5 Tips for Creating a Personal Financial System

Updated: Jul 18

Lessons From Episode Three

Money Matters by Impart Media | 5 Tips for Creating a Personal Financial System

It’s easy to think that we have money to spend—until we don’t. Episode three of Money Matters by Impart Media illustrates why it’s essential to account for every single expense and establish a personal financial system geared toward accomplishing your goals.

Dennis and Dallas speak with Jerel about their dreams of getting out of debt and buying their first home, ideally in the next two to three years. Meanwhile, Bruce and Haizel made headway on Adrianne’s homework (limiting Bruce’s shopping sprees to a specific amount each month) but still have challenges ahead. Though their circumstances are quite different, each household learns the game-changing practice of not just setting a budget—but creating a system to keep that budget in check.

1. First Steps: Set Your Goals and Manage Your Money

Dennis and Dallas have been using the bucket method (essentially, funds are divvied up for specific purposes) to manage their money, but they’re in a debt cycle that’s getting in the way of their goals. Their top priorities are paying off their debt and saving up to buy their first house—but just as they start paying down their debt, money gets tight again, and their debt climbs back up. Jerel assures them that their aspirations are entirely reasonable. He proposes a new household money-management system to help them stick to their budget and achieve specific milestones to qualify for a home loan.

2. Understand Your Cash Flow

Bruce and Haizel completed most of Adrianne’s homework, and the results were eye-opening. Since the couple viewed a crystal clear picture of money flowing in and out of their accounts, it motivated them to hold themselves (and each other) accountable for sticking to a new budget.

3. Manage Your Debt-to-Income Ratio

How much money and debt you have to your name plays a role in more than just your credit score. Managing your ratio of debt to income also gives you an advantage with major financial goals, like buying a home. To calculate this ratio, divide your total debt by your total yearly income. For example, if you make $40,000/year and have a grand total of $10,000 in debt, 10,000 divided by 40,000 is 0.25, for a 25% debt-to-income ratio.

Buying Your First Home

Julien and Kiersten Saunders from rich&Regular offer a fantastic lesson on debt-to-income ratios for first-time home buyers. Most banks prefer buyers with a ratio in the 30-40% range, while Jerel takes it a step further and says that 20-28% is ideal. If your ratio is higher than you’d like, tailor your budget to either lower your debt, raise your income, or both.

Paying Off Student Loans

Student loans don’t need to be a lifelong burden weighing down your wallet. Working student loan payments into your plans is a great way to help lower your debt-to-income ratio and free up your future finances once they’re paid off. Melissa Jean-Baptiste explains the difference between federal and private student loans. She also advises people with student loans to ensure they know their options, what payment plan they’re currently in, how much is going to the principal, and how long the payment plan will last. She says that making larger payments whenever possible is ideal because the minimum payment will likely only pay the interest.

Federal student loans come from the federal government, as the name implies. They’re more flexible than private loans, can be repaid in seven ways, and sometimes come with a forgiveness program.

Private loans come from banks, credit unions, state agencies, and online lenders. They usually require a credit check, so you’ll need a co-signer if you don’t have established credit. Although you can’t consolidate these loans, you might be able to refinance. But forget about forgiveness!

4. Commit to a Budget

Sticking to a budget will empower you to take control of your finances—and also help you achieve the following:

Live Life Without Sabotaging Your Financial Goals

Bruce and Haizel calculated how much Bruce spends in a year on impulse purchases and set a limit in their budget. That way, he can still enjoy shopping while sticking to the budget and their long-term goals as a family.

Pursue Multiple Financial Goals

Dennis and Dallas can pursue all of their goals—saving up for a house, paying down debt, and investing in stocks—as long as they stick to their plans.

Create Generational Wealth and Boost Financial Literacy

Adrianne suggested that Bruce and Haizel set up Capital One savings accounts for their children because minors can sometimes receive a better interest rate than adults. As an added bonus, the interest will compound when they’re ready to invest those funds. It also creates an excellent opportunity for Bruce and Haizel to set expectations about money, like what they’re willing to spend money on and what each child will be responsible for.

5. Get Real About Your Spending Habits—and Talk About Money

No matter where you’re at, these common variables are crucial to making your money-management system work for you.

Account for everything, not just regular expenses and savings. Things like date nights and impulse purchases cost money too.

If you’re living with a partner, consult each other so that you’re working together, not separately. It’s hard to work as a team unless you both understand your cash flow.

If a specific habit is throwing off your budget (like retail therapy), set up your devices to make impulse purchases more difficult. And save more by discovering new activities that don’t cost money.

Once you’ve crafted a system that gets your money flowing in all the right places, don’t make exceptions to the new rules unless it’s absolutely necessary. Change is difficult—but it’s important to let go of old habits that only get in the way of reaching your goals.