I’ve been reading a lot of books lately about family financial planning and, frankly, I’m not all that impressed.  Some of the plans are interesting, but they are also very complex and can be confusing.

As I was sitting down to write this column I suddenly remembered a conversation I had many years ago with a wealthy friend of mine when I lived in Medina, Washington.  Medina, for those who don’t know, is a wealthy suburb of Seattle where people like Bill Gates, and Steve Ballmer (the President of Microsoft) live.

As my friend and I talked about money, he said that it isn’t what you earn that matters, but, rather, how it’s managed.  “Most people,” He said.  “Spend almost everything they earn and then wonder at the end of the month why they are dead broke.”

Then he explained that as a college student, he learned how to manage his money so that he would always know that he had what he needed to buy whatever he wanted.  “It’s a form of strategic (forced) savings,” He said.  “At first it was difficult, but once I saw how well the plan worked, I kept using it.  In fact, I continue the practice even today.”  (Please note: My interview was in 1980 and my friend has long since left us.)

The chart below outlines the plan he showed me.  The plan involves the management of five savings accounts and a single checking account, which are all designed to manage a personal or household cash flow.  The chart is based on an arbitrary income of approximately $3,200 a month (which, in theory, at least, a family of three can live on.)

The Wealth Building Account: This is the most important of all of the accounts, since the goal is to let it build up, year after year.  It is not meant to be used for anything under any circumstances.

The Save to Spend Account: This is meant to be used to save for special needs, such as getting the car fixed, buying a new refrigerator, iPod or whatever else might be needed.  When drawing money from this account the idea is to spend on a small percentage of the total – say 20 – 30 percent at any given time so that the account continues to build.

Emergency Fund: This is for and emergency visit to a doctor, emergency repairs for the car or whatever else may suddenly arise.

Play Fund: Go to a movie, save for a special vacation, or have a special night out.

Tithing/Community Sharing: Tithe to your church or give to your favorite charity.

As my friend pointed out, it was difficult to be disciplined at first, but when he saw how, by having a disciplined savings plan, he had more personal and professional choices, he continued the habit even after he achieved great wealth.

“It really comes down to what someone feels is important in life.  Being stressed and confused or having the money to make the choices that lead to a stress-free lifestyle.” He concluded.

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