Recently I had the opportunity to read a book on how to better manage your finances. Like many of you I was interested in seeing if I could do more to improve my own personal bottom line (being into gadgets can get expensive!). After completing the book I realized that I many of the ideas mentioned made no real sense to the average Joe on the street. Most people don’t have the time for complicated financial plans and much of the advice on the net is just snake-oil promises of get-rich-quick schemes that never work. So I decided to take my own experience as a place to start to write this guide; a simple, easy to understand layman’s guide to making the right moves on the financial playing field.

Step #1 – Gain situational awareness over your current finances.

Of all the steps in this self-help guide, this is by far the most important. Without a detailed and up-to-date overview of where you stand financially you cannot even begin to know where to start. You may have heard of the concept of running your personal finances like a small business. My advice is very similar in that you need to understand that all emotion regarding your situation, no matter how bad it may be, needs to be left out of the financial decision making process. You need to focus on everything that may have a financial impact; credit card dept, mortgage, car payment, taxes, etc. Also, be sure to understand clearly where your income comes from. Understand as much as you can about how to maximize that income. Can you work more hours if you need more money? Do you have year-end bonuses? Don’t worry if you don’t have the ability to extend your primary source of income, you’re not alone!

Now comes the hard part, being honest with yourself. If you have lots of debt, or make less than you wish you did, now is the time to decide how you are going to play the financial game using the cards you have been dealt. Never think it is too late, or that the problem is too big. The only way things are going to get better is if you play the game right and take control of your life right from the start. Don’t wait, trust me when I say the world is not going to wait on you! Once you make that start it is very important to understand that changes start slowly and grow with time and patience. If you don’t like your job, look for low-cost ways to get training in a field that better suits your goals. If you are buried in credit card debt, look for new ways to generate extra income to help pay it off (eBay is a great way to raise money if you have junk lying around).

As you might expect, you will need to come up with a standard way (to use later for tracking your progress) to list and organize financial obligations and income. I know this might seem like a lot of work, especially if your finances are complex (investments, lots of credit card debt…etc) but it actually is very simple and does not consume much of your time if done correctly. First off, lets talk about specific tools you should use to do this.

To better track the numbers you are going to need to get familiar with a spreadsheet program such as Microsoft Excel or even better, Google Spreadsheets. I personally use Google Spreadsheets for tasks such as this since I can access my “situational awareness” spreadsheet from anywhere that has a web browser should I feel the need.

For the purposes of this guide I am going to assume you have enough spreadsheet skills to do simple calculations such as adding up a column or row. If you find you are having trouble there are numerous guides on how to use Google Spreadsheets or Microsoft Excel which can be found elsewhere online.

Ok, now down to the details. You basically need to create a spreadsheet that has two columns; one for sources of income, and one for your monthly expenses. These don’t have to be fancy, they just need to be able to total at the bottom of the spreadsheet. Next you then need to pick a cell to use for subtracting the total number of monthly bills from your total income to get an answer (if this is a negative number don’t panic, we have all been there!).

A couple of good pointers on getting started are to always understand which bills can hurt you the most. One mistake I see people make all over the place is they pay bills late that directly impact credit and other resources. If you are running short and can’t avoid being late on a something then always pick something that won’t have a lasting impact. In the past I always put utility and cable bills at the bottom since they don’t report after just one late payment. But do be warned, having to pay bills late is a sign of poor planning to begin with and should be dealt with on your situational awareness spreadsheet right away!

Step #2 – Set and understand realistic financial goals.

Now that you have your basic finances in your situational awareness spreadsheet it’s time to develop a game plan on what you should do next.

For many developing a financial plan of action might seem like wasted effort but don’t let the concept fool you into thinking this means you need to complete paperwork or talk to a financial planner. What you really need to do is develop an idea of what you wish to accomplish over a set time frame. Maybe you want to get out of debt over the next six months, or maybe you need to save for that new car. Regardless of what your goal is, you need to define it in financial terms. If you are getting out of debt, then total up what debt you have and start looking at a payment plan. If you are saving for that new car, then start figuring out how much per month can you save towards that down payment. Planning does not have to be formal, it can just be a quick trip to your situational awareness spreadsheet to see how things look for the upcoming month.

On aspect many people overlook when planning finances is just how realistic are their goals. If you think you are going to be rich in two years, think again. Very few people can play the financial game well enough to actually become truly wealthy, so don’t bother thinking you might be one of them. Instead concentrate on goals that you can build on such as paying off credit card debt, or building up a rainy day fund. Ultimately your goals are your own, so don’t sell yourself short, be realistic and make them something you can actually archive!

Step #3 – Understand the power of monetary leverage.

