Personal Finance 101
Let's Get Real!



Personal finance 101 is the very basics of managing your money. It is a critical subject that most people don't know enough about. Many individuals (families) are having financial difficulty during the current economic times.

Personal finance 101 has become a topic that people are looking to learn. This is a quick lesson on managing your money, and if you are in trouble how to get out of trouble.

Unless you have been under a rock or living in a cave for the last 3 or 4 years, you know that there is serious financial trouble being experienced on both a national level and a personal level. For nerds like me that is basically the difference between macro and micro economics. I only focus on the micro part of this. In other words, how do families (even if it is a family of 1) get some financial stability in their life? That is what I am writing about. There are lots of web sites and blogs on the internet that discuss this. In reviewing the suggestions and comments I often think that the advice is a level or two too high for a lot of people. Let’s review some of this advice.

1) Many sites say the most important thing to do is “pay yourself first”. Good advice if you have positive cash flow. If you are just making ends meet it, frankly, doesn’t apply.

2) Take advantage of your companies 401K. It’s free money! This is very solid advice and yes, it is free money. However, if you are struggling to pay the electric bill or worse, the mortgage, this makes no sense.

3) Make sure you have an emergency fund in the amount of 3 months living expenses. Really? Not even feasible if you are struggling to pay for groceries.

4) Pay off credit cards. Many people are relying on the credit cards to feed themselves and their families. They struggle to make the minimum monthly payment let alone pay them off. We will examine this closely later in personal finance 101.

So where to begin? If you don’t have an understanding of personal finance 101, keep reading.

If you are one of these people that are just making ends meet I’m here to help. Or if you are making ends meet (barely) but are uncomfortable about the current situation, take heed of my suggestions, they may help you made some changes.


Have worked your way through some tough financial times? Share your experience with others and give them encouragement.


WARNING: I will be brutally honest here. This is a no holds barred, honest talk for people who are serious about making some changes and getting on solid footing financially. If you are not ready to really look at yourself, your priorities, your lifestyle, and learn personal finance 101 and make some changes, don’t bother to read this.

With that being said, let’s move forward.

First Things First

Actually, the problems you have are very easy to solve. Personal finance 101 is not rocket science. Even rocket scientist struggle with money problems, I promise!

I don’t mean to make light of the situation. Believe me, I understand. I have lived through this!! I speak from experience. It is painful and you will need to make some painful decisions. The reward is worth the sacrifice. Once you get your personal finance under control, you will have a different depth of understanding.

The solution to your financial problems is this……live within your means. It sounds so simple, but applying this can be very difficult. But there are ways to do it. Again, if you are reading this than I assume you are ready to make some changes. So let me lay out some principals of how to accomplish this and we will examine as we go along. Take the pieces that apply to you and implement them.

Let’s take a look at an imaginary situation with a family called the Smith’s. My family is completely made up, no need to hide identifications because there are none. However, many families are suffering the same situation the Smith’s are suffering. Let me introduce you.

John Smith is a working man that has a fairly stable job. He could be blue color, white color, a doctor, lawyer or Indian chief, or business owner it doesn’t matter. What matters is that he works hard and takes home his paycheck. It doesn’t matter how much the paycheck is. He has been in his job a while but that does not guarantee that “things won’t happen.” In today’s economy everyone is vulnerable. His personal finances are in real trouble. He needs personal finance 101.

Jane Smith tries to work part-time selling something (candles, cosmetics, children’s toys, whatever). Or Jane could have a full time job like her husband. They have two children that require supervision so day care of some sort is on the board. Jane doesn't have a clue about personal finance 101.

Unfortunately John and Jane fight a lot about their personal finances. It can cause serious stress.

Here is the heart of the matter. Every month John and Jane struggle to keep up with the bills. They have to make decisions on what to pay this week, and what to wait on for the next paycheck. Many times they use the credit card at the grocery store or the doctors, and it seems they are always just scraping by. Generally they are borrowing from B to pay A. Then they borrow from C to pay B. They have no savings, no retirement, haven’t taken a real vacation in years, and holidays and birthdays are a nightmare. This results in some nasty fights, hurt feelings, worry and sleepless nights, and problems in the marriage. What is the solution? Personal finance 101!

If you see yourself in John and Jane Smith’s place, or close to it, there is a way out. It may be painful, but there is a way out. First of all, everyone has to be on the same page. Personal finance recovery must be a top priority. If John wants to do this, and Jane is resisting, it won’t work. If both partners can’t work on this together then the trouble goes much deeper and that is beyond this advice. Your personal finance 101 fix will take both of you pulling in the same direction. If both partners are ready to go, read on.

Follow along with these steps and try out the ones that may apply. Give it some time and commit to working for this.

