Personal Finance means different things to different people.

• For some people, it is just money coming in, money going out.
• For some people, it is about achieving their dreams through money.
• For some people, the lack and mismanagement of money is disastrous.
• For some people, it defines a good life and financial growth is what fuels that.

You are one of the above, or at different points in life you had to deal with one of the above states.

How do we distill the core idea behind all of the above situations?

Even though each of the four scenarios sound so different, they are all bound by the same idea of personal finance – the art and science of money management.

This art and science of money management is the IDEA of personal finance.

It is a very simple framework to understand how money flows and plays a much bigger role in our lives.

Let’s start by defining the components of IDEA and then we will see how it can be interpreted and used in different ways throughout money management.

Personal Finance in four dimensions

The IDEA of personal finance defines the four dimensions in which your money will be pulled and used.

I – Income, the money that is coming in.

D – Debt, the money that you owe and have to return.

E – Expense, the money you will spend on needs and wants.

A – Asset, the money you will keep and build wealth with.

It is as simple as this. Explaining money to a young person or even a child is easy with this framework. This is the first step of money management.

The money flow in our lives

The IDEA of personal finance can also be used to define the flow of money in our lives.

I – You get paid and the money hits your bank account.

D – You have to pay your obligations, that is rent/mortgage, car loan payment, other loan payments and taxes. These are sometimes called EMI (equated monthly installments).

E – Once you pay your obligations, you can enjoy your money. You will spend some on essentials (needs) and some on your wants, desires, dreams.

A – If you are left with anything (that is, you have not spent it all or have so much debt), you will keep it for your future.

And this happens month after month, year after year. It defines your cash flow, and a basic accounting with the four factors can be done monthly, quarterly, yearly and so on.

If you just keep track of these four numbers every month and then yearly, you are already in the path of money management and wealth building.

Toying with the IDEA of personal finance

Now that you understand how to define and measure personal finance, the next step is to control it, play with it and use it to your advantage.

This is the step of a basic financial plan, when you start asking the right questions.

I – Income

• Am I making enough money?
• Can I use my skills better to increase my income?
• Can I start other activities to create additional streams of income?
• How do wealthy people do this? What does their “I” look like?

D – Debt

• What is my debt to income ratio?
• How do I feel about my debt? Leverage or stress?
• What can I do about it if it is stressing me out?
• What behavior has got me into this debt?

E – Expense

• Am I living my life with enjoyment?
• Am I spending with purpose according to my values?
• Am I wasting money on material things that have no value?
• What can I change to use my money to live a richer life?

A – Asset

• What part of my income is going towards building assets?
• Am I investing my asset (saved money) wisely or squandering it emotionally?
• What do I have to show for? net worth, passive income.
• What productive assets can I build or acquire?

I hope you are feeling excited, because now you can see the possibilities.

As you dig deeper into these four components, you have a lot more control on your life.

It’s much beyond money in the bank, we have asked questions that touched the following intangible aspects.

• Skills
• Wealth
• Leverage, stress
• Behavior
• Enjoyment, purpose, values
• Rich life
• Wisdom, emotional
• Productive

Now you have set goals for yourself by asking the right questions.

A budget is created out of the IDEA

Now that you have done a very basic financial planning, you can put it into action.

Money management is sometimes made overly complicated, by the expectation that you have to track every dollar, you have to know where all you spent your money etc.

Nothing can be further than the truth. The IDEA gives you a simple framework on how to intentionally control the flow of money. That is a budget, plain and simple.

I – hits your checking account, once or twice a month. This is called a paycheck direct debit and is automated.

D – setup auto pay or bill pay through your bank to let this money be deducted.

E – setup a transfer of the amount that you normally spend (or target to spend) to another account. Call this your expense account and have a credit card linked to it.

A – decide beforehand how much you are going to save (or from your previous step of goal setting). Set up another transfer to an account from where all your goals can be funded. Leave some cash in this account always for emergencies, unplanned expenses and travel.

That’s it! It will take 15 mins to set this up and you will never need to touch it.

You may have to adjust it yearly, as your income increases or if you add a new debt or expense.

This system by design avoids you living paycheck to paycheck, a common problem in most of America. Once setup, you have to be disciplined to spend within your target E.

Taking the IDEA to a growth mindset

Before we go further, let us see what you have achieved from the IDEA so far.

• You have understood the IDEA of personal finance
• You have seen your current money flow
• You have set goals by asking the right questions
• You have set up an automated budget

Now the last step is to use the IDEA for Financial growth and Financial Freedom.

Financial Freedom is nothing but the IDEA in reverse. Your entire working life is dedicated towards saving and building enough assets, so that you can play the IDEA in reverse. Here is what the final outcome that defines Financial Freedom.

A – You have assets in the form of investments. Cash, stocks, bonds, real estate. These assets provide income, now or later (by cashing out). This is the revenue from the asset.

E – Every asset will come with expenses or taxes. Real estate comes with property taxes, insurance, maintenance. Stock dividends are taxed as they get distributed. This is called the NOI (net operating income) after expenses are paid.

D – Some assets may be leveraged with debt. Real estate is an obvious example. Most real estate investments are leveraged with debt. So there will be debt payments subtracted from the income.

I – This the cash flow in the hands of the investor, after E and D are paid.

The final goal of Financial Freedom is to generate this “I” enough to cover the “E” and “D” of your personal life.

So we have just defined Financial Freedom with the same IDEA.

All of retirement planning is to make sure that you get the IDEA in reverse correctly.

Conclusion

We have just taken a four letter word and defined the money transformation everyone wants. From the current state to a state of financial freedom or retirement.

Money is not something you crave for. It’s the freedom to do anything, anytime, with anyone of your choice is what is meaningful to many of us.

By using the IDEA, I hope I have been able to give you a framework to think about money management and wealth building in a way that does not seem like rocket science.

This is what I help my clients with, a powerful financial transformation in just four steps.

We do the following steps in 6-8 weeks of a financial transformation.

It sets them up with a foundation on which they can build their own financial freedom.

• Financial Reboot – take a look where you stand.
• Financial Plan – define your dream life and attach numbers to them.
• Financial Flow – set up a flow (automated budget) to fund the dreams.
• Financial Growth – create the framework for financial freedom.

If you or someone you know would be interested in this financial transformation, email me at : info@startyourfinancesright.com.

Everyday is a fresh start. Start with the IDEA. Implement it. Live it. Enjoy it.