What Is Your Financial Truth?

Personal Finance Planning

Financial freedom starts with being honest and knowing where your money is today

What are you doing with your money? Where is your money going? How is your money spent each month? Are you being wise with your money?

It’s so easy to lie to ourselves about what we really spend on eating out, clothes, or vacations. And it’s easy to pretend our investments are making money—or at least breaking even.

These are all personal finance planning questions that we should have answers to off the top of our head. But the reality is that most of the time we don’t. Partly this is because we all lead busy lives and it’s hard to stay on top of our finances. But sometimes it’s also because we know deep down that we’re not making good financial decisions, but we don’t want to face the truth of it.

It’s so easy to lie to ourselves about what we really spend on eating out, clothes, or vacations. And it’s easy to pretend our investments are making money—or at least breaking even.

It can be uncomfortable to face the facts and learn that you’re actually spending more every month than you’re making, or that the money you placed in that mutual fund, which the “experts” told you would make 10 percent, actually lost 20 percent last year.

But here’s the deal: The truth shall set you free. I promise, once you get a handle on your personal finance management, you’ll be able to improve your situation.

Jamie’s personal finance planning story

I know a woman named Jamie, who got quite a surprise when she took a closer look at her finances. Here’s her story:

what is your financial truth

“One day my husband and I were having a conversation about our future and planning for retirement. We have no savings, no investments, we don’t own any properties, and we live paycheck to paycheck. We are both very naive when it comes to finances and have absolutely no knowledge about investing or creating financial security.

We were expecting to receive our tax return soon, so we talked about opening an individual retirement account (IRA). We knew absolutely nothing about this except that people opened these to save money for retirement. We went to our bank to open an IRA. They were more than happy to assist us. We sat down with the regular bank teller and went through the steps with little-to-no explanation of what this process means and what really happens with our money. I was a little concerned that someone in the financial advising area did not come out and speak with us to make sure we fully understood what we were doing. They were quick to take our $500 and have us sign papers. Even so, after the process, we walked out of the bank thinking we had made the right decision and that our financial future was going to be great.

A year later, I was working on my financial statement with a mentor and we discussed the IRA. I pulled out our statement and showed her that we had made 41 cents last year. She responded, ‘You know that is a return on your money of about zero. Silver went up 31 cents in the past 24 hours, and 75% in the last year.’

What an eye opener! I thought the 41 cents was what it was supposed to be. I thought I was doing well! My husband and I are now getting ourselves educated through books, seminars, and mentors. We play the CASHFLOW 101 game often with our entire family. We are determined to be financially free together.”

When you read Jamie’s story, do you see echoes of your financial reality? Do you feel powerless and unequipped to make good financial decisions? Do you have a hard time knowing what the right financial direction is for you? You’re not alone.

The truth shall set you free

An old and wise saying is, “The truth shall set you free.” What this means is that only when we’re honest with ourselves and our situation, will we be free to start making changes. Until then, we just hide and hope for the best, which usually leads to the worst.

When it comes to money, the truth will set you free. Not only do you have to know where you are financially, but you also need to understand what “where you are” means in this financial world. Jamie thought that where she was, earning a 41-cent annual return on $500, was a good investment.

The truth is that was not a good place to be financially. There are investments that any woman can participate in that will earn much greater returns — as long as you know what you’re doing.

Today is the day to start being honest with where you are financially and to start learning new truths about money and investing — personal finance management is the foundation upon which you will build a better tomorrow. Here are some great steps to take toward being financially free.

  1. Be honest about your earnings. The first step in personal finance planning is to tell yourself the truth about any and all income that comes into your household. If you don’t have many income streams, this part will be pretty easy — but be sure to include your ordinary earned income (your wages, tips, salaries, commissions), your portfolio (profits from investment sales), and passive income (income from rental properties or limited partnerships).

  2. Be brutally honest about your expenses. Ok, now it’s time to put on your big-girl pants and stare the truth right in the face. What exactly do you spend every month? This is not a matter of your numbers “looking good.” It’s a matter of knowing exactly where you are: period.

    So, if you enjoy eating out every night, then achieving your vision financial freedom better include eating out every night. Financial independence means having the money to live the life you want, not just having enough to survive.

    Financial independence is not living below your means. I would rather expand my means and have my money work hard for me so that I can create the financial life I want for myself and my family. Being honest about your expenses now is important, because this sets you up to have the financial future you desire.

  3. Ask yourself important questions. Now is the time to take stock of what you do and don’t have. Ask yourself these personal finance basics: What investments do I own? Do I have stocks, bonds, mutual funds, retirement plans, real estate (other than your home), business investments, gold, or silver? What do I have that is making me money without me working for it? What price did I pay for the investments? What is happening with that investment today? It’s not uncommon to not want to open that investment-fund statement when you’re guessing it may be worth a lot less than you put into it. My advice: Look at every statement — that one action alone can be a valuable eye-opener.

Personal Finance Basics

Once you’ve gathered all the information from steps 1-3 above, it’s time to put all those facts and figures on your personal financial statement. What’s that? It’s comprised of two things:

Income Statement
  1. An income statement, which is made up of income (money flowing in) and expenses (money flowing out).

  2. A balance sheet, which consists of your assets (things that put money in your pocket) and liabilities (things that take money out of your pocket). Oh, and if you think your house is an asset, guess again! Watch this quick video to learn why your house is actually a liability.

Balance Sheet

Now, if you aren’t quite sure how to fill out these forms, that’s OK. Start by examining this example of a personal financial statement and you’ll be on your way to having everything you need to know about your current financial state right at your fingertips. Then, you’ll update this information as things change — especially as you begin to invest.

And by the way, investing is what you want to do in order to get ahead; saving your money in a bank account is not going to get you any closer to your financial dreams and certainly won’t carry you through retirement someday. As Robert likes to say, “Savers are losers,” so don’t fall prey to that outdated line of thinking.

Whether you need help resetting your credit, want to learn how to invest using other people’s money, or are ready to create real estate cash flow, our Rich Dad classes are sure to point you in the right direction.

Original publish date: August 22, 2013