Step 1 - Examine Where You Are

You must understand where your personal finances currently stand. This will be a little scary but push through it. In the end it will help you with your resolve to correct this.

First step in personal finance 101 is to produce some financial statements. You must produce what is called a balance sheet and an income statement. Don’t worry; I will help you do this. First let’s do the income statement.

You will need to track every penny you spend. Anyone that practices good personal finance 101 knows where they spend their money. You may already be doing this but check it to make double sure you are right. When I say every penny I mean it. Keep receipts for the smallest of expenditures. Even a pack of gum goes on the list. Start a spreadsheet (either manual or on the computer) and every night write down what you spent money that day. Be sure to put down everything that went on the credit cards or any other credit (like a home equity line).

You will need to keep track of all your expenses for a couple of months to really get a feel for where you are. You might need a list to help you start this.

Here is a spreadsheet that can get you started. Make sure you do this for a minimum of 2 months.

At the top of the spreadsheet enter all your income for those two months (before they took out taxes, also called Gross). Every paycheck, every penny you earned, no matter how you earned it. If money came it, list it.

Enter how much you paid in taxes as an expense.

Now comes the painful part. Add up all your income and all your expenses. Subtract expenses from the income. You are now practicing personal finance 101!

This is how short of cash (or how close you are) every month. The bigger the negative number, the bigger this issue, and the harder it will be to correct it. Here is the real truth about your personal finances.

Next I want you to build a balance sheet. Again, look at this site to help you with this. What we are looking at is the amount of assets you have verses the amount of debt you have. List everything on the balance sheet. Even items like jewelry, art, furniture, anything that has value.

Some items may be on both sides of the balance sheet. For instance, your home may have a market value of $100,000 but you also have a $90,000 mortgage on it. Be very detailed. When it comes to the debt make sure you call the bank (or whoever the debt is with) and ask for the current balance.

Once you have done that subtract the liabilities from the assets.

This amount, in personal finance 101 speak, is called net worth.

Is it a negative number? If you have more debt than assets, and more expenses than income you have to face facts. You are in deep trouble. You have a decision to make.

Step 2 - Decision Time

Could bankruptcy be your best option at this point? I am not an attorney and will not offer legal advice. However, if your personal finances are not recoverable, if you are in really deep, you might want to consult a bankruptcy attorney to learn what you can do.

Bankruptcy is very difficult and should be carefully considered but you can come out the other side and rebuild your life. If this is your situation, seriously consider this and seek legal advice.

If you decide that bankruptcy is not an option and you think you can work this out yourself than here are a few things to get you started.

Step 3 - Cut Anything Not Considered A Necessity


If this is your situation then it is time to get real with your personal finances. Your basic essentials are food, shelter and clothing. Now is the time to get cozy with your personal finances. Everything else is just a “nice to have.” And as far as the food, shelter and clothing goes, the basics will do.

I hate to tell you this but driving a BMW (or whatever type of car you think makes you look more successful) is ego not necessity. Living in a gated community in a five bedroom house is ego not necessity. Buying the latest fashions at Macy’s or Sak's is ego not necessity. Buying your makeup at a high end store and getting your hair and nails done every 2 weeks are ego not necessity. Belonging to the country club and golfing twice a week are ego not necessity. Even vacations at this point are ego not necessity. Going out to eat 3 times a week is convenience not necessity.

And I hate to say this, but enrolling the kids in private school and signing them up for piano, soccer, art class, dance, baseball, cheerleading, band, and what have you, is ego not necessity. I know that this last one will raise the hairs on the back of your neck. Let me think…you are currently saying that the kids should not have to suffer because you made mistakes. That you want to give them what you didn’t have. That they are so talented to take them out of (fill in the blank) will hurt the chances of getting a scholarship. BLAH BLAH BLAH. Forget it. We are talking sink or swim with your personal finances.

If the kids are that talented the instructors or coaches will find a way to keep them in. Other than that they’ll live. Sorry, but they will. And, they will learn a very valuable lesson that will save them this same pain in their personal finance life.

They are a part of the family, they have enjoyed the good times, and they can help in the bad times. Maybe it’s time for them to get tough and get over their entitlement attitude. The world owes them nothing (or you for that matter) and the sooner they learn it the better.

Take a little time and let this sink in. Look around and realize how much ego you have invested in. Think about the BIG picture of your personal finances. Is it more important, this minute, day, month, year, to invest in that ego so you can “feel good” or is it more important to do what is right for your future? The decision is yours.

Personal finance 101 is tough, isn't it?

So now let’s go back to that expense list. I bet with this new frame of mind you can find all kinds of things to cut out. Let me give you a few suggestions.

•Check your withholding on your paycheck. It may be nice to get a refund at tax time, but that is very bad money management and poor, poor personal financial practice. Try to get as close to even as you can. You don't want to end up owing the IRS, but you don't want a big check each year either. Remember, they don't pay you interest on this, why loan it to them? This one step could help your cash flow.

