As we discovered by your homework of last week, the commitments you already have circumscribe your financial freedom, and the priorities you have help to dictate the allocation of resources. You will recall the five short term uses of money: give it away, spend to support lifestyle, repay debt, use for taxes, save or accumulate. Note that lifestyle, debt, taxes are all consumptive. Giving away or saving are productive. Lifestyle should be your last category, not your first! Oh what a tough lesson this is to learn:
Think of it as like a pyramid:
Total income-tithe-taxes-debt-savings=lifestyle resources
4 truths that Ron Blue lifts up about money:
- All of us have limited resources
- There are more alternative uses of money available than money available
- Today’s decisions determine destiny
- The longer term our perspective, the better our decision making
The goal of a financial planning conversation then is to insure that we plan and act rather than react and respond.
Definition: “Financial planning is allocating limited financial resources among various unlimited alternatives”(p. 26)
Here are six typical long term financial objectives:
-financial independence -college education for children -paying off debt
-lifestyle desires -major charitable giving -owning your own business
4 step process to financial planning (this is not rocket science to ponder; it is Olympian to do):
- Summarize your present situation
- Establish your financial goals
- Increase your cash flow margin
- Control your cash flow
Ultimately the goal is not simply to “accumulate”. It is to fulfill God’s gameplan for your life. Knowing what God would have you to be and do and seeing that become a reality.
Ron Blue’s basic message:
- God owns it all
- Money is never an end in itself, but is merely a resource used to accomplish other goals and obligations
- Spend less than you earn and do it for a long time and you will be financially successful
Edward Gibbon once said, “I am indeed rich, since my income is superior to my expense, and my expense is equal to my wishes”
“He who gathers money little by little makes it grow” Proverbs 13:11
The Magic of Compounding
If you want the magic of compounding to work for you rather than against you, then you must have the law of compounding working for you.
Rule of 72. Take the interest rate and divide into 72; number of years will take to double
Earning power of money, over time, will beat inflation. Our struggle is whether we are paying interest, or earning it.
Homework: Larry Burkett forms: Income & Expense. Do, for your family, on a monthly basis(in other words, annual expenses/12). Then, modify to include your goals(short term and long term)