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            One of the first areas to look at when learning to manage your money is your personal net worth. This simple calculation will give you an idea of weather or not you are moving in the right direction. Think of it as a financial feedback mechanism. I would go so far as to say that this is the single most important piece of information you will need to know. If you just learn what this is and how to calculate it, you will be further ahead than most of the population. Lets look at how to calculate your personal net worth, as well as how you can get your free personal net worth calculator.

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           What comes first, the harvest or the planting? To any person this would be a rather stupid question. Obviously you will need to plant a seed before you can harvest it. Then why do most people have this concept in reverse when it comes to money management? Most people spend money before they make it, or they want to reap the benefits of a large harvest without planting any seeds. To put it bluntly, most people want to spend like the wealthy while working or investing like the poor. I’m not judging or comparing; I’m, just simply saying that if you want to spend like a wealthy person, you should probably make money like the wealthy person. Most wealthy people I have met or read about say they view money as potential or opportunity. Just like a farmer would see the oak tree instead of just an acorn, wealthy people see things like vacation homes and time with family instead of money. Wealthy people are farmers, planting and harvesting seeds of money. A healthy farm would allow you to quit your job.

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            What if I told you that one-cup of coffee a day could cost you your financial independence? Would you believe me? In the first part of this series we looked at the process called the rat race, and what it means to be broke. In his book: “The Automatic Millionaire”, David Bach talks about what he calls the “Latte Factor”. We will now look at what the latte factor is, what it means to you, and how you can benefit from the information.

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            Most people think that the quickest way to become rich is to increase their income as quickly as possible. Though this is important, it is not necessarily the first step you need to take in becoming wealthy. In his book: The Automatic Millionaire, best-selling author David Bach describes something he calls the latte factor. If you have any intention of understanding your money, or simply want to just manage your money better, you need to understand what the latte factor is. This one simple concept could literally change your life. Before we learn about the latte factor, there are a few basics we need to first cover.

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In part 1 of this series we looked at the cost of waiting when it comes to investing. An example of this showed that waiting only 5 years to invest could cost you literally hundreds of thousands of dollars over the long run. Many people want to pay off debt before they start to save. Figure 2 shows the excuse debt and how much it will cost to play catch up. For this example we will use a fixed total amount to save for, let’s say $500, 000 by age 65:

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            Do you know how much it costs to wait to invest? What if I told you that a couple of years could cost you more than a million dollars over time. Would you care? Would you do something about it,? or would you just read this and carry on the same way? Many people think they can play catch-up, but it is much harder and much more expensive to do so.

            Are you like most people? Do you wave your arms forward and say something like: “Ah, no problem, I will start investing when I get my student debt paid off?”. Then its: “I will start investing when I am done saving for a house”. Then, “I will start investing when my kids move out”. Then, “I will start investing when my house is paid off”. Then, your life is over. Sound grim? This was most of the excuses I heard while working in the field. I realized that most people always had an excuse not to invest no matter where they were in their lives. I think people would be more likely to invest sooner if they knew what the price was to wait.

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            In the last post on March 24, 2009, you were given a free budget spreadsheet that allowed you to analyse your income and where it goes. In this post we will look at the spending guideline, which outlines where your money should go.

            The guideline below shows what the proper allocation of your money should look like. In the free income statement sheet you will have your own pie chart to compare to this guideline.

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          Budgets don’t work. What? Then why the heck am I writing a post on how to create a budget? Budgets don’t work for the same reason diets, or new years resolutions don’t work. They appear to be too restrictive, oh yeah, and were lazy. We are inherently lazy and we like things to be easy rather than difficult, this includes me. I myself don’t like to use the “B” word, I prefer to call it “a guideline for money so that you don’t have to be a greeter at a department store during your retirement”. I’ll give some personal finance help and show you how to create a working guideline in 4 simple steps

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