• You don’t need to buy new cloths. Wear the ones you have until they wear out. Kids of course need cloths, but if you can do hand me downs do it. Otherwise buy at a discount store like Wal-Mart or Target. If the kids don’t like it, tough.

• Buy your make up and other toiletries at a discount store or a drug store. I know it’s nice to use Estee Lauder but Maybelline will do for a while. Remember, logical personal finance 101.

• Cancel any subscriptions you have. Period. And that includes any on the internet like magazines and newspapers. Don't cancel the ones that offer protection to your personal finances like identity theft protection.

• Get rid of the lawn guy, housekeeper, or anyone else you are paying to do things for you. If you have kids, they can help.

• Quit buying expensive coffee. Starbucks is off limits. Make your own. Really, think personal finance 101. $5.00 for a cup of coffee?

• Examine getting cheaper cars. If you lease a car and/or are in a position to trade go for something very inexpensive. Think about buying used.

• Stop eating out. It really is not necessary. Stop it. Take your lunch to work.

• Plan your meals around coupons and use them. Cut corners on groceries all you can. Get creative. Scrambled eggs for dinner is okay.

• If you can get rid of daycare do it. I have seen many families work out different shifts so that one parent is home all the time. It can make a huge difference in your personal finances.

• Examine your insurance policies and make sure that your coverage is at the correct amounts. You don’t want to be in the situation with having to come up with a huge deductible, however you don’t want to pay extra either. Consult your agent if necessary. This is key to personal finance 101 and you should do this every year at the least.

• Take a look at your other bills around the house. Cable, phone, subscriptions like Netflix, electronic books, etc. Cable companies are famous for getting you in on a “special package” then in a few months hiking the rate. I had a client that signed up for a bundled package (internet, phone and cable) for $94 a month. Within 1 year they were paying $174 a month and their service had not changed. Cancel cable if you need to. Change companies if you can’t get a deal with your current provider. Do you really need a home phone? Many people these days use just mobile phones. These can add up quickly.

• Do you buy e-books without thinking because they automatically hit your credit card? Try the library!! Do you shop on the internet because it is “so convenient?” If you have something like a Paypal account cancel it. It will make you think twice before shopping on the internet. When you have to go to the store and fork over the cash, you will think twice about spending that money. Remember, personal finance 101.

• Do you really need a smart phone? Wouldn’t just a flip phone do? You can save lots of money.

• If you live in a situation where you can move and save money on rent, do it. If you are in a home that you can sell and pay off the mortgage from the sale, consider this a viable option. I know you don’t want to move from the house you love but don’t let a house drag you down. It is only brick and mortar and can be replaced in the future. Don't ruin your personal finances over a house. If you are in a home that you are upside down on the mortgage, you are stuck it your current situation. Other than foreclosure (which if you’re going to do that you might as well declare bankruptcy) you have few options. Have you thought about renting out a room to a college student?

• Concentrate on keeping the home expenses as low as possible. Check your homeowner’s policy and make sure you aren’t over insured. Make sure your county has reassessed the value of your home for property taxes. Turn off the lights and control the thermostat. Run the pool pump one less hour per day. Look at the things that you do or have that are nice, but not necessity. Whatever you can do to save money. Go through your expense list with a fine tooth comb. There are probably lots of things that you think you can’t live without, but are really not necessary. Be brutal with yourself and cut expenses everywhere. Nothing is exempt. In personal finance remember the difference between necessity and ego.

Think of it this way. If your house burnt to the ground and you had nothing left, what would you need to keep you and your family alive? We are back to food, shelter and clothing. That is all you would really need to replace. Think about this carefully. Now re-add the expenses after your cuts. Are you still short?

Step 4 - Increase The Revenue

Once you have cut everything you can think to cut your only other option to make ends meet is to increase revenue. Yes, I am talking about taking a second job, or mowing lawns, or washing windows, or babysitting, or whatever you need to do to earn extra money. Don’t sit there and whine that you can’t do that. Quite whining and get out there and figure it out. I know you are tired when you come home from a long day. Oh well. How else will you do this?

If your children are old enough to help out they should. Anyone over 16 should be working part time anyway. Start them out with a good sense of personal finance 101. Unless they are paying for their own clothing, food, books and extracurricular activities, they can help out around the house. You must make enough additional income to at least breakeven.

If there is no way you can work this out to breakeven, then you may need to revisit the bankruptcy option. If you have done everything you can think of and there is no way to make it, then you, at this point, have no other option. You can probably delay it for a while, but other than winning the lottery it will catch up to you. Again, it is there for a reason. Each state has different bankruptcy law so you must consult an attorney. Consider this carefully.

