Episode 8 The importance of a financial system

This episode discusses what a financial system is, how to develop one, and why it's important for financial success.

Transcript

SPEAKER_00 0:02

Discussions on this show should not be construed as specific recommendations or investment advice. Always consult with your financial investment professional before making important investment decisions. Securities offered through registered representatives of Cambridge Investment Research Inc., a broker dealer, member of FENRA SIPC, Advisory Services through Cambridge Investment Research Advisors Inc., a registered investment advisor. Cambridge and Innovative Financial Solutions Consulting Group LLC are not affiliated.

SPEAKER_01 0:45

When it comes to money, there is no limit to the advice to get a bit of a money.

SPEAKER_00 2:08

You guys heard me take that little pause or that gas right there. That's because unfortunately, my AC is out. And I'm hot. It's over 85 degrees in my office. I got my fan running, trying to stay cool. So but I'm committed to this podcast. So this is the time that I designated to uh do the next episode. So I gotta suck it up. But enough of that. So today I want to talk about something that's near and dear to my heart. As a financial professional and as a person that's been in the financial services industry for a number of years, I often talk about something that I consider to be very, very important and really critical to being successful financially. And that is having a financial system. So today's episode, as I mentioned on the previous podcast, would be designated towards a financial system and just getting into the ins and outs about what that uh is. So I gave the definition last week, I will give it again, but to keep it simple, a financial system, and in this particular case, we're really talking about creating a personal financial system, okay? Um a financial system is a predefined process for how you're going to manage your money. Just to keep it simple, okay? Because you know, we don't really think about it, but the world we live in operates in systems, you know, and for the most part, almost everything that we do, it involves operating within a system. So for example, we got a weather system or we got an ecosystem, we got a solar system, there's a meteorological system, uh, there's a banking system, there's a legal system, there's a highway transportation system, there's an educational system, um, there's a medical or health system, and I'm sure there's some that I'm not even thinking about. But then let's let's talk about our bodies. The human body was created to operate in a systematic manner, right? So we have what's called our intergumetery system, where that's our skin, our hair, our nails, right? We have our uh musculoskeletal system, or our skeletal system rather, that's the bones, cartilage, ligaments, joints, and things of that nature. We have our muscular system, right, which uh includes the skeletal part of our system, but our cardiac muscles are included in that system. We have our nervous system, which is our brain, our spinal cords, our nerves. Uh, there's our endocrine system that uh involves our glands, um, our hormones, um, and and our reproductive uh components, our cardiovascular system, which of course is our heart, you know, the blood, the blood vessels, and um all of that. We have uh our uh in our weight system as well is included in that. We have our lymphatic system, which is our lymph nodes, um, the the spleen, uh the lymphatic vessels, right? Um, so everything about life really, if you really think about it, there are systems involved. But when it comes to our money, personally, very few people create intentionally a system. Now, everybody has some way that they do what they do, but it's kind of um how do you want to say this? It's kind of just a a default behavior pattern that people acquire as they're growing up and as they kind of learn how to do things. It's not thought put into it, so it's not intentional in the sense that I am intentionally designing a system to maximize my effectiveness of how I manage my money. So, what I'm talking about when I talk about a financial system is I am talking about creating a way, as I said, a predefined process that is thoughtful, that's thought out in terms of how you do what you do. Okay, so um, you know, it's identify what a financial system is again, a predefined process for uh how money will be managed or how you're gonna manage your money, but it's also a process that includes goals and priorities and boundaries, right? And we're gonna get more a little more detail into that, but it it incorporates things like do's and don'ts, it incorporates uh you know things like what's the things that are most important to me and the things that uh are of uh essence to make sure that that I'm successful with my life and that you know my quality of life is protected and preserved. As I said in a previous episode, you know, the primary purpose of money is to protect and preserve our quality of life. So this system should be designed with that in mind, okay? Um, but it's also a principle-based arrangement that adjusts to life changes. Because as things happen in life, your priorities are going to change. You know, uh your emphasis is going to change. You know, if you start off young, as we all do, start off young, uh, but you decide you want to have a family and children, well, you have to prioritize raising those children because you bring them into the earth, you have to make sure that the things that are that things are in place to make sure that they are raised properly. So they're they're gonna uh uh they are going to be prioritized in a certain way that's going to be different once they get older. So all of those things we have to be mindful of because it's going to impact what I said in terms of adjustments being made as we go uh throughout life. Okay, if there's some special needs with your child, allergies, or some kind of uh you know abnormality, then that it further enhances what those um priorities are going to be. Alright, so but when we talk about what is a financial system, it is primarily uh, as I said, a predefined process for how money will be managed. Uh, it's a process that includes your goals, your priorities, your boundaries, and it's a principle-based arrangement that adjusts to life changes. And what I mean by a principle-based arrangement, right? So, for example, there's a a principle uh that's called organization. Okay, so these arrangements are based on the principle. Now I just use organization as an example, but these arrangements are based on the principles that you establish for your life and the things that are important and and priority for you and your life. Okay. Um, again, just to give you an example, uh, me, myself, I don't give money to beggars. Now, other people do. That's on them. That's their value system, that's their principles, that's their you know, belief system. I don't give money to beggars. And I have a number of reasons as why I don't, but at the end of the day, I don't give money to beggars. Now, if a beggar asks me for something to eat, I'll get them something to eat. Okay. If the beggar says, Man, I need some shoes, I don't have no shoes. If I'm able to get them some shoes, I'll go get them shoes. But I'm not gonna physically hand them money because they give me a sob story about why they need it. Because I have learned through my you know five, six plus decades of life that the majority of the people out here on the street begging are hustlers, and there's a reason why they're on the street, and while there are some exceptions, the majority of the people that's on the street is because they're making bad decisions. So they're making bad decisions, you're giving them money, all you're doing is enabling them to keep making bad decisions. So I don't do that, but again, that's me. Am I telling you that's what you should do?

