The 3 Big Tools of Personal Finance





Nobody is responsible for your personal finances but you. To make your personal finances work properly you must learn the tools to manage your money properly. You must get all of the tools. You cannot do it with one or two. You need the “Big 3” tools of personal finance. You need a Personal/Family Budget, a Personal/Household Balance Sheet and you need a plan, a Life Plan.

Fill them out one at a time. When you do this you will see that they work together to give you a complete snapshot of your personal finances and gives you a total and dynamic capacity to manage your finances to success. Use the 3 tools in conjunction to identify your situation and your goals. Use the 3 tools to manage your income to achieve your goals and attain personal happiness.




Personal Life Plan – the personal part of personal finances:

Take a life plan table and fill it out, you should have an idea of who you are and what you want from life. Once you set a goal, you can achieve it sooner than you ever expected. Focus is very important. If you don’t know what you want you just thrash around. That’s not living.

If you have a life plan filled out you will know what you want in the short term, medium term and the long term. When you are looking at using a financial product you can analyze whether it helps you achieve your short, medium and long term goals. There are so many financial products offered these days that you do not have to settle for anything less than what will get you exactly what you want. You are bound by the limitations of the product and by the limitations of your personal situation but as long as you have achievable goals, you should be able to find a product to get you there.

The Budget – spend less than you make

Your budget is for analyzing and managing your cash flow. The only goal that is sustainable for a budget is that you should have positive cash flow. That means that on a month to month basis you should spend less than you earn. It may mean prioritizing your goals by making some wait in the longer term goals so that you can get more pressing goals paid for in the short term. Sometimes you have to realize some short term goals to make long term goals possible. Saving in the short term allows for the long term goals of home ownership and investing in the long term. The key to successful personal finances is a positive cash flow budget.



The Balance Sheet – Own more than you owe.

Your balance sheet keeps track of your wealth. Your net worth is the total value of your assets minus the total value of your liabilities. The first goals of your balance sheet should be that your net worth should be positive and growing. It should grow like compound interest. It will take time.

The most misunderstood and mismanaged of financial tools are Debt Tools and how they affect your balance sheet. We define good debt and bad debt and the differences between the two in several more pictures in your folders. Good debt builds your net worth and bad debt is the spiral of doom for your finances.

Personal Finances can be analyzed and planned using these 3 simple tools. The life plan is best explained with a Yogi Berra quote. “You need to know where you are going or you might not get there.”

Once you know that you manage your budget and your balance sheet by some very straight forward rules so that you have the financial resources to attain your goals. You use these two tools in tandem. You can figure out what you need financially, where you are and what you need to do financially to have the money to attain the goals in your personal life plan. Your budget and your balance sheet can be used to explain all of the products in the financial market place so that you can understand it they help your budget and balance sheet. The numbers will always tell you the truth as to whether a tool will help you or help someone else other than you…like the guy trying to sell you the product.

There are of course a couple of problems. First you lie to yourself when you input data into your budgets and balance sheets. Then you will deny it or lie about. That is the psychology of money. However knowledge is power and you can tell yourself to stop denying your destructive financial behavior and to engage in positive financial behavior. Remember to understand the psychology you need to follow the money. Inversely to understand the money you need to follow the psychology. When you budget and balance sheets are operated with the proper principles and honest data is input, you will have good results.


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