit the monetary obligation (often $500) that will be enforced under an oral contract, and the type of property that can be exchanged under an oral contract.

      The exact rules that will apply depend in large part on your state's law on this issue. Accordingly, if you are concerned that you may have knowingly or unknowingly created legal obligations by way of an oral arrangement, it's best to consult an attorney.

      Personal Budgeting Is Essential to Building Wealth

      In a pre-fight scene from Rocky III movies, Rocky looks into the unblinking eyes of his opponent, Clubber Lang, who, after a long silence and menacing glare, sums up in one word what he will shortly bring to Rocky: "PAIN!" The prospect of creating and sticking to a personal budget may not be as frightening as stepping into the ring with Clubber Lang, played by Mr. T, but for most of us it certainly promises (and delivers) pain.

      This pain can come from two sources: 

      • The time and effort needed to start and maintain the budget
      • The financial sacrifices that may be necessary to make the budget work

      It would be nice if we could say that you'll be able to reach all of your personal financial goals without making some current sacrifices. However, that's probably not possible for most of us. If it were so easy, everyone would have attained financial security. We all know this is not true.

      A personal budget is the tool to help you to reach your personal financial goals. It is intended to be an organized way to compare income and expenditures over a relatively short time frame (a week, month or sometimes a year.) It should allow you to forecast your income and expenses, monitor your progress and make changes as needed to achieve your goals.

      Your personal budget should give you a detailed picture of:

      • How money comes to you
      • How you spend it within the reporting period you choose

      Choose a reporting period that gives the most accurate picture of your financial cash inflow and outflow. For most of us, this would be monthly, since the majority of personal obligations are usually billed monthly.

      Use Your Budget to Monitor Your Income

      Many people figure that if they closely watch and diligently control the expenditure side of the budget, the income side will take care of itself. This may be okay if your only income is from fixed salaries. However, individuals whose incomes vary from month to month—like most small business owners—need to track income received as part of the budget process.

      As a worst case example, you obviously wouldn't want to be in the situation of thinking you are bringing in $5,000 a month (and making spending decisions on this belief), only to find out several months later that your income has been averaging $4,000 a month. And even if you never find yourself in a negative cash flow month, seeing a pattern develop where your income is falling (or not growing as fast as your personal expenses are) may give you an early warning signal that will allow you to pare down expenses before a cash crunch develops.

      Tracking personal income against expenses may also alert you to happier news. If income is rising faster than expenses, you may be able to increase personal savings, or cut back on draconian spending limits that you have imposed on yourself.

      What Income Do You Include

      If the business pays you a formal salary (this is generally required for C corporations), you should use your monthly net income—that is, income after taxes and payroll deductions.

      If you're operating as a sole proprietorship, partnership, S corporation or LLC, you may be taking an owner's draw without making any payroll deductions. In that case, look at your draw over the past year, and take an average figure.

      You can adjust this upward or downward, depending on your expectations for this year's performance. Don't forget to adjust your net income figure by the amount of the taxes you'll need to pay on that income. You can determine this by looking at last year's income tax return, if you were in business last year; otherwise, check with your accountant.

      Also include any investment income from stocks, bonds, checking accounts, rental properties, royalties, etc.

      Once you've computed your income, the next step is to take a look at the expenditures side of your budget.

      Staying Diligent in Your Expense Tracking

      Anyone who goes about setting up a personal financial budget is well aware of the importance of accounting for personal expenses. However, recognizing the need to scrupulously account for all expenditures during the reporting period that you choose (monthly, for most people), and actually doing it for long enough to do much good, can be two different matters.

      Unless you are the type of person who really enjoys record-keeping and working with figures, the process of budgeting for expenses can be difficult and tedious. Although it may be hard to see when you start, the time you spend preparing and maintaining your personal budget can yield real financial gains.