I have to admit it, this is my favorite step. Just about everyone I meet has no idea what the power of monetary leverage can do for them. It is just amazing, if you know how to leverage your assets over banks and credit suppliers then you can live like a king on a the budget of a pauper.

Once you have made it though your first few financial goals it’s now time to take a closer look at how you can move up to the next level up on the financial playing field. Right about when you begin to see some light at the end of the tunnel (if you are paying off debt) you should begin to start putting small (start with $50 and move up in $50 increments) amounts of money away in whatever interest bearing account you can get. Don’t worry about where you are putting your money when you start, even using PayPal is a good choice (currently at 5% yield!) if you can’t think of anyplace else. The point of this exercise is to start you on the path of saving enough cash to open up a high interest checking account or asset management account. Why do this? Well, for starters those types of accounts get better services from banks and often carry no fees, which saves you money. Another little secret about those types of accounts is how they are perceived by financial organizations. Something like an asset management account gets you better service and lets you do some interesting things, such as investing in mutual funds or stocks, with the money you save in fees and any other funds you can put towards your long term savings. The downside is that you need to save up a considerable amount of cash to set one up, about $5000.

Once you have saved up enough to get an asset management account you can begin to consolidate your assets! What does this mean? Have a old 401k from a past job that you don’t know what to do with? Don’t cash it out and pay tons of taxes, not when you can move it into your asset management account and still reap the rewards without having to lose your savings. How? It’s amazingly simple. If you gather up all your investments, retirement, and checking accounts under one account you will very likely have a much higher balance under one roof. Most banks reward you for this by extending you all sorts of perks. Lines of credit (usually quite large), mortgage offers, and low interest auto loans are just some of the perks you get for managing all your assets under one roof. If you are smart about how you run your little empire you can even use financial tools such as money market accounts and cash-back on purchases to have the bank pay you every month!

Like I said in the beginning of this section, if you know how to use savings and other assets to leverage your way into better deals on loans and other resources then you can continue to build your finances without having to drain those very assets every time you need to purchase something. A good example would be how you can use the leverage of having a decent size 401k to get a better deal on a mortgage. Better to keep the money in the 401k working for you vs. using it as a down payment just to get approved. The secret here is the more you keep in savings, the more the banks are usually willing to loan you. If you are getting an average of 6% or better on your 401k then you stand to continue gaining that interest even though the balance was “used” to help get you that lower mortgage rate. It’s all about having that money there vs. spending it on something. Always remember the golden rule, he who has the gold rules.

Step #4 – Keep your enemies close, and your credit closer.

Credit cards are evil. They only serve one purpose, to get you into trouble so the banks can make money off you. Most people seem to think credit is equal to real money and they spend it like such. This is completely nuts, credit (and credit cards in particular) are most definitely NOT money. They are not loans either, and if someone tries to tell you otherwise just ask them the interest rate they get on their cards. Credit card rates are a barely legal form of loan-sharking, just about any type of personal loan will beat a credit card rate hands down. So is there any reason to have a credit card? Yes, and no. Thanks to the way the banks run the credit system you do need to have some type of credit cards to give them something to measure you by for future loans. The secret they don’t want you to know is that all you need to do is have credit cards, nothing in the fine print says you have to use them. If you need to carry a card (for travel or other such activities) then by all means get an American Express card or similar. Don’t even think about using a store card or even a over the counter Master Card or VISA, the rates will eat you alive.

So can credit cards ever be useful? Well, it may not be useful to all of you but there is one trick I have noticed that you can use to your advantage. One thing I have noticed over the years with the credit system is how they respond to people who don’t use their cards. They just keep upping the limits. At first glance this seems like a bad thing, or at the very least useless for those who don’t need it, but even stranger is how banks and other financial institutions respond to this situation. I have observed on numerous occasions that banks sometimes treat individuals who have lots of available credit almost the same as individuals who actually have the same amount of cash in the bank. Beyond being very counter-intuitive this can only work to the smart person’s advantage, and gives you yet another reason to not use credit cards whenever possible since you can leverage them to get a better deal on a standard loan, complete with a much lower interest rate!

Step #5 – Don’t get greedy, know your financial limits.

Last but not least, don’t get greedy. Really, just don’t. Once you begin to have some financial success, and you see your income and future in better light you will be tempted to over-indulge in the fruits of your labor. Anytime you feel the urge to run out and purchase something, or when some life event throws you a curve ball, make sure you stick with your game plan and budget for it. Remember in life nobody cares if you win or lose, or even if they run you over along the way, so always stay within your limits and think before you act. Some tips to guide you along way; leave the cards (credit or charge) at home in the safe if you don’t need them, always save something each month (no matter how small), and finally, always remember where you came from, so you don’t end up back there again!