unknown 11:06

No.

SPEAKER_00 11:07

Just give you an example of principles, okay? So, why is a financial system important? Good question. A financial system is important because it helps us to get and stay organized. Um, you know, it's hard to function in life if you're disorganized and things are disorderly. And so a system helps to be organized, get organized, and stay organized. But a system also helps us to stay focused. Um, it helps us to develop consistency, it helps us to develop routines. So, again, you look at your employer, you look at your job, there are systems in place. There's a certain time that you come to work, there's certain things that you got to do at certain times. There's an order to if you need something, or you know, if if if if there's something that has to be ordered, there's an order that you got to go about. Uh, when I say order, a process that you got to go about in order to get that. You don't just do things any old kind of way without no accountability. So that's another part of it, right? Why is a system important? Because it it includes checks and balances, right? It it creates a way for there to be accountability. So that's important when we're talking about our money and we're talking about trying to be successful financially. So a system also it helps govern the how, the why, uh, and the what that we do with our money. And it promotes a higher probability of being financially successful than we would be otherwise without having a system. So all of these things play a critical part in the ability to be successful. You you encounter any person who's very successful financially, millionaires, multimillionaires, or even people who are just you know financially independent. They may not be multimillionaires or millionaires, they may be people who have have put things in place and and done things in such a way to create a uh revenue stream or multiple revenue streams in their latter years of life that support their ability to live the way that they want to live, even if they don't have you know millions of dollars in savings, right? Well, that is a byproduct of a system, and what a system does is it also helps to build discipline, right? Because the first thing that has to happen is we have to be obedient to the system. So if the system says 20 uh uh that may make it a little conservative number, 15% of my discretionary revenue that I have available every month, I'm gonna put into a savings separate and apart from my 401k savings that's coming out of my paycheck. I'm gonna put this in an IRA or put this in some other kind of uh investment vehicle or or savings account, whatever you know your particular goals and priorities are, then you don't cheat yourself. You be obedient to what you have established. If you and ultimately that obedience develops discipline to where now you're just disciplined to do it. I I have a friend who some years ago, he doesn't do it now, but he used to do it some years ago because he was doing it for a specific purpose. Every time he had a $20 bill, and he broke that $20 bill and he would get $5 bills, he had a jar that he would put those five dollar bills in. And the reason why he did that is because at the end of the year, rather than spending money on credit cards and going into debt, he used that money for Christmas. So from the beginning of the year to the end of the year, whenever he had a $20 bill and he spent it and he got a $5 bill, he would take the $5 bill and he would put it away and put it into the jars. So what that did was made him think about what he was spending money on because he knew once he spent that money, if he got two or three five dollar bills, now he had to put those five dollar bills into the jar. And so that left him with less money to actually spend for you know whatever time period he had left for the week because he operated on a budget, which is also a part of a financial system. Okay, so I just use that as an example to say that um uh financial the importance of a financial system is it brings all these things into place to help us to live a life that's more effective and more successful financially. Okay, so I said it it helps us get and stay organized, helps us to uh really get and stay focused, uh, it helps to govern how, why, and what we do with our money. It promotes a higher probability of being financially successful, it helps to build, it helps to build discipline, right? So these are the the the some of the some of the they're not the only things, but some of the reasons why it's important for a financial system. So then how do we create a financial system? Good question, right? Now you don't have to do what somebody else does, you have to do what works, but it has to be based on some sound fundamentals. You know, so for example, you have your systems should be a system that helps you to be organized. Okay. I I have a sister. I'm gonna talk about her on blast because she openly admits this. But I have a sister who has certain areas where she has things. Matter of fact, when one way back several, maybe maybe 20 years ago, uh, when I was temporarily staying with them, in her bedroom, she used to have papers all over the place. And she would, and stuff, and she would, on occasion, ask me to go in to her room and get something. And she would try to help me to figure out where it was. Now, she remembered where she saw it last, but trying to tell me how to identify that was like, you know, putting a blindfold on me and telling me to walk across the street. It was almost like committing suicide. Uh that's how bad it was. Now, most of the time she could go in and within a you know, few minutes here or there, she could find what she was looking for, most of the time. A lot of times it would take her 10-15 minutes, uh, and it wasn't where she thought it was, right? But that's because she didn't have an intentionally designed system. She had something that was just random based on her memory. And had she had an intentionally defined system that had files and folders and was you know intentionally organized, she could have sent me or anybody else in there, and instead of taking three, four, five, six minutes to find something, it could have been found in 30 seconds. So, what I'm saying is your system should be based on some sound fundamentals. So, organization is a principle, and that should be