      Forecasting Your Expenditures

      Look at your checkbook register and credit card statements for the last six months or so and see how much you spent each month. Group expenses into categories that makes sense for your lifestyle. Many budget-conscious business owners use categories such as:

      • Savings
      • Housing
      • Utilities
      • Phone
      • Car payments
      • Gas & transportation
      • Insurance
      • Cothing
      • Gifts
      • Entertainment

      Don't forget to account for out-of-pocket, cash expenses that will arise during the month (or other budget period you choose.)

      If you don't know precisely how much you spend this way, you can start by penciling in an estimated figure. Then, keep track of your cash expenditures for a month, perhaps by writing them down in a small notebook. 

      Once you get to the point that you know the actual amount spent, you can replace the estimated amounts with the "real" figures. You may be surprised at how much money dribbles through your fingers this way.

      Tracking Your Monthly Expenses

      The key to tracking your monthly expenses is to track your expenses daily. If you try to remember every dollar you spent at the end of the month, you will not have an accurate account and will jeopardize your success at building wealth.

      Compare your actual expenses for each category with what you budgeted for that category. Even if money budgeted for one purpose is not spent on that, there's a real temptation to spend it for another purpose.

      Making Budget Adjustments

      When it turns out that you have incurred more (or fewer) expenses than the amount you had budgeted for that category, you will want to adjust your estimated budget expense to agree with the amount you actually paid.

      What if an Item Exceeds the Budgeted Amount?

      If you are dealing with a cost overrun (or unbudgeted item), you may want to consider one or more of the following:

      • Decrease amounts budgeted for other items, either in the current or future budgets
      • Increase income, either in the current or future budgets
      • Do nothing, and let the change to the "bottom line" for the current budget (the amount of decreased cash or increased deficit) be carried over to the next budget

      Unlike the government, business owners and their families normally can't run budget deficits for any great length of time. If your personal budget shows you to be running a deficit, you'll usually need to quickly bring in more assets (by increasing income, tapping savings or obtaining loans) or, more likely, to decrease spending on other budget items.

      Because a small business owner's ability to obtain a business loan is often dependent on his or her personal credit worthiness, it's vitally important for your business operations that you keep your personal financial house in order.

      Steps to Take if Item Falls Under Budgeted Amount

      If you are dealing with the situation where a budgeted item was either acquired for less than the budgeted amount, or the expenditure was not made at all, you might want to:

      • Increase amounts budgeted for other items, either in the current or future budgets
      • Do nothing, and let the change to the "bottom line" for the current budget (the amount of increased cash or decreased deficit) be carried over to the next budget

      If it turns out that you're spending less than your income, congratulations! You're among a very select group of Americans. We usually recommend that you try to save at least half of the excess cash for other times when you might have more expenses than you forecasted.

      Take Advantage of Budgeting Tools to Create Your Wealth-Building Plan

      A workable budget is one that:

      • Is easy to use
      • Encourages the collection of accurate and useful information
      • Is consistently applied
      • Is updated as often as needed
      • Is used as a personal financial decision-making tool

      Between the various online software, installed software and spreadsheet options, budgeting is always best done on computer, not by hand.

      Besides the obvious advantages of saving time with calculations and the ability to make changes on the fly, an electronic budget provides "what if" projections, such as "can I double up on my Visa payment this month, without running into trouble next month?" 

      Tools to Use

      Interactive Personal Budget Worksheets

      Our Monthly Budget Business Tool allows you to predict your monthly personal income and expenses over a six-month period. Its aim is to predict your ability to take in more money than you are spending.

      This Excel template can be easily customized and used over and over after downloading the file. We've formatted the worksheet and put in most of the income and expense categories for you. All you have to do is put in your numbers and print it.

      Once you've downloaded the worksheet, feel free to modify it to fit your own needs.

      A personal budget may be used as a stand-alone tool to help control your current finances. It may also be used as one of the components in a long-term effort to build your personal wealth. If you're creating the budget as part of an overall financial plan, the next step is to consider the goals that you want to achieve.

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