The greatest economic threat since the Great Depression has exposed a serious weakness in our collective fiscal management policies. Money management expert Sandra Simmons explains how to avoid the next big economic crisis.
Wow, what a roller coaster ride. Not since the Great Depression has the U.S., nor the world wide economy, come so close to falling off of the financial precipice. And while we are not out of the woods yet financially (not by a long shot), the current economic crisis does serve to illustrate a very harsh fact of life: The lack of an ethical, disciplined money management philosophy will eventually come back to haunt you.
While our economic leaders are scrambling to put out the fires and rescue our economy, the big question on the minds of many is how did this happen and who is responsible?
“The answer to the question of who is responsible for this economic crisis is both “everyone” and “no-one” from a philosophical perspective,” says well known money management expert Sandra Simmons. “What I mean by that is all of us are responsible for the global economy to a greater or lesser degree, but it is hard to really “blame” anyone because there is no consistent financial money management philosophy that everyone knows and can agree upon.”
What Simmons is referring to is not necessarily capitalism versus communism, liberal versus conservative, or Republican versus Democrat, for there is a common element that virtually every econo-political philosophy has in common: money.
“We can-and probably will-debate and argue the pros and cons of the various political philosophies forever,” says Simmons, “but at the end of the day, there is one thing that all governments, corporations, businesses and individuals must manage correctly and that is their money and cash flow. The correct money management philosophy, in fact, undercuts all of the various political points of view and deals in the most basic of financial principles.”
In other words, the fundamentals of money management are actually the same regardless of your political views, and when those fundamentals are violated, there can be a heavy price to pay.
“The essential centerpiece of any successful money management system is ethics and discipline,” states Simmons. “If you are not disciplined when it comes to the handling of money and cash flow, it doesn’t matter if you are an individual, small business, Wall Street, or the government. A lack of financial discipline is eventually going to come back to bite you and lead to financial crisis regardless of the scale.”
Discipline enters into the money management equation because money management, correctly done, is going to lead to a very high level of financial stability. When an entity is financially stable, it can withstand the economic threats that will inevitably arise, and create a rock-solid economic foundation from which to operate.
“When we talk about money management discipline, we are talking about paying your bills and getting out of debt properly, eliminating the over-reliance on credit, building reserves, and always planning and predicting where money and income are going to come from, among other factors,” explains Simmons. “The easiest thing in the world is to fall into the credit trap. It is very seductive. But you can see what happens, and I think our current economic crisis is an excellent lesson of what can happen when governments and the biggest financial institutions in the world fall victim to the allure of living beyond their means.”
“When we talk about economic or financial “ethics”, we are not necessarily talking about violations of the law,” continues Simmons, referring to the fact that the collapse of Wall Street will not necessarily involve the indictment and prosecution of any corporate executives. “Ethics has a lot more to do with judgment and decision making. A successful money management system is going to automatically encourage this because the objective is security and stability. Obviously ethics was sorely lacking considering our current economic crisis.”
Although we are currently in the middle of crafting an economic bailout that is going to involve astronomical financial numbers, according to Simmons, there is a basic money management principle that is always at play: It’s not how much you make; it’s what you do with it that determines your financial condition.
Whether you’re a government, corporation, small business, an individual, or Wall Street, the following are the money management principles that Simmons recommends:
Money Management Principle #1: SPEND LESS THAN YOU MAKE
Cut your expenses back to operate within your income. This may seem difficult, but building a budget that includes everything you need to run your business is essential. If you know exactly how much you are spending to run the business, and where the money is going, you can identify areas of waste or even areas where more needs to be spent to get the income up and increase profitability. Most UNDER-ESTIMATE what they need financially by 10 – 13%–a critical mistake when you are aiming for an income target that is too low.
Money Management Principle #2: PUT 10% OF YOUR INCOME AWAY IN SAVINGS OR RESERVES
Set aside regular amounts of cash from your income for the future – put the money in savings toward gaining financial freedom and don’t ever spend it. Put a minimum of 10% of income into savings out of every dime earned. Note, even government is recognizing the importance of building reserves as California Governor Arnold Schwarzenegger wants to see this become a part of that state’s budgetary process.
Money Management Principle #3: DO NOT BUY ON CREDIT
Pay cash instead. Debt is a disease that you should avoid contracting. If you already have some credit debt, a successful money management philosophy will show you how to get it paid off fast.
This, of course, lies at the very heart of our current economic crisis. Too many people in the U.S., getting into too much debt, played an enormous factor in creating an economic collapse. It can be said with a high degree of confidence that had everyone from end users to financial institutions followed this money management principle, we would not be in financial straits as a nation.
If you need to buy something that is expensive, put money away towards the purchase every week until you have the cash. If you absolutely must use credit for a home, office, or equipment, only use credit when you are 100% positive that it can easily be paid for without undermining your financial security.
Money Management Principle #4: FIND WAYS TO MAKE MORE MONEY
The cost of doing business goes up about 8.5% every year, so you need to make more money just to keep up. Look over your line of products and services and figure out how to sell more of the profitable items. Be willing to discontinue items that are not bringing in enough profit for the time, effort and cost to sell them. Find out what new products and services you can offer your clients to increase your gross income. Look at every financial decision you make with an eye on the return on investment you will get for the money you spend. Don’t spend your hard-earned income on “fruitless” expenditures.
Money Management Principle #5: USE YOUR MONEY TO INCREASE YOUR INCOME
After paying the 10% into savings and paying your bills, use any money left over in ways that increase your ability to produce more income.
Why is controlling the flow of money so important? It is the energy and life blood of a business. It is necessary to pump it through the income producing areas first to keep it running well. Everything runs smoother when cash is available.
“I hate to say “I told you so” but I saw the current financial debacle coming several years ago,” says Simmons. “When the fundamental principles of sound money management are violated, it becomes a ticking time bomb. Without the right kind of fiscal discipline, economic pressure is going to expose money management weaknesses.”
If we survive the current economic crash, perhaps the biggest tragedy will be the next time this happens if all of us don’t get our financial houses in order.
Sandra Simmons, President of Money Management Solutions has years of experience helping business owners and individuals manage their money to achieve financial freedom. Claim your FREE Debt Reduction Solutions Guide.