incorporated into your system, intentional organization, not randomism. Okay, but a system includes having defined priorities, standards, and boundaries. Defined priorities. Now, a lot of people would think, okay, well, you should have goals in there. Yeah, but goals don't come before priorities. So you have to define what your priorities are, right? Do you have a mortgage? Do you pay rent? Uh are you living with your parents? Are you in school? Like, what's your situation? Your priorities gotta be based on your situation. Do you have children? You know, are you married? Do you have a spouse? Right? You gotta think about, sit down and think about what your priorities are, and you gotta make sure that they are properly um defined and and thought out so that you can stick to them. No need in creating a priority that you're not gonna stick to. So it it should be something that's thought out, okay? But it also should include standards. So, again, um, I use an example of giving money to beggars, right? I don't do that. But there, if people want to borrow from money from me, I have boundaries. Why do you need to borrow money from me? You work, you have a job. What did you do with your money? Yeah, I'm pausing for a second because I want you all to think about that. When somebody asks you for money, what did they do with their money? Why do you need my money to take care of your responsibilities? Are you making bad choices with your money? See, I want to find those things out. Now, what a person ultimately will end up doing is I'm gonna go to somebody else. Why? Because they don't want to be accountable, so if they're not gonna be accountable to themselves, they're not gonna be accountable to me. And chances are I might not get my money back. So those are just boundaries and standards that I incorporate into my system. So you should do that. Once you've had your uh priorities established, you your standards, your boundaries, you kind of laid that out, then you identify what your goals are, right? Because those goals have to be ordered based on your priorities, right? You may need a new car, you may be saving up to buy a new house, you may be saving up to buy a house and stop renting. You may be, you know, saving up to pay up college loans, right? You got planning for retirement, uh, you may be trying to plan for your you know, save up for your family, annual family vacation. Like all of these things, they should be a part of your goals and they should be prioritized based on uh you know that thought process that you went through. And then once all that's done, then you create a budget. Now, the budget obviously is going to be based. On what your income is. So you in creating a budget, you need to identify what your income is. Right? Now, your income is not your salary. Your income is not the amount of money that you have after taxes. Okay? Your income is the amount of money that's coming in to your possession that does not have to go out because of obligations. So if you are doing this and you already have a mortgage, you already have a car note, you already have student loans, that money is not a part of your income. That money belongs to somebody else. So that's not coming in. Hence the term income. It's not coming in, it's passing through. You know why it's passing through? Because if you have a mortgage, you sign a promissory note. And that promissory note was not conditional upon whether or not you have a job. That money, say a $2,000 a month mortgage, you every month, if you get $5,000 every month, $2,000 of it belongs is legally the mortgage company's money, not yours. So you can't count that as income because you can't make decisions with that money. That money doesn't belong to you. That's true for your car note, that's true for your utilities, electric, gas, water, because if you don't pay it, they're gonna turn it off. So you can't make discretionary decisions with that money. So identifying your income is important. Once you identify your income, that's gonna let you know what you have to work with. And then you can create a budget where you allocate X amount of money to these things that you have established as your goals. Okay, because your priorities like your mortgage, your car note, these types of things, tuition for your child school, whatever that is, right? Those things, those are priorities. Those are already, but that's why I said you start there because those things have already been identified. Now, what's left over is your you know, you go towards your goals, and you may not have enough money to address all your goals at one time. So some of those goals may be long-term goals, some of them may be immediate, and you have to organize how you approach them. Now, I will probably talk about this a little bit more because there's more detail that I can go into that I will go into as it relates to a financial system. But for right now, just to do a recap, a financial system is a predefined process of how you're going to manage your money. It's important because it helps us to get and stay organized, helps us to get and stay focused, helps to govern how, why, and what we do with our money, and it promotes a higher probability of being financially successful as well as helping to build discipline. And we create a financial system by establishing and defining our priorities, our standards, our boundaries, our do's and don'ts, and all those things. Identify our goals, and we create a budget. And when you create your budget, the first thing you gotta do is you got to identify what your income is because most of us actually don't know what our income is if a person was to ask. So that's today's episode on creating a personal financial system. Hope you get something out of that. And hey, if you want to get in a little bit more detail about this, you can feel free to reach out to me and we can have a one-on-one to talk about how you can build your financial system. So until next time on money, finance, and investments. I'm Will Smith. Peace.

SPEAKER_01 26:33

This has been another episode of Money, Finance, and Investments with Mr. Will. For more information, check out his book, Money Ain't the Problem. What we do with it is so that you can learn how to live your best financial life. In the meantime, be sure to check out our next episode of Money, Finance, and Investments with Mr. Will.