Tuesday, February 12, 2008

Money Management by Malia Kesler, CPA

Malia Kesler is a licensed CPA (Certified Public Accountant) with experience at Ernst & Young and other CPA firms. She is currently a full time stay at home Mom. She has a Bachelors and Masters in Accounting from BYU, whose Accounting School was ranked 2nd in the nation when she was there. She says she loves anything coconut...which probably explains a lot about her.

Question: You've studied a lot about budgeting. Could you explain some of the different methods and how they work?
  • One way to budget is called a zero based budget. The idea is that you take all the money you have coming in and decide where it will go out - either spending, saving, or paying off debt. By not leaving a cushion, you make sure to meet your goals. Before I learned about this method, I used to just 'see how much money was left over' and I would just end up spending it. This way, you decide up front how much money to send to your goals and each category and then you stick to it.
  • Another way to budget is just to base everything on previous months numbers. the only problem with this method is that you may not have enough money for something that is different this month than it was last month. you'll be close, but you may get frustrated because you didn't anticipate upcoming expenses.
  • One thing I really like to do, because I don't like surprises that cost money, is to average out my variable costs and save a little each month so that when I go to spend the money, I have the amount I need. So for example, for your back to school shopping, if you were doing the zero based budget, you would budget a large amount of money (say $200) for clothes and school supplies in July and/or August. With this averaging method, you would figure out a good estimate (say $20) to save every month and when August comes around, you have the money saved up to spend. I use this for anything variable, like travel, clothing, gifts, Christmas, insurance premiums, etc.
  • The last budgeting idea I've come across is the cash or envelope method. You would use this for expenses like food and supplies and eating out that can get out of hand if you're not careful. So once a month or once a week, you put your budgeted amount in the food envelope and when it's gone, you're done spending money on food until the next week or month. On the other hand, if you have leftover money you can treat yourself, or save it.
Question: What is the one most important thing you can do to make sure you are financially secure?

I've thought a lot about this question and I have to say I think it is to get and stay out of debt. Commit now to never go into debt again except for a house you can pay off in 15 years or less. This one decision will make all the difference in the world for financial security and wealth building. Every case I have seen or heard of where people get into trouble, have severe stress, and financial problems involved debt. People usually operate in a world of best case scenarios when it comes to large financial decisions. But the problem is that they live in the real world and things can go wrong. Life happens. If you have no debt and an emergency fund, you are well insulated and prepared when life comes at you in unexpected ways. If you don't have any payments, you are very secure. You could save your emergency fund and retirement very quickly if you had no monthly payments. You could lose your job and survive just fine on food storage or a part time job at McDonald's till you found new work. And most of all, you would have peace, knowing that whatever happens, you can keep your car and your house and be just fine.

The vast majority of millionaires operate without debt, and that is exactly how they became millionaires. I think I should add that the way to do this is first to become debt free, and then to save money for things like your next car, remodeling and vacations. If you pay yourself a car payment every month and put it in the bank, you can go buy a car with cash every few years. If you do that with every expense you never have to go into debt again.

Question: What is the best book you've read on money management and why?

The best book I've read on money management is 'The Total Money Makeover' by Dave Ramsey. He teaches truths about money and provides the way and the motivation for getting financially free. He gets to the core problems or challenges that keep people from winning with money. It has changed my life and many other people's lives. Most other books provide good tips on how to save money or how to be frugal, but if you're not doing the important things (staying out of debt, saving for retirement, and funding an emergency fund), those ideas are a drop in the bucket toward peace or wealth. Some other books I've enjoyed were 'The Millionaire Next Door' by Stanley and Danko, 'America's Cheapest Family...' by Steve Economides, and 'The Five Lessons A Millionaire Taught Me' by Richard Paul Evans.