You should now, by default, have a budget. Everyone that manages their personal finances has a budget. You should know exactly how much you bring in and how much goes out. If you have been able to cut enough and/or raise revenue to make ends meet then you are ready for the next step.

Step 5 - Make A Plan

The next step is to make a plan for your personal finances. You need to get yourself out of the debt that is strangling you. My guess is you have several credit cards, probably a car loan, mortgage, maybe a home equity loan, boats, jet skis and snow mobiles.

First – Look for any sources of extra cash you may have. Any old series E bonds hanging around? Do you have some silver or china you could sell? Any collectables you can turn into cash? Have you sold your unwanted gold and jewelry? Have you converted all those penny’s you have collected into dollars?

Second - The mortgage and home equity loans are probably non-negotiable at this point. Be sure to check with your banker and/or mortgage company to see if there is any way to reduce the payment. If you are behind in your mortgage you must negotiate with the company to get caught up. Believe me, at this point they don’t want your house back, however if you do not exercise some good faith they will start foreclosure. Call them and work something out. Be honest with them about your personal finances. Everything you do first is to get you on even ground with the mortgage company. They may want a “good faith” payment. Use the cash you get in #1 to help you.

Third – Can you sell the boat, jet skis, snow mobiles or whatever and pay off the loan? Yes I know, you don’t want to, but we are past that point. Whatever you can sell off and pay off debt, do it. Remember, not only do you get rid of the debt on the “toy” but you also get rid of the storage, insurance, etc. Sell anything you can to pay off all the debt. If you can’t pay off the toys any other way, all the extra month each month goes to paying them off.

Fourth – Can you get along with one less car? Think about this long and hard. Many families don’t really "need" the second car. Can you share a car with your teenagers? Can you get up and take your spouse to work and use their car all day then pick them up? Can you take a bus to work, or ride a bike? Does someone in your neighborhood go in the general direction you do? Can you hitch a ride for a tank of gas a month? Getting rid of a car is a big expense saver. Make it work!

Fifth – At this point all you should have in debt is the mortgage, home equity loan and the credit cards. If you still have a car payment, investigate if you can refinance it. Extend the time on the loan and get a lower rate. The objective at this point in your personal finance journey is cash flow. If you have a leased car, could you put that lease up to be taken over by someone else? There are websites that do that. Don’t get another car. Get along with one. If you are stuck with a car payment, make sure you have the best terms you can get.

Sixth – Pay off the credit cards. First of all, cut up all the cards. You might save one in case of emergency or if you have to travel, but get rid of all the cards. Don’t trick yourself into thinking you “need” a credit card. Believe me, you can get along without them. From this point forward do not charge anything on a credit card. If you don’t have the cash, you don’t buy it. It is that simple. This is a hard personal finance lesson, but very necessary. This includes groceries. A bag of potatoes, a jar of peanut butter, a loaf of bread and a dozen eggs can go a long way. Get over it and do it.

Make a list of credit cards, their balances and their interest rates. Pick the card with the smallest balance. Go here and download this Excel spreadsheet to help you calculate paying off the credit card. In this calculator you input the number of months you want to pay off the credit card. The calculator then tells you what the minimum payment must be in order to pay it off within that time frame. What I want you to do is change the number of month until you get a number that takes all the extra cash flow you have created from the steps you have already performed. Every extra penny every month must go to the balance of this credit card. Continue to make the minimum monthly payment on the rest of your cards.

Once the first card is paid off you will have a sense of accomplishment and feel much better about your situation.

Now, use the calculator again only this time take the card with the highest interest rate. Again, play with the number of months until all the extra cash flow is consumed by the credit card payment. This is how long it will take you to pay it off. Since you already have one card paid off, don’t fudge on the amount of cash you have to throw to the payment. All the extra cash every month goes to the credit card.

Move your way down the list until all the credit cards are paid.

Seven – You should be feeling really good by now. You have dealt with the reality of your situation. You have separated what is necessity verses ego. You have cut all the extras out of your spending and pared down to what you need to live. You have gotten rid of all the extras that cost you money every month, and you have implemented a plan and paid off your debt.You now have free cash flow to do something with. STOP!!

WARNING – do not get yourself back into the situation you just worked out of. It is very easy to do! You do not need to go back to the way you were spending your money. You have a new lifestyle now. You live within your means. Keep it there! Instead do this…………

Now you can start thinking about building up that emergency fund. You can start thinking about investing in your employers 401K and other plans. You can begin to build your retirement fund. Now you can look at other web sites to help you handle your money and build for your future. There are many good sites out there that will take you from here.

These websites can teach you everything you need to know regarding money management.

Are you glad you took my short course in personal finance 101? Let me know how this has helped you.

Good luck!!